Much has already been written about Google’s news last week that they are opening up “Pay Per Action” advertising opportunities within their AdSense network (Google Post here).  After digesting the news and the blogosphere discussion, I have the following observations:

This Won’t Change the World Overnight

• Google has a huge cash cow to protect in its Cost Per Click revenue model.  But CPC advertising suffers from some growing problems (e.g., click fraud and search engine spam that will ultimately diminish its power)   Thus, Google is forced to move towards CPA advertising (which helps eliminate these problems), but I’m sure that Google’s moves will be slow and methodical.  This news is a case in point: the new CPA system is being rolled out in beta and is limited to its AdSense network of third party publisher sites (where click fraud and spam are at their worst).  But how quickly will advertisers, and most importantly third party publishers, move towards the model?
• Bad actors in the Adsense system are not going to adopt CPA unless there is an equal opportunity to defraud the CPA model within AdSense.  If a publisher has built a network of click optimized sites, or developed click fraud practices that allow it to fly under the radar, I doubt that that publisher is going to jump at the Google CPA option.  A number of comments in the TechCrunch post highlight the fact that Google’s CPA system will allow a number of different kind of actions short of an actual sale that might create new kinds of “Action Fraud.”  So if the scammers do move over, it won’t help advertisers or consumers.  This is just one reason why Google is also pushing its Checkout product to control the shopping cart and measure conversions with precision. 
• Legitimate third party publishers are being asked by Google to assume a significant amount of additional risk.  With CPC, publishers control the revenue generating activity (the click) on their own site; with CPA, that activity moves over to the end advertiser.  For publishers to jump in, they are going to have to see significantly higher advertising rates and a highly integrated relationship between advertiser and publisher that helps the publisher qualify traffic for conversions.  Google’s CPC system has thrived on a low touch, automated system.  Again, several of the TechCrunch post comments highlight this disconnect.  Google will need a long term, sustained effort to convince publishers that this added risk is worth it.  I suspect this will take several years.      

Google’s CPA System Will Create Some Benefits for Advertisers and Consumers

• Jellyfish was the first comparison shopping engine to adopt a 100% Cost Per Action ad model, so we are happy to see a giant like Google help to push mainstream adoption of CPA.  As Google’s CPA system gains traction with legitimate publishers, the scam publishers may start to be isolated in the CPC system.  If this happens, Google’s AdSense model may reach a tipping point where CPC rates start to drop because the quality publishers are no longer subsidizing the scammers.  This will help make the Internet a better place (To this point I disagree with Scott Karp’s conclusion that Google’s CPA network will create direct response hell online.  It is easy to dupe users into clicking on things, you have to deliver value to them to get them to sign up for a service, order a product, etc.)   

Consumers Still Aren’t Getting the Full Value of their Attention with Traditional CPA

• This is why Google’s news ultimately lands with a thud.  If we assume Google is wildly successful with their CPA model, it may help elimiate the search engine spam and click optimized sites that frustrate untold online consumers.  This is a good thing for consumers but it doesn’t go nearly far enough to deliver consumers the true value of their attention online (see my post on Buying Attention here).  At Jellyfish we take Cost Per Action one step further to create Value Per Action, which directly rewards consumers for making purchase decisions on our site.  In the Jellyfish VPA model, as advertisers bid higher and higher rates to reach buying consumers, the end consumers share directly in that competition for their attention through greater savings.  This won’t happen in Google’s CPA system.  As advertisers compete for CPA opportunities and bid up CPA rates, Google and third party publishers will make more money, but the end consumer will still be completely disconnected from this significant value creation.  Ultimately, this makes Google’s CPA moves of marginal benefit to online consumers.           

A quick thanks to Thomas Claburn and Mitch Wagner over at InformationWeek for their coverage of Jellyfish and our Smack Shopping Show this week here and here.

I met with Tom in San Francisco last week and it was great to see his summary of our conversation about Smack Shopping.  One minor point of correction on the article, however, is that Brian is the CEO of Jellyfish; I’m the President.  No worries though Tom, I appreciate the promotion!  

Mitch wondered about our barriers to entry with Smack Shopping in his post.  I’m not aware of many start ups that have a business model that can’t be copied by the big boys (it all comes down to continuous cycles of innovation and excecution), but I did point out to Mitch that we’ve been pretty active with our patent filings at Jellyfish and are working hard to secure some patent rights to the Smack concept.       

Kudos to Niki Scevak over at Bronte Media for a great post yesterday on the dilemma facing the big boys of Comparison Shopping.  Using Shopzilla’s recent struggles as an example, (thanks to Brian Smith’s coverage of Shopzilla here and here) Niki correctly points out that the gravy train of Search Marketing for big PPC-based Comparison Engines like Shopzilla and Shopping.com may be coming to an end as keyword competition becomes more intense. 

The big four CSE’s (shopping.com, shopzilla, pricegrabber and nextag) found a classic arbitrage opportunity: buy customers from Google, Yahoo! and Microsoft, and then quickly sell them to retailers through multiple paid clicks at higher rates.  This strategy works great when the clicks at GYM stay low, but as retailers get smart and start competing for keywords, these GYM rates rise and the arbitrage dries up.  

The big problem is that these PPC-based shopping engines create limited, if any, customer loyalty.  The result is that the CSE’s have to continue to re-acquire their customers time and time again from GYM.  As paid search rates go up, this strategy becomes increasingly problematic and ultimately unsustainable. 

Brian was just in my office yesterday contending that no CSE has built a sustainable business outside of the shadow of GYM.  It appears that many of the new CSE start ups (e.g., Shopwiki) are also jumping into the PPC arbitrage game.  We are taking a completely different approach at Jellyfish.  With our VPA auction and cash back system, the Jellyfish model creates strong customer loyalty.  But since we aren’t playing the PPC game, competing against our retailer partners and extremely deep pocketed CSE’s, our big challenge is customer acquisition and brand awareness.  Our answer to this challenge has been to spend our marketing dollars creating remarkable, entertaining content through Smack Shopping.  Time will tell whether this approach works, but as the GYM arbitrage model dries up, this strategy looks better every day.