Since we’re using Google Apps for Business for our startup, we’ve been getting a bunch of emails trying to get us to sign up for Adwords. The latest promotion is offering a credit of $300 if we spend $100. It’s a pretty common marketing tactic and tons of companies have similar promotions. What’s special about Google is that they’re running an auction for every single click and by giving some businesses free money, they’re driving the prices up for the entire market.

Without being at Google, it’s impossible to know what effect this has but I tried to do some estimates. According to the NY Times, Google had 4M businesses on Google Apps at the end of 2011 and by June of 2012 it was up to 5M. So over the first 6 months of 2012, Google Apps gained 1M businesses. If each of those businesses was offered $300 a credit and took Google up on it, there would be an extra $300M in the Adwords market provided by Google, in addition to that business’s Adwords contribution. If we compare this against Google’s advertising revenue during the first two quarters of 2012, $20,750M, we get 1.4%. That may not seem that big but think of every bid on Google Adwords increasing by 1%. Of course, not every business took Google up on the offer so the true number is going to be lower but I’d bet even then it’s still enough to affect the market.

I was trying to think of an analogy but had trouble. I initially thought this is similar to a casino giving some of the poker players free money but then realized that the majority of that money will still end up in the hands of players. I then thought it would be akin to ebay offering free credit to some buyers, but once again, most of the value would still captured by the marketplace participants; either by sellers getting higher prices or by buyers being able to buy more or better items. I finally settled on the idea of an amusement park offering free passes to random people. Those people end up making the park more crowded for the visitors who paid yet still buy concessions and the amusement park profits.

I suppose this is what happens when the dominant company in a market full of near-zero marginal cost products runs a promotion. I don’t know whether Google has a responsibility to their existing businesses to keep the auction fair but I know if I were advertising on Google I wouldn’t be too happy with Google giving free credits to my competitors.