I guess that my point is: why reduce transaction costs to 0% if it is not necessary?

Greg is also saying (if I am reading this correctly) is that he thinks it is necessary to reduce trx costs to 0% to compete with google/overture in any significant way.

I am not convinced that this will enable anyone to compete with google. In fact, as you pointed out, search engine ad inventory will still be the most valuable inventory, which will still sell for a premium.

A better approach to competing with google would be to develop more valuable inventory. For example, it could be argued that del.icio.us has extremely valuable advertising potential because they’ve collected so much about the interests and thought patterns of its users. Root.net has the potential to do the same. MSN is working on better demographic targeting. I am sure yahoo and msn are both working on personalizing ads based on this information.

Another way to go to market with a new ad network is to pick under-optimized verticals, refine targeting or enable more effecitve direct or affiliate marketing. That is what my startup is aiming to do for events. The margins that ticketing and event registration are extremely high. We are not undercutting them in any way. But, increasing event planners/concert promoters ability to increase turnout through affiliate and word of mouth advertising. I am sure that other verticals are ripe for this kind of innovation.

Another route to competing is to increase efficiency in the marketplace. RightMedia has developed an automated bidding mechanism which translates CPA offers from advertisers to CPM bids for publishers. In real time. Think of all of the quotes, proposals and manual optimization that is done in the industry and how this has the possibility of reducing a lot of that fat.

I think there are lots of ways to skin this. But, building an ad network that doesn’t take a cut of the transaction seems an act of desperation to me.

Further, any ad network that takes this route, unless extremely capitalized, will have difficulty re-investing to compete with the bigger more established networks. The established players will have better sales teams, development teams and more money to invest in developing partnerships.

But, who knows? Maybe somebody has a few 100M to test this out.

I think the point is that Google is not a market. Google is just like any other publisher in that they have inventory for sale. It just so happens that their inventory is particularly good (in terms of subsequent conversion).

Just because you have a ‘bidding system’, you do not have a market. What is missing?

An ‘asking system’.

Google never(*) buys inventory. Advertisers never sell inventory.

This is why Google is making a 20% margin, whereas what I think Greg is hinting to is a market with a 0% transaction cost.

I think there is plenty of opportunity for a business model around a 0% transaction cost market. If you look at traditional financial markets plenty of participants pay for flow – namely they are willing to pay other participants to clear through them so that they get more insight into market operations.

(*) Ok, AdSense is slightly different.

I do think, however, that margins will be reduced over time, but not until/unless someone comes along who helps advertisers *convert* traffic better than Google does.

I believe purposefully reducing margins in any industry is an act of desperation and shows a lack of ingenuity. The reason google has been able to have such healthy margins is not because they aren’t transparent, it is because they’ve developed an advertising mechanism that is significantly more effective and efficient than any other.

Therefore, I disagree with your leap that anyone that wants to compete with google’s advertising network must compete based on price reduction.