Is the magic of Google’s ad network wearing off?

This blog post from BloggingStocks raises that exact question. Google built its empire on the idea of contextual, text-based ads that are relevant to the content that the reader is interested in. This simple system, described fully in chapter 11 of the test, allowed the search company to go from a PhD project at Stanford, to a $100 IPO, all the way to a stock price high of over $700.However, Google – along with a good portion of the market – has fallen on hard times recently, with its stock price falling to under $500. (As of the market close on Thursday, Google was at $444.08.) Conventional reasoning writes this loss off as a consequence of the economic difficulties the market is facing right now. However, what if there is a deeper problem; what if people are starting to wise up to Google’s method of capturing attention?

In class, we have learned that Google’s system is at least partly based on the generalized second price auction model. The whole system, however, is predicated on the assumption of independent, private values. If those values are indeed being influenced by a perceived devaluation in a placement on Google AdSense, then Google may be in a difficult position; if I don’t have confidence that I will see a return in my advertising investment, then I will be unlikely to make that investment in the first place. The billion-dollar question is going to be whether this represents a temporary blip or a permanent downswing.