I was chatting today with an executive from an Internet media business that collects tens of millions of dollars in advertising fees annually. He has invested as much as possible in direct salespeople because of the heavy commissions extracted by Google and Yahoo. Google won’t say exactly how much of a rake they are taking from Adwords, but he estimated that as little as 20-25 percent of what advertisers pay flows through to the sites where ads appear and that Google adjusts this number in order to meet quarterly earnings targets. Google thus collects a 75-80 percent commission. How does that compare to the bad old inefficient pre-Internet world? Standard ad agency commissions were 15 percent.
[Google has itself apparently divulged some accounting figures and claims that they rake off only 32 percent (source), which means that in the best case they are taking twice as much as the bricks and mortar ad agencies.]
The goal of advertising is to get results (sales) not to minimize the profit margin of your ad agency. An ad agency that is able to deliver better results at lower internal cost structure versus the competition is able to maintain a higher profit margin.
The traditional 15% commission of traditional advertising agencies reflects a cost-plus model, not greater efficiency in producing effective advertising. Google provides far better value than previous advertising channels and lacks competition, which allows it to keep more of the value it creates.
Michael, I could not have said it better. Also the ad-agencies are still charging the 15% commission for internet ads they place. The problem with adwords is that they are not able to go through as much money as before. Which is bad for commission model.