My view on Adwords and Adsense

1. Introduction
AdWords and AdSense are both Google’s commercialized solution of disseminating advertisements online. AdWords offers pay-per-click (PPC) advertising, and site-targeted advertising for both text and banner ads on Google’s website whilst AdSense has the similar functions in the content network which the owner intend to cooperate with Google on ads.
The AdWords was launched in 2000 and became more standardized in 2005 after the Google Advertising Professional (GAP) Program. Besides, the technology of AdSense, which operates like a subset of AdWords, originally derived from WordNet, Simpli, and finally be acquired by Google in 2003. Nowadays, it becomes Google’s flagship advertising service and the main source of revenue which is 98% of Google’s total revenue $16.4 billion in 2007.
The AdWords/AdSense works in the following way.
For advertisers:
First, advertisers do a registration to Google and choose proper keywords, placements or both of them as their AdWords. Then, advertisers should choose an AdGroup (a group of advertisers have same keywords) to join in. After ranking by Google’s AdWords server, Google disseminate the ads to search network and content network. The positions of ads are shown based on the ranking results.
For internet users:
AdWords: After internet users searched keywords on Google’s search engine, Google’s server returns search results together with the ads which appear on the top and the side bars.
AdSense: Webmasters create their web pages with a piece of Javascript code, which create the relationship between web masters’ web pages and Google’s AdWords Server, in flexible position. After internet users make a request for the page, this piece of code can get ads from Google’s AdWords Server and return the page together with ads which is related to the content of this web page.
2. AdWord/AdSense Ranking Mechanism
Ads are positioned on search and content pages based on their Ad Rank. The ad with the highest Ad Rank appears in the first position, and so on down the page. The ranking is based not only the cost-per-click or content bid, which is referred to Generalized Second-Price Auction, but also the ‘Quality Score’, which is a dynamic variable calculated for each keywords. Different types of AdWords have different calculation of the ‘Quality Score’.
a) Keyword-targeted ads on Google and the search network
Ad Rank = CPC bid × Quality Score
The ‘Quality Score’ is calculated by historical click through rate (CTR) of the keyword and the matched ad on Google, an advertiser's account history, the historical CTR of the display URLs in the ad group, the relevance of the keyword to the ads in its ad group, the relevance of the keyword and the matched ad to the search query, and other relevance factors as determined by Google.
b) Keyword-targeted ads on the content network
Ad Rank = content bid × Quality Score
The ‘Quality Score’ is calculated by the ad's past performance on the site in question, the relevance of the ads and keywords in the ad group to the site, a landing page quality and other relevance factors.
c) Placement-targeted ads on the content network
Ad Rank = bid × Quality Score
The Quality Score for determining if a placement-targeted ad will appear on a particular site depends on the campaign's different types of bidding. If the campaign uses cost-per-thousand-impressions (CPM) bidding, Quality Score is based on the quality of your landing page. If the campaign uses cost-per-click (CPC) bidding, Quality Score is based on the historical CTR of the ad on this and similar sites and the quality of your landing page
Quality Score is calculated every time your keyword matches a search query. i.e. Every time your keyword has the potential to trigger an ad. So it ensures that quality plays an important role in ranking and a fairly competition.
3. “Generalized Second-Price” auction
The GSP auction is used by search engines (Google & Yahoo) for selling online advertising and for multi-slot auction as their bidding mechanism. Advertisers submit bids stating their maximum payment per click on a certain keyword and the advertiser win the slot i pays the price of slot i+1 plus a minimum increment. It may become Vickrey auction when there is only one slot available. There is not best dominate strategy include true-telling in GSP because advertisers must consider whether the payoff in the auction is reasonable.
4. Summary
AdWords and AdSense changes the mode of advertisements from all audiences online to a certain group audiences who really concerned about these ads which Google provided. It relies on its complex fairly ranking mechanism. Nowadays, more and more search engines implement their ads server and operate the similar way of Google’s AdWords and AdSense.