From Zero to Standard
Google Ads launched in October 2000 under the name Google AdWords, just two years after Google itself was founded. The original AdWords platform charged advertisers on a CPM (cost per thousand impressions) basis, similar to traditional advertising. The pivotal innovation came in 2002 when Google introduced the pay-per-click model with a quality-score-based auction system. Instead of simply giving the top ad position to the highest bidder, Google factored in the relevance and quality of the ad, meaning a better ad could win a higher position at a lower price. This quality score system revolutionized online advertising. Google rebranded AdWords to Google Ads in 2018.
The Technical Edge
Google's ad auction system was directly inspired by the work of Nobel Prize-winning economist William Vickrey, who theorized about second-price auctions in the 1960s. In Google's implementation, the advertiser who wins the auction does not pay their maximum bid; they pay just one cent more than the next highest bidder, adjusted for quality score. This mechanism encourages advertisers to bid their true value rather than trying to game the system. Google's Chief Economist, Hal Varian, who joined the company in 2002, was instrumental in designing and refining this auction mechanism. Varian is himself a distinguished economics professor who literally wrote the textbook used in most intermediate microeconomics courses at universities worldwide.