Google announced that is discontinuing the agency commission structure it has in place for European agencies that are growing their accounts. Known as the European Best Practice Funding, the “kick-back” program will officially be terminated in January of 2009.

Google pays agencies a percentage of money back based on how much they spent on behalf of clients. The commission program is believed to be worth around $100 million (£50m) a year to agencies.

The Best Practice Funding was used by Google to encourage agencies to appropriately increase their cost-per-click spend and try out new initiatives such as Google’s new Gadget Ads.

How will agencies be affected?

According to Andrew Girdwood of Big Mouth Media:

“The announcement, whilst not unexpected, nevertheless could put in some jeopardy the financial health of some agencies involved in search, and along with them, the client campaigns. In this competitive industry, some agencies based their business model on paying the kicker directly to the client as an incentive.

In fact, there has been a growing trend amongst some heavy users of Google PPC to systematically move PPC work between agencies to benefit from ongoing growth kickers. These agencies are going to feel the pinch as they are reliant on kickers and BPF to provide their margin.”

As an FYI, Google does not provide the standard 15% commission to agencies. This is a clear signal that Google is developing their internal agency (regardless of what they are saying), which currently is building out keyword lists and putting together teams for various verticals to come up with advertising ideas and manage campaigns for select clients. Is this a conflict of interest?

Mediapost published this quote from Google CEO, Eric Schmidt, in their article, “Agencies: Google Has Put A Target On Your Back:”

“Google’s intentions relative to its planned offerings for the world’s marketers are quite well summed up by CEO Eric Schmidt, who tells the WSJ, “The long-term fantasy is we walk up to you and you give us, say, $10 million and we’ll completely allocate it for you across different media and ad types.”

The writing is on the wall. Google is planning to unseat agency mediaries. If Google executives fantasize about controlling the allocation of media spend across all online and offline channels, they certainly seem to have their sights set on taking over the media ad business.

Of course, this is just my opinion…

Technorati Tags: Best Practice Funding, Gadget Ads, Google Ad Agency