(Editor’s note: Some people, it seems, are steamed about changes Google has made to the way it lets outside developers tap into its search and ad platforms. We asked Rob Drapkin to write about the changes in Google’s ad platform. These changes are different Google’s separate changes to its search platform, where you can see an example of a complaint here.)

APIs, Application Programming Interfaces, are interfaces that allow one computer program to call another to create services. Web 2.0 mashups are predicated on APIs to allow programs to access each other. Recent, well known examples of programs built on APIs would include the mashup of Salesforce.com and Google Maps, or Adbrite, which raised $4m from Sequoia Capital to exploit Amazon’s API to create a marketplace consisting of thousands of advertisers.

Google began charging this month for usage of the API for AdWords, its flagship advertising tool. When Google initially published this API last year, the press speculated that software companies would quickly emerge to take advantage of the new access to AdWords.

Earlier this year, investors funded an initial wave of startups that offer additional functionality built on Google API data. Companies such as Efficient Frontier, Clickshift, and Adisem, for example, offer AdWords management and optimization. Going forward, however, the new API expense could prevent startups and established companies from offering many services based on the AdWords API. In addition, several ad agencies have also decided to scale back or eliminate API efforts, since they find it less costly for them to hire analysts, usually in India, to crunch numbers on large spreadsheets.

Just trying to understand the API pricing in a specific business situation is a challenge, as is clear from seeing the Google price sheet. The billing appears as a large, non itemized bill.

The structure of the API fees will also significantly impact several areas of the software industry. Since API cost scales with frequency of access, there are very negative implications to companies who would like to use Google data in a real time web analytics platform. Given that Google offers a free low end analytics tool, could this be a hint that Google will be targeting higher end web analytics in the future?

Venture investors would need to be aware of how open Google will be with APIs going forward. Any startup that is working on a mashup that would take information from Google via an API would have an increased level of risk. (What if Google begins to charge for the spreadsheet API, or the maps API?) Just this week, it appears that Google is removing new access to its SOAP search API as well.

Perhaps the most puzzling thing for those of us in the AdWords management business about the AdWords API charges is that it will prevent us for developing code that would improve results for the advertisers, ourselves, and Google as well. As an example, one very common request from Adisem customers is to help them populate the ‘long tail’ of keywords, which improves relevancy (and Google revenue) by serving ads where there were none before. Since there is now a charge per keyword, we are actively discouraged from doing so.

So, what are Google’s competitors doing? Microsoft is not charging for its competing Adcenter API, and in fact, it even has a team dedicated to encouraging software companies to develop for it. Still, they are playing catchup in both advertising market share and API development. I would doubt that Google is overly concerned.

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