Knowing what I do ...

Never forget the first rule of AdSense:

Loose Lips Sink Ships

FarmBoy

I don't know how long Google has been placing ads above organic search results (in a contrasting color), but it's been quite a while. I also doubt if those paid results are taking much away from organic search referrals. (My own Google search referrals have been pretty consistent, and I recall reading somewhere that the CTR for Google search ads is quite low compared to the CTR for organic search results.)

recall reading somewhere that the CTR for Google search ads is quite low

If anyone has seen a number for that I'd be curious to see it...

Loose Lips Sink Ships

Hehehe...it's a bit difficult to hide what I do locally and I have known both these guys for about 15 years, slightly before Google was even dreamt about...I know where you're coming from though:-)

If anyone has seen a number for that I'd be curious to see it...

Me too however their traffic numbers are a bit more than mine!

If we look at the CTR of all advertising it is typically a few percentage points for the best performing ads and less than a point for banner ads. I would think that at Google search it is somewhere in that range. In other words, more than 95% of people have some idea of what is an ad and what is a search result, though, they may not have a full understanding of the complex economics that means so much to us publishers.

...they considered Sponsored Results as part of the normal SERPs...

Yes, this is what I've observed when helping family and friends with computer/internet stuff. Most thought that the top ad links were the best recommended results until I told them that they were ads.

If anyone has seen a number for that I'd be curious to see it...

I did a quick Google search just now and found some ComScore clickthrough numbers from February, 2007. According to ComScore, Google was averaging 14.4 percent CTR from search ads, and Yahoo was averaging 12.9 percent.

In contrast, a 2006 study of AOL organic search results suggested that the #1 slot got a 42.3 percent clickthrough rate, the #2 slot got an 11.92 percent CTR, and #3 got 8.44 percent. Since the page is a legitimate resource, I'll cite it here, and the moderator can delete it if he doesn't think it meets the forum guidelines:

Clickthrough rate of Google Search Results on AOL [redcardinal.ie]

There's obviously no way to know what effect AdWords on a Google SERP have on clickthroughs to a publisher's page in any given situation, and it probably isn't worth getting upset about. After all, Google has a right and a need to place ads on its pages, just as we do. (To Google's credit, ads aren't blended with the organic search results, and if many users are like me, they're so focused on the white-background organic results that the beige-background ads aren't even noticed.)

Whenever I am sitting next to a friend or colleague in front of a computer, it's exciting (in a way) to see how they use Google. In most cases, normal users do not recognize (or even think about) the ads. They just hit the first result.

I am always shocked when I see this. My immediate thought is - "gosh, another $1 [or whatever] into the pockets of greedy GOOG".

I enjoy watching family members and friends conduct web searches because I learn a lot, too. Almost all of them, and I mean ALL, are likely to click the sponsored links at the top of results. This includes the technically savvy.

Why should the general surfing public care if a listing is sponsored or not?

It can be an indication of content if a site is in the natural listings rather than a paid ad. I'll avoid the paid ads if I'm looking for information as I don't want to waste advertiser's money.

Those pastel colours are tricky though. I bought a new monitor recently and clicked on quite a lot of those ads in the serps before realising I should adjust my brightness and contract so I could see the pastels.

As an advertiser, those sponsored listings can be heaven or hell. Sometimes they get a high clickthrough rate with good conversions and sometimes they get an even higher clickthrough rate with crappy conversions.

For example, Joe the Surfer types into Google the phrase "black widgets."

The first thing he sees at the top of the ensuing search results page is an AdWords ad that says, "Black widgets, all shapes and sizes." Now Joe is looking to buy a new black widget, does or doesn't know that's an ad, but he's happy with what he finds when clicking the link and purchases exactly what he was looking for.

Google is happy, the advertiser is happy (assuming he didn't outbid his ROI), and Joe is happy. Who's unhappy? The webmaster at SERPS result #1 who didn't get the traffic and the ensuing ad click or e-commerce sale.

Now along comes Tom the Surfer. He types in "black widgets" and gets the exact same Google page that Joe saw. Tom, though, wants to fix his old black widget. He's hoping to find a repair manual and maybe some parts for his widget. He clicks the first thing he sees, the AdWords ad, and finds that site has only new widgets for sale. Unhappy with his choice, he clicks more links, maybe they're ads, maybe SERPS links, he doesn't know the difference. Not finding what he's looking for, he smartens up a bit and types "repair black widgets" and gets a different search results page.

Now maybe he sees the same ads as before, or maybe he sees different ads. If the advertisers were running lots of keywords with high bids to retain those top slots, they're wasting Tom's time and probably a chunk of their ad budget. If they're using negative keywords so their ad doesn't show for keywords like repair or manual or parts or used or something else they wouldn't be selling, then Tom might see more appropriate ads for his search. He might even finds what he wants in the regular SERPS.

It's hard to tell what happens to Tom's clicking pattern. In the first scenario, if he clicks the ad, Google makes money, the advertiser loses money, and Tom has wasted a bit of his time. When he refines his search, he may click the same ad not realizing he'd already done it a few minutes ago. Now if Google serves a more targeted ad to his refined search, then maybe Tom is better served. But the webmaster at the top of the natural SERPS loses again.

You'd think that Joe and Tom and other non-webmaster surfers would use better refined searches, but they don't. They'll type in "black widgets" the vast majority of the time rather than a more refined search that might target the ads and search results a bit better. Advertisers who want the sponsored listings at the top of the page are treading a fine line. If they're selling just new widgets, they know a lot of their sales from the ad will come with Joe and Tom just typing "black widgets." If they're smart enough to use negative keywords to keep from showing the ad when the surfer is looking for something they obviously don't have, then everyone is better served this way. I suspect many advertisers don't do that.

There are products, though, where the vast majority of people are looking for something other than purchasing something when typing in "black widgets." The advertisers in those sponsored links at the top of the page may be losing money on those ads because the conversion rate is too low. Why are they still running the ads there? They've either not done the analysis that shows a negative ROI, they're still testing ads and negative keywords and haven't given up yet, or they want it there for branding purposes.

Just a perspective from an advertiser (and yes, I'm a publisher too, though not to the same sites).

I'll avoid the paid ads if I'm looking for information as I don't want to waste advertiser's money.

Earlier today I did a search for a fairly low-cost common product. The first page of the organic results were iffy as far as actually sending me to a helpful site. Several were "MFA type" pages - although they didn't have AdSense ads, they were clearly "middle man" pages people developed to have me visit their site and click on more links to actually find what I wanted. I didn't find these very helpful.

Above the organic results were three sponsored ads. The ad text told what I would find at the sites. I clicked on all three. Each offered the exact product I wanted and I requested a catalog from all three.

After comparing colors, prices, etc., at least one of those three advertisers will get my initial purchase and likely a lot of repeat business.

My guess is clicks on the sponsored ads at the top of search results pages increase as the quality of the organic search results below decrease.

FarmBoy

Having watched intentionally and without interfering others using search: yes many make *no* difference between those ads and the real SERPs, only the more advanced users (like most here) know to ignore those first results as they only will want to sell stuff.

I've even observed a PA searching with the full name of a local hotel (to book a VIP a room), click the first of those ads only to continue to click like mad for finding the phone number, while the SERPs did return the hotel's own site as #1 ... but she never got back to the SERPs.

Afterward, I did show and explain ... the interesting part is that she said she knew the ads were on the right and she ignored those, but didn't realize those on top were ads too. She then searched again for it and said: "well yes the text is indeed rather commercial sounding".

Many users are clueless, period. I routinely get e-mails from people who've read an ad and think I'm the advertiser, or who've read a review of a National Widget Corp. product and think I'm National Widget Corp. So yes, there probably are users who think an AdWord is an organic search result, just as there are users who think an AdSense ad is a link or part of a site's navigation scheme. But what of it? As publishers of ad-supported sites, we can hardly begrudge Google's use of ads to generate revenues--even if we might prefer that Google SERPs be ad-free pages from a not-for-profit organizaion.

This is why I bid on AdWords for phrases I'm already ranking for, and recommend it to clients as well. Ranking #1 in Google hasn't been the same for many many years.

I'm reminded too, of the various Google experiments in lightening the background colour [webmasterworld.com]. I think it's safe to say that making ads that the average searcher doesn't realise are ads is the way to get the biggest CTR. Perhaps that's also the reason that text-based ads have done so well when compared to the more obvious multimedia equivalents?

As a searcher, I appreciate as much separation as possible - I tend to click on ads more frequently if I want to buy stuff, and avoid them if I want information.

Google is happy, the advertiser is happy (assuming he didn't outbid his ROI), and Joe is happy. Who's unhappy? The webmaster at SERPS result #1 who didn't get the traffic and the ensuing ad click or e-commerce sale.

Well ... you know ... that sort of indicates the world is spinning in the right direction. After all, the advertiser paid for that spot and the webmaster didn't pay Google for his spot.

FarmBoy

I think it's safe to say that making ads that the average searcher doesn't realise are ads is the way to get the biggest CTR.

That, along with not giving the visitor exactly what he is looking for.

FarmBoy

That, along with not giving the visitor exactly what he is looking for.

Perhaps, but that would be a different equation altogether. If you encourage a click (even if the user is deceived into clicking) and the user goes away happy, then could still be deemed a successful result. CTR is verifiable "favourable" in that scenario.

If someone clicks and doesn't get what they want, they're less likely to click in future. That can't be a good thing. It's unsustainable, and more to the point, measurable. Returning clicks for an ad broker is like returning visits for a site owner - a basic, but fundamentally useful way of qualifying visitor stats.