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How Google Adsense Works?

The webmaster inserts the AdSense JavaScript code into a webpage. Each time this page is visited, the JavaScript code uses inlined JSON to display content fetched from Google's servers. For contextual advertisements, Google's servers use a cache of the page created by its Mediabot crawler to determine a set of high-value keywords. If keywords have been cached already, advertisements are served for those keywords based on the AdWords bidding system. (More details are described in the AdSense patent.)
For site-targeted advertisements, the advertiser chooses the page(s) on which to display advertisements, and pays based on cost per mille (CPM), or the price advertisers choose to pay for every thousand advertisements displayed. For referrals, Google adds money to the advertiser's account when visitors either download the referred software or subscribe to the referred service.  The referral program was retired in August 2008. 

Search advertisements are added to the list of results after the visitor performs a search. Because the JavaScript is sent to the Web browser when the page is requested, it is possible for other website owners to copy the JavaScript code into their own webpages. To protect against this type of fraud, AdSense publishers can specify the pages on which advertisements should be shown. AdSense then ignores clicks from pages other than those specified.

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