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Friday, February 07, 2003

Overture's Insatiable Cash Machine Explained

Some further thoughts on the Overture price increase (minimum bids are now 10 cents). Price increases have been recurring theme since paid inclusion and pay-per-click search engine advertising began to be a serious force. The response from smaller businesses and grassroots webmasters is, predictably, negative, while larger businesses wouldn't know a five-cent bid if it stayed the night in the guest house.

On one hand, I think the concern tends to be exaggerated. With average prices per click hurtling towards 50 cents at Overture, and already exceeding that at niche "B2B directory" services like Business.com, 10 cents is not yet anywhere close to a breaking point.

But the increase is significant and disturbing on a number of levels.

First, Findwhat, one of Overture's strongest second-tier competitors, has been using its strong ROI as a selling point - attributing that ROI not to higher-quality traffic (since it usually isn't), but to the significantly lower price per click. Even admittedly diluted traffic can be a relative money-maker when you can bid half (or much less) what you'd have to bid at Overture. The Overture increase, then, seems likely to increase Findwhat's current advertiser base (of about 20,000), as Findwhat is still willing to take bids as low as one cent per click. Other second-tier players can also make hay from the perception that Overture is getting pricey.

Second, the announcement looks like a desperate and ill-timed attempt to hold up the company's stock in the wake of a warning that revenues will be ahead of schedule this year but profits may be significantly below forecasts. At various times Overture has wanted to tell the analysts "we have pricing power." And it usually seems to work in convincing them.

Overture indeed has pricing power, but that brings me to the next point. Its pricing power is created by artificially restricting the depth/width of the keyword inventory available, thus forcing more bidding wars on popular terms. Bidding wars are exacerbated further by the need to bid high enough to appear in fourth spot or higher (premium position on Yahoo, etc.) to see any significant traffic. Sixth or seventh won't generally cut it. It boils down to a key difference between the way Overture and Google sell keyword inventory. Overture does not have flexible phrase matching options (such as broad matches), so every match must be an exact match (or either an exact match or a match generated by their proprietary and mysterious Match Driver software). As a result, a great deal of lesser-known keyword inventory simply goes unsold. There is little reward, and some significant barriers, facing the advertiser who wants to seek lesser-known keyword inventory to enjoy the cheaper prices possible when one escapes bidding wars.

The change won't affect the majority of the advertisers - or to put it perhaps more accurately, it won't affect the minority of advertisers who comprise the majority of Overture's revenue. But it does illustrate the pressure facing a public company to meet targets at all costs. The question is, is this short-term thirst for cash and Wall Street acceptance in conflict with the long-term interests of advertisers, and ultimately, of Overture itself?

Perhaps most disturbing of all is the tendency of those at the higher levels of the advertising and publishing business to disdain the "mom and pops" - although one is happy to take their money, it doesn't seem cool to speak well of them. But the whole principle of pay-per-click advertising is that it's a direct marketer's dream. This is a world where you're not supposed to ask someone where they went to school or what their annual budget is. What's supposed to matter is response rates and ROI - for anyone.

A lot of so-called mom-and-pops are successful examples of the millionaire next door. And quite a few other small startups are driven by successful semi-retired or career-shifting executives, marketers, and technologists who may indeed have worked inside the bowels of the largest familiar-brand-name companies. The worst thing that could happen to the pay-per-click middlemen would be to lose their passion and sense of what makes search engine advertising different from the traditional advertising business. Less friction, better customers, direct response. For anyone and everyone with a buck and an idea.

Posted by Andrew Goodman




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