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Wednesday, April 09, 2003

Putting the End of Overture's Penny-Bid Grandfathering in Perspective

After a long grace period, Overture's one-cent minimum bids were finally discontinued. All advertisers are forced to pay at least the minimum of .05 on all their keywords. New keywords are now going for a minimum of ten cents.

Inevitably, a few site owners complain that they could "turn a profit at a penny but not at five cents," so why doesn't Overture just take their money as they are happy to pay it?

Hmm. Turning a profit on penny traffic isn't so far away from turning a profit on free traffic. Those who actually refer the traffic through their search engines (Yahoo, AOL, MSN, Google, etc.) decided some time ago to repatriate a larger share of that free traffic. Because in an environment where traffic is free or nearly free, there is every incentive to load up on as much of the free or nearly free commodity as possible, and then figure out what to do with it after the fact.

I mean, if you had no particular use for 1,000 barrels of oil, but could get them for half price, wouldn't you go ahead and find a buyer for the oil, then sell it to them, and pay the guy selling the oil? That's why the guys who control the oil don't put the oil on for half price if they can help it. They do what they can to avoid discounting the commodity too much.

This is approximately what many of the "penny-dependent" sites have been doing: engaging in "traffic arbitrage." Some of these sites actually act like mini-Yahoos or mini-Overtures, charging for listings or even per click. Some "PPC traffic brokers" buy penny clicks and then resell them to customers for 10 cents. What happens when those clicks actually cost 10 cents? Suddenly, the advertiser sees more incentive to deal directly with Overture or Google Adwords or Espotting as opposed to having the broker "just take care of it."

If some online businesses' status as mini-Yahoos or mini-Overtures depends on getting Yahoo (through Overture) to send them traffic nearly for free, their days are numbered. Because the Yahoos and the Overtures of the world are not in business to help mini-replicas of themselves turn a profit - although they certainly hope that retailers and B2B advertisers who don't actually "sell traffic," but rather sell a real product or service, can enjoy a strong ROI from pay-per-click.

So you see, penny-bidders, you really haven't been giving money to Overture and Yahoo all this time. You've been taking from them what they feel is rightly theirs, and reselling it for a higher price to someone else who values the traffic more. Traffic arbitrage. Well, no more. Overture, Espotting, and Google have minimums of five and ten cents or pence, or more. Problem solved.

As more serious advertisers enter all keyword areas, bids are on their way up anyway, minimums or not. A process of natural selection is endemic to a keyword auction. Some business models will be able to sustain high bids; others will either have to change their model or find another type of advertising (or get a day job).

Posted by Andrew Goodman




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