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Saturday, May 31, 2003

PPC Margin Compression Thesis Influences Stock Traders

Bill Martin and Matt Ragas often write about companies like LookSmart, Ask Jeeves, Google and Overture in their subscriber-only FindProfit newsletter. On May 19 they mentioned that Google's recent deal with Ask Jeeves UK gave away as much as 70% of revenue, which offers further proof that pay-per-click middlemen will get squeezed as search and portal players play off the PPC providers against one another, or threaten to take it in-house. This reality is made plain to investors in Overture's public filings, which state that they expect "traffic acquisition costs" to increase each quarter by an estimated 0.25%.

Martin and Ragas call this the "PPC Margin Compression Thesis." It's a theory I've been holding forth on for some time now - I'm just glad it now has a name!

Google's fallback, of course, is that it gets to keep 100% of the revenues from advertising on Google. And it stands to reason that companies like LookSmart, and to a lesser extent FindWhat, will face the disintermediation problem. It's just this problem that caused Overture to snap up two search engines (AltaVista and FAST) just so it had some search franchises to call its own.

Thus we continue to feel that talk of Yahoo buying Overture is misguided. A more compatible scenario would be one of the major online ad networks such as DoubleClick merging with one of the top or second tier PPC players.

Posted by Andrew Goodman




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