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Thursday, October 02, 2003

LookSmart Bets the Company (Again)

If it were a biz school case study, I'm sure LookSmart would look like roadkill. What else could you say about a company that kept changing its core product to something different, and when it wasn't doing that, it was changing its pricing scheme in ways that confused current clients?

All that being said, if you ask me what I think of LookSmart's announcement that it's moving into "sponsored listings," I have to give it an unequivocal thumbs-up. Without knowing about their plans, I concluded that this is exactly what they should do when I sat down to write a review of their service recently. (Unfortunately, that review will now have to be rewritten!)

Their paid inclusion offering as currently structured is just too confusing and offers too little control. Ultimately it doesn't treat advertisers as advertisers, even though they wind up paying by the click. It's a hybrid that made apples-to-apples comparisons difficult (is LookSmart as good as another pay-per-click provider, or should we even compare them?) and didn't allow the keyword auction market to set prices (flat pricing of fifteen cents, and later, tiered pricing which charged up to 75 cents for some keywords).

So the move to offer a "pure" pay-per-click sponsored listing service that competes directly with Google AdWords and Overture will be welcomed by many advertisers. LookSmart will maintain its paid inclusion LookListings program, for now, and indeed it is not going to be showing sponsored listings on MSN Search, since MSN is still using Overture for these. It's fair to say, though, that LookSmart's product development was largely driven by a need to please MSN in case MSN chose to terminate its search listings partnership with LookSmart.

For the time being, then, LookSmart Sponsored Listings will have modest distribution in spite of what looks like a solid product. It's easy to get set up with in a minute or two, and the pricing scheme is easy to understand. The big task now, as they told the press today, is to convince large portal partners that they are the new Switzerland in the space now that Overture is owned by Yahoo and now that Google is seen as a dangerous frontrunner.

LookSmart's shown great tenacity in the face of much adversity in the search and directory (and now, paid search) business, and they will offer credible competition to the industry leaders in pay-per-click. It's not out of line to imagine them powering MSN's sponsored listings in Overture's place. They'll also be serenading AOL Search to see if they can't dislodge Google, but that will be a tougher sell.

For seasoned PPC advertisers, a couple of features are notable. First, the minimum bid is fifteen cents, three times what Google charges. This won't be appreciated by smaller advertisers, but since the trend in average costs per click is upwards, it may not be a huge issue in the near future. (We would prefer that everyone go down to one cent, but I guess that isn't in the cards.)

But the really intriguing thing is that they've emulated Google in factoring clickthrough rates along with bid amounts into the formula that determines how prominently one's ad is displayed in the listings. This makes economic sense for the publisher, when you really think about it. Imagine a cost-per-click banner ad deal that kept running forever with very few people clicking on that particular ad. The publisher gets no money, yet the advertiser gets to clog up the space with their message.

The trend of factoring CTR's into the formula for CPC auctions, and indeed into all CPC advertising deals, is likely to continue. Competitors like Overture and FindWhat may need to sharpen their attention to this issue.

Moving into sponsored listings could be a rude awakening for LookSmart in some ways. After all, it's no fun dealing with click fraud and editorial policy issues. But then again, LookSmart has some of the deepest experience in the business when it comes to editorial control. They are at least as likely to succeed in this field as anyone else, and frankly, it's high time they stopped taking a back seat to their competitors by clinging to a convoluted product mix and awkward pricing scheme.

Posted by Andrew Goodman




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