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Thursday, May 22, 2008

Microsoft-Google Price War Already Insane-o

A few days ago when I posted about the "coming war of free," I really had no idea the competition could get as heated as Microsoft not just giving away search by monetizing less, but giving away search *ads* by passing pretty much all the ad revenue from certain search ad sales conversions onto consumers in the form of rebates.

In other words, Google spends huge resources on developing great search and other products to pour people into its Super Funnel. And they develop a huge exchange model with a massive number of advertisers which has been optimized to maximize Google's revenues from ads that sit near the pleasing search experience.

Microsoft's response? Minimize its own revenues from the ads, without reducing the amount of ad clutter. Make a tweak to the pricing model in an attempt to be competitive, in a bid to increase market share. Maybe it's logical given that minor improvements in search quality wouldn't pry consumers away from Google, but as logical as it is, it's a reminder that Microsoft is firmly entrenched as an also-ran. Pricing gimmicks tend to be signs of weakness.

Meanwhile Google, perhaps sensing blood in the water, gently posts something about its deep commitment to search quality.

This reminds me of the losing strategies of the North American automakers. You can discount and rebate yourself into the ground, or you can build a better product that commands high margins at the end of the day.

To turn to specifics, there are reasons why CPA hasn't taken over from CPC and CPM in Google's pricing models, in spite of the trial run. CPC auctions provide a major incentive for advertisers to measure, improve communications & relevancy, and the most efficient survive - paying strong advertising fees to Google. With CPA, none of these incentives exist, so a lot of ads get shown to users but not enough of them convert. Eventually, the publisher tires of the CPA deal and goes back to plain old advertising.

The premise -- that "commerce searches will flock to Live" because of lower consumer pricing on products -- is at least interesting. However, user behavior doesn't work that way, and I think, deep down, Microsoft knows it. A certain experimental phase is to be expected, but the power of the toolbar, recurring user habits, search quality, and a bigger, better digital funnel is not something that can be bested with a pure pricing move. In the classic economics sense of "search costs" and "transaction costs" relating to the overall reliability and flexibility of the search experience, Google users are still going to be plenty satisfied.

P.S. If I have misinterpreted the program and it's advertisers who set the rebates, I'll still go out on a limb and guess that the typical user experience won't improve (even with the cash) enough to cause users to alter their search behavior.

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Posted by Andrew Goodman




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