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Search Engines
By Andrew Goodman, 10/17/2001
What is it with people who think they invented the Internet? Or at
least seemingly important aspects of it?
Not so long ago in absolute terms, but an eon ago in Internet time,
a company called E-Data thought it had invented, nay patented, the whole concept
of e-commerce, or at the very least, the idea of selling digital goods via
download. They sued everyone they could think of, and actually
managed to induce a few large companies to settle out of court. Last time
we checked, Amazon.com (no stranger to patents itself, having invented something
it calls "1-click ordering") was still in business. In spite of continued interest
in the case by patent law geeks, E-Data is going nowhere fast. What seemed like
a very specific patent in its day now, quite simply, covers so much ground that
it is practically unenforceable even if the letter of the law might suggest otherwise.
That was bad enough. As the Internet bubble reached its
zenith, venture capital was funding whole companies based on general ideas about
new economic paradigms. Remember "group buying" (Accompany.com, later changed
to MobShop)? And what about "name your own price"? For about three seconds there,
it seemed as if companies with actual products and customers were going to
be eaten alive by smart alecks who were discombobulating value chains, accelerating
the volume of network effects, disintermediating and reintermediating brick
and mortar industries, and splitting atoms in their off hours. Shareholders
later found out to their dismay that many of these companies were, in
fact, turning dollars into pennies.
Now let me be the first to say that Overture (formerly GoTo), a company that facilitates "pay-per-click"
results for major partners such as AOL and Lycos, is far from an empty shell.
There continues to be keen demand (mainly on the part of advertisers) for
something it has in fact patented - paid
placement in search engine results, a concept we previously referred
to as "search engine as bazaar."
One doubts the patents are enforceable. But that isn't the point.
Certain precedents make us uneasy about the direction in which Overture
may be headed. Overture is in good company with a family
of general ideas that some venture capitalists wrongly believed could be
monopolized by particular companies. It makes one begin to question whether
being the self-appointed "leader in the pay-per-click search space" makes one
the leader of anything at all. As one Yahoo! Finance message board wag pointed
out not too long ago, selling clicks is a bit like selling sunshine.
Strangely enough, though, Overture isn't claiming to be the
#1 company in the pay-per-click search space anymore. If an artificial industry category
can be created (even patented!) when it is convenient for the purposes of raising
capital or attracting advertisers, it can just as easily be eliminated when
it becomes inconvenient. Coinciding with its name change, Overture is
distancing itself from the notion that it has anything to do with search engines
or search results. It now insists on the term "paid introductions" instead of
"pay-per-click engine." Its name and its revamped image suggests that it is in
the business of facilitating advertising, not consumer search. One can only speculate
on the reason for the shift in emphasis, but surely one factor must be the recent
complaints raised by Ralph
Nader's advocacy group claiming that search engines and portals were engaging
in a "bait and switch" scheme by misleading consumers with paid links which
were too similar to the expected "raw search" results. GoTo, now Overture,
was at the center of this controversy, even if Nader et al. chose to put
the spotlight on GoTo's partners such as AltaVista, Lycos, and MSN.
Even more curiously, at the same time as it denies being a search
engine, Overture is tightening relevancy requirements on its advertisers. In
other words, it is claiming to be an advertising service, not a search engine,
while actually acting more like a search engine or editorial organization than
it did in the past. Some speculate that an existing partner is demanding this
increased emphasis on query relevance; others believe that Overture's policy changes
may be intended to woo new search and portal partners.
What haven't changed are the assumptions made by most observers,
consultants, and journalists: that there is a strictly-defined "pay-per-click
search space;" that the list of companies in that space is headed by Overture;
that Overture's competition is limited to companies which define themselves as
"pay-per-click engines," "sellers of sponsored links," or "PPC companies,"
such as FindWhat, Sprinks, ValleyAlley, and dozens of tiny competitors; and due
to Overture's overwhelming lead in that "space," the company has a near-monopoly
on an important industry category.
But is it really all so cut and dried? (Evidently, Overture doesn't
believe so, as it no longer boasts of its lead in this category.) Such assumptions
may be leading many advertisers to overlook valuable alternatives which also fall
into the general category of "paid introductions" - be they pay per click or something
similar.
Overture has done well to ride a rather narrow idea, backed
by next to zero unique technology, as far as it has. Let no one be under the illusion
that Overture actually came up with the idea of advertisers paying for clicks
which emanate from within or near search engine results. Open Text
toyed with the idea briefly in 1996 before abandoning it and, shortly thereafter,
exited the consumer search engine business entirely. AltaVista had also threatened
to implement paid search placement as recently as 1999. Today, everything is back
on the table, possibly for good. Most search engines today, AltaVista being
no exception, are implementing paid inclusion and paid placement concepts
with a view to making ends meet.
From an advertiser's standpoint, it was always misleading to define
the playing field as "GoTo the clear leader, with Sprinks and Findwhat as
distant competitors." Let's run down the list of advertising opportunities on
search engines and portals. Many are not so different from what is offered in
what has been formally defined as the "pay per click space:"
-
LookSmart LookListings.
Larger advertisers such as EddieBauer.com can pay to have LookSmart include
"more than five" (and up to several hundred) product or service listings in
the LookSmart Directory which powers search results on MSN and other portals.
There is a monthly expenditure minimum of $2,500; payment is on a "pay
for performance basis." Previous informal conversations with LookSmart management have
indicated that this equates to per-click charges around or slightly above the
industry average, that is to say 15-30 cents per click. For those simply wanting
the regular LookSmart Express Submit
service, there is a one-time-only fee of $299.
-
Yahoo Paid Inclusion. Paying for inclusion
is not the same as paying for clicks, of course, but in paying $299 for express
consideration for inclusion in the Yahoo directory, businesses are indirectly
paying for targeted clickthroughs, and it's a one-time-only payment. Less
well known to advertisers is Yahoo's introduction of Sponsored
Site, a program which places an advertiser's listing at the top of a Yahoo!
Business Directory category. Monthly prices for these extra listings range
from $25 to more than $500 depending on demand. Only sites which are already
listed in the Yahoo business or shopping directories can apply for the sponsored
site service.
-
Inktomi Paid Inclusion. Inktomi's Site/Submit
service (operated through resellers such as Position Technologies) is fairly well known to advertisers.
Inclusion of multiple pages in the Inktomi index can be bought for $15
per URL (price fluctuates). Although Inktomi is not the driving force it once
was in the days when it powered Yahoo results, it's still an important database
that plays a role in search results for MSN, AOL, Hotbot, and others. Where
a page will rank in the index on a given search term, of course, is outside
the control of the advertiser, so this service, like most paid inclusion services,
is somewhat akin to a lottery ticket. Many are not aware, however, of Inktomi's
large-company paid inclusion service, Inktomi Index Connect, "a
pay-for-performance program designed for partners with more than 1,000 URL's." Repeat,
a pay-for-performance program. Who said Overture was the only one who did
the pay-per-click thing?
-
AltaVista Trusted Feed.
AltaVista has instituted a new Express Inclusion model (not recommended) for
smaller sites seeking more reliable inclusion in the index. For larger
enterprises seeking to have frequent refresh of 500 or more URL's in the AltaVista
index, there is a new Trusted Feed program. Of particular note is the pricing
model: it's based on a cost per click (CPC) model. (Wow! This thing is rampant!
Didn't someone claim to have patented this stuff?)
-
Google AdWords.
Clicks? We don't need to give you no stinking clicks! Being the darling
of the search engine industry, Google can get advertisers to pay for impressions.
The AdWords program allows advertisers to advertise on search key
phrases such that the advertising appears in discreet text ads next to the
raw search results, or for an even bigger sack of cash, in a large bolded
text link at the top of the page. Poorly-planned campaigns can wind up costing
more here, but not necessarily. Google offers numerous tips on proper targeting,
and the reporting interface is excellent. Some campaigns can attract clickthrough
rates as high as 4 or 5%, ten times the industry average. Clickthroughs
from a Google search are likely to convert better to sales than clicks from
other forms of advertising or "pay per click" search results.
I could probably go on at some length, but the point is made: Overture
can't claim to own the "pay per click search" space. Advertisers have a wide variety
of alternatives in this general area, and not only with Overture's obvious competitors
such as FindWhat.
The problem with Overture's ostensible lead in the "pay-per-click
space," mind you, is not just that it has competition. It's also that pay-per-click,
or any scheme which ties rankings to payments, threatens to sow the
seeds of its own undoing. Online consumer behavior is not only fickle, it's savvy.
Consumers quickly tired of clicking on banner ads when the novelty wore off;
clickthrough rates plunged. And they spurned search engines which seemed
to have stale results and cluttered interfaces, shifting their support to the
no-nonsense Google. At this point in the evolution of the search engine business,
we really have no clear sense that any business model for "monetizing
search results" will work, save perhaps for metasearch software that users actually
pay for. The reason for this is that every time a successful, beloved consumer search
engine takes steps to make ends meet (instead of burning venture capital), it
seems that consumers stop loving it, and move on to a more fresh-faced (money-losing?),
"pure search oriented" competitor. For now, Google seems to have struck the
right balance between pure search and revenue generation. They'd do well to stay
on consumers' good side by erring on the side of less advertising as opposed to
fatter profits.
Outside of Google, the closest search seems to come to making money
is in the context of the major portals MSN, AOL, Lycos, and Yahoo. Here,
through what we have previously referred to as "diabolical distribution channels,"
the large portal monopolies have more leeway to force consumers to view more advertising
crammed in with, or placed near, search results. Long term, the leverage is all
with those who own these distribution channels. They'll still need companies
like Google and Inktomi, and/or in-house product managers and search technologists, to
provide them with the relevant search results that consumers demand. But when
it comes to figuring out how to monetize search, how badly
do the large portal monopolies really need Overture? They seem to be monetizing
for all they're worth - with or without the recently-renamed pay-per-click patent
holder.
If precedent is any guide, Overture has just about reached the end
of its honeymoon period, and investors and advertisers alike may soon be clamoring
for tangible results. Inktomi, like Overture, decided that its destiny was not
to be a standalone search site, but rather to power the search results of
portal partners. As its independent franchise eroded, portal partners gained more
leverage over "Ink." Yahoo dumped them in favor of Google. Eventually, Ink was
forced to develop a paid inclusion model to make up for the lost revenue from
partners, but the question remains, will advertisers bother paying for inclusion
in a database which generates relatively few consumer searches?
Even more unsettling than the Inktomi analogy is the company
Overture seems to be keeping with dot bombs which made grandiose
claims that they were "restructuring
the money chain." After the smoke cleared, it became easier
to see that Buy.com was not miraculously inventing an online world which (unlike
the offline world) made negative margins a viable business model ["It extracts
value differently, through a mix of advertising, manufacturer sponsorship, and
upselling of value-added products. No offline retailers can sustain this model
over time, because they lack Buy.com's volume of both visitors and products."
-- hilarious ain't it?]; it became easier to see that Priceline.com was not
going to re/disintermediate capitalism itself, but rather would become an online
travel wholesaler (at best); it suddenly became unclear to us all how
or why Ariba would "capitalize on network effects" when it had fewer clients than
it did last quarter; etc. Arguably, all of these companies have had as much
or more "meat" to them than does Overture. All of these companies have won and
lost customers; they lost them faster when they attempted a transition
from rhetoric to profit.
Although it hasn't always been kind to particular middlemen or facilitators
such as Ariba or Priceline, the concept of reintermediating the supply chain (the
creation of new online hubs and new middlemen in particular industries) makes
some kind of sense in general. If the product is mutual funds or insurance, for
example, an online advisory service could take away some of the referral business
traditionally enjoyed by full service brokerage houses or insurance brokers. Assuming,
that is, that the online advisory service is uniquely qualified to play this role,
and assuming that there are strong barriers to entry into this form of "reintermediation"
(tall assumptions indeed).
But in the case of Overture, what specifically is being supplied?
What industry is being reintermediated? I can come up with a few possible
answers, but no conclusive ones. The obvious answer is that Overture is trafficking
in "paid introductions." It's an advertising middleman. Thousands of companies
of varying sizes are buyers of keyword-based, click-based advertising
(paying to reach consumers); major portals and search engines are sellers of that
advertising. The sellers (AOL, MSN, Lycos, AltaVista) get most of the booty from
the advertisers, and Overture gets in the middle and takes its cut.
Seems like a great business? Actually, to this point, the online
advertising middleman business has been a bust. Be it based on clicks or on "impressions,"
the online advertising middlemen have been some of the least successful online companies
of all. Doubleclick, 24/7 Media, Engage, and dozens of similar middlemen have
failed to make a go of this role as online advertising intermediary; some are
restructuring their businesses to emphasize software. Even at the best of times,
it seems, putting buyers and sellers together is not as much of a walk in
the park as it seems at first blush. Buyers and sellers alike tend to feel
like they're getting a raw deal. Buyers feel they're paying too much; sellers
feel they're getting too little. The middleman gets squeezed. If it happens
in cases where a well-accepted, well-understood product or service is being exchanged,
what might make us think that a company with no independent technology franchise or
audience of its own can build a thriving business around facilitating others'
trafficking in "clicks"?
The point of all this is not to suggest that Overture is facing imminent
extinction. Rather, the point is that one shouldn't limit one's analysis of Overture's
competition to the list of companies which formally inhabit the "pay per click
search engine space" (the industry which Overture formerly claimed to be in).
Overture competes with a number of facilitators of "paid introductions" (or advertising
middlemen, the industry category Overture now correctly identifies itself with).
Advertisers seeking targeted placements in search engines and directories,
therefore, should be more careful than ever to periodically re-evaluate the
return on investment provided by the advertising vehicles they've chosen (be these
click-based, impression-based, pay-for-inclusion, pay-per-click, or something
else), and should consider looking beyond those advertising vehicles which formally
identify themselves as "pay-per-click search engines." Considering that almost
all major consumer search engines have business models - they are all seeking
to get paid by advertisers in one form or another - the "pay-per-click
search space" was always something of an artificial construct.
Andrew Goodman is Editor-in-Chief of Traffick.com and principal of Page Zero Media, a Toronto-based consulting
firm which focuses on search engine optimization and related marketing services.
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