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Search Engines Are Powering Ad Revenue
Monday, May 24 2004
Back when it was all the rage to make money losing money on the
Internet, the notion of slipping paid advertising into search engine
results was roundly ridiculed.
"Crass commercialism over editorial integrity," sniffed
Gary Ruskin, executive director of the Commercial Alert advocacy
group, in 2001.
The concept was hatched in the idealistic days when the prevailing
sentiment was that Internet searches should be untainted by commercialism.
The disdain ebbed when what came to be known as "sponsored
search" started generating billions of dollars for online companies,
helping keep the commercial Internet alive.
Sponsored search lured advertisers back to the Internet after the
dot-com crash. Now it's a huge moneymaker for tiny websites, Internet
service providers and heavyweights such as Google Inc. and Yahoo
Inc.
The fight for advertisers is ferocious as targeted ads in search
results have supplanted flashy banners as the way to connect merchants
and buyers online.
"It helps us reach customers that wouldn't know our name otherwise,"
said Justin Christopher, marketing director of Jenson USA, an Ontario
bicycle shop whose ads on Google and Yahoo steer tens of thousands
of visitors a month to its website.
The importance of sponsored search was underscored in first-quarter
earnings reports from Yahoo, Time Warner Inc.'s America Online,
EarthLink Inc., United Online Inc. and Ask Jeeves Inc. All credited
search-engine advertising with boosting profits.
Most dependent on sponsored search is Google, the search provider
planning the hottest initial public offering in years. Google disclosed
last month in a regulatory filing that 95% of its $962 million in
2003 sales came from search-related advertisements on its websites
and those of its partners.
Now search providers are nervously eyeing Microsoft Corp., which
has promised to build search functions into the next version of
its ubiquitous Windows operating system — potentially introducing
yet another rival for advertising dollars.
With major companies relying on sponsored search, it's easy to
forget that the concept was widely blasted just a few years ago
as a bad idea.
It may prove to be the best "bad" idea to come out of
Idealab, the Pasadena-based business incubator famous for flameouts
such as EToys.
In 1997, Chief Executive Bill Gross was struggling to attract traffic
to the 20 start-ups in Idealab's portfolio. Online advertising at
the time took the traditional approach of charging for so-called
eyeballs: Ad rates were based on how many people saw an ad, not
on how many people clicked through to the website in the ad. (Many
online banner ads take the eyeball-only approach, though they contain
links to websites.)
At the same time, Gross was bouncing around ideas for a new search
engine. He came up with the idea of giving the top spots in search
results to the companies willing to pay the most for it. Website
operators would bid to appear when people typed certain keywords
into the search engine.
"A keyword that someone types in with their fingers is the
highest indication of intent for your product or service,"
Gross said.
The engine would order the results from the highest bidder to the
lowest, and advertisers would pay only if users clicked on the link.
When Gross pitched the idea in 1997 to other executives in Idealab's
Pantheon conference room, the response was less than enthusiastic.
"You could never do that," he recently recalled one participant
saying. "Charge for placement in search results? People would
go nuts."
Gross argued that as long as the search engine clearly labeled
paid-for results, users would appreciate having information they
wanted. The system would become an efficient marketplace, weeding
out the serious sellers from the hucksters.
"There were no apologies that we were a pure commercial search
engine," said Bill Elkus, founder and managing director of
Clearstone Venture Partners, which invested in the company that
launched in 1998 as GoTo.com.
The venture faced immediate skepticism.
"People were saying, this is heresy," said Yahoo Chief
Operating Officer Dan Rosensweig, who was then running the technology
news and reviews site ZDNet Inc.
GoTo.com shelled out millions of dollars for banner ads on other
sites to attract people to its site, but traffic was scant. Without
traffic, advertisers weren't compelled to raise their bids for prime
placement.
As GoTo.com languished, Stanford graduate students Larry Page and
Sergey Brin unveiled a search engine that ranked relevant websites
not by any money paid but by how many other sites linked to them.
Google quickly became the most popular search engine, but the fledgling
company had no plan to make money aside from licensing its technology
to other websites.
At one point, Gross said, Page and Brin rebuffed efforts to partner
or merge with GoTo.com because they were uncomfortable with the
way it mixed advertising and search functions.
Google declined to comment for this story.
"One of the advantages of having an idea which is more heretical,
if it's a good idea, is that you have a two-year window before people
copy you," Gross said.
So GoTo.com struck deals with companies like AOL, Microsoft and
AltaVista Co. to feature its sponsored search results on their websites,
then split the money from advertisers. The company changed its name
to Overture Services Inc. in October 2001 and abandoned its stand-alone
search engine to focus on distribution deals.
Google, meanwhile, realized that Internet users did indeed want
a blend of regular results and sponsored results. It developed its
own version of sponsored search and quickly started stealing away
Overture's top-drawer partners, including AOL and EarthLink.
Overture sued for patent infringement. Google denied the allegations
and countersued, calling the patents invalid. The case awaits trial
in U.S. District Court in San Francisco.
The dot-com crash in 2000 gave sponsored search a huge boost. Advertisers
who had fled from overpriced and over-hyped banner ads started buying
sponsored search ads. They made financial sense: The ads were very
targeted, like Yellow Pages listings, and advertisers had to pay
only when someone clicked over to their site.
For big advertisers, it was a way to dip their toes back in without
worrying about getting them bitten off. And for struggling businesses
scrambling to stay afloat, it delivered a stream of new customers.
"That desperation for new revenue was in some ways one of
the defining events that allowed paid search to take off,"
said Jeff Lanctot, vice president of media for Avenue A, a Seattle-based
online advertising agency. "Born out of these dark days was
a willingness to test this new concept."
Consumer groups like Commercial Alert, co-founded by Ralph Nader,
thought some search engines (including a few powered by GoTo.com)
didn't distinguish paid-for results clearly enough and sued them.
In July 2002, the Federal Trade Commission told search providers
that sponsored search could aid consumers by improving results but
warned the firms to mark results boosted by payments.
In spite of the controversy, paid search carried the online advertising
market on its back, soaring to $2.5 billion, or 35% of all Internet
ads, last year from only $300 million, or 4.2% of online ads, in
2001. It took off even while banner ads slumped. They shrank to
$1.5 billion, or 21% of all Internet ads, in 2003, from $1.7 billion,
or 29% the year before.
That helped Overture turn a profit in the fall of 2001 while other
Internet businesses were collapsing. But its stock swung wildly
each time it won or lost a distribution deal.
Yahoo, its biggest partner, acquired Overture last October for
$1.8 billion and immediately made it a centerpiece of its advertising
business.
For example, Rosensweig said, car manufacturers buy banner and
flashy video ads on Yahoo to promote their brands. Then they encourage
car dealerships to buy sponsored search ads so potential customers
will find the closest place to buy that car.
"Sponsored search offers the ability for marketers to hit
consumers at the exact moment they're in need," said James
Lamberti, vice president of marketing solutions with ComScore Networks,
a market research firm in Reston, Va. "It does a better job
of it than almost any advertising form there is." |
