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.