Search Companies Perfect Monetization Strategies
Upside Article Published in 2001
by John F. Ince
In the classic board game Monopoly, you not only started the game at Go, but if you were lucky, you might draw a chance card, which sent you past Go, where you would pick up $200. Search engines, these days, seems to be drawing a lot of chance cards which are sending them back past Go. In fact, there are two Go’s uppermost in the mind of search company executives, these days. Each represents a polar extreme in the ongoing tension of how to monetize their Internet traffic flow. And if one stretches a bit, these two Go’s might be seen as the upside and downside of the modern boardgame of MonopolySearch, in which the goal is to acquire value by mining the hidden profits of the Web.
The Go downside is, the former Disney portal Go.com. In January of 2001 Disney pulled the plug on it’s once promising Internet property and heightened anxiety levels amongst investors and executives throughout the search space. Infoseek, which had been subsumed under the Go.com brand name, had been one of the Web’s “four horsemen”, along with Yahoo!, Excite and Lycos. It was one of the Web’s most popular sites, usually ranking in the top 10, and sometimes in the top 5. Go.com, was going to be the killer portal for all of Disney’s properties: a central place on the Web to distribute all of Disney’s content. Free search was an important, if not critical element of the strategy. But increasingly Disney started realizing that they weren’t getting much of a return on their invested capital, and pulled the plug in January of 2001. Suddenly the reality hit home with other search engines: if they fail to monetize their traffic better, they, too, could be sent back to Go in the boardgame of MonopolySearch. Says Rob Wrubel, Rob Wrubel former CEO of Ask Jeeves, now their Executive Vice President for Market Development, “What is amazing about the whole phenomenon is how many people fell into the trap. Nobody across the whole system, and sat back and asked, ‘What happens if the retraction of capital has a bigger impact than we think.’ It’s amazing how powerful the boom/bust psychology is and how many people could not think through a reversal.”
As a result, the search/portal landscape is now littered with the debris of former shooting stars who have have fallen to earth as their stock prices have plummeted. Ask Jeeves, Yahoo!, InfoSpace (which owns metasearch engines Dogpile and Webcrawler) LookSmart and Inktomi, are all trading at a small fraction of their stock highs. The April, 2001 decision by NBC to scale back their Internet venture, NBCi, was but one more indication that traditional thinking for search/portals would not suffice in this increasingly competitive landscape.
Learning Lessons The Hard Way
Tasha Irvine, Lead Program Manager, Search & Reference for InfoSpace agrees, “The idea of trying to monetize search without any advertising or forms of sponsorship is very difficult, because essentially you’re trying to support a free product to the public.” All over the Internet, CEOs have been learning the hard way about the renewed importance of developing a clear path to profitability. Many in the search space are discovering that one of the hidden keys to profitability may lie in the search results themselves. Bob Davis, former CEO of Lycos, is one of the few who managed to anticipate the bursting of the Internet bubble, by selling Lycos to Terra Networks, a subsidiary of Spanish Telecom, Telephonica, near the market peak., for over $5.4 billion. Davis, now a partner with VC firm, Highland Capital Partners and author of the just released, “Speed is Life.”, thinks that the pressure to develop sound business models may force people to look towards search as an increasingly important ingredient in revenue models. According to Davis, “It is not unreasonable for search services to charge for catalogue listings. Search is a major distribution point on the Web, and we may see the day that if you’re a business and you want to show up in the search results, you have to pay. That’s the way the Yellow Pages do it. ”
It is also interesting to note that virtually all the major portals have now opted to outsource their search capability. Says Evan Thornley, CEO of LookSmart, “Clearly one of the major trends in search has been outsourcing.” Today, Ask Jeeves, Google and Alta Vista are the only major branded Websites that still power their own search. MSN uses Inktomi and LookSmart. AOL now uses Inktomi, LookSmart and GoTo. Lycos uses Fast. Hotbot uses Inktomi. Yahoo! uses Google for search, but still compiles it’s own directory. Says Wrubel of Ask Jeeves, “The cost of providing Webwide search is like the nuclear arms race right now. To crawl 1.5 billion pages on the Web, Google, you need 5-6,000 servers linked together. These are not inexpensive servers and then you need a huge database to store all the results. Then you have to comb all of that content, use your link analyses and algorithms to sort it and post it every two weeks. This is hard, expensive stuff.”
Picking Chance Cards and Moving Back to GoTo
In this environment, one can understand why the demise of Go.com sent shock waves throughout the industry. Suddenly over the board, MonopolySearch players started started their own search for viable business models, and unique monetization strategies. Many picked up their chance cards and went back to Go. In this case, they were searching for the upside in search, and gravitating towards variants of GoTo’s “pay for performance” model.
GoTo was founded by Bill Gross’ idealab! in 1997. The way the model works is elegantly simple. Companies bid for the privilege of being listed, and the amount they pay for each click through is listed alongside their link on the search results page. The company that bids that the most is listed at the top of the listings and so on down the page in descending order. If no one bids on a keyword, then sites are shown in order of relevance, applying Inktomi’s technology. This approach offers several important advantages to advertisers. First advertisers are able to target users with a higher degree of specificity than other advertising forms. Second, if a Websurfer does not click on the link, the advertiser pays nothing. They only “pay for performance” in the industry jargon. Third, the advertisers reach is significant. GoTo recently signed deals with with America Online, Terra Lycos, Alta Vista, GoTo and now has a reach of 75% of the Internet. According to GoTo CEO, Ted Meisel, “We have witnessed a subtle, but important paradigm shift from, ‘Internet search is a description of Web pages,’ to ‘Internet search is a description of Web pages plus the products, services, and information services offered by any business using the Internet as a marketing channel–which increasingly is every business.’ So essentially what we have done is provide an economic incentive for people to promote themselves, their product or business on the Internet.”
Using this model, GoTo has acquired over 40,000 advertisers, who spend an average of $1,120 per quarter. In Q4 2000, GoTo made 288 million paid introductions between consumers searching the Internet and advertisers. Advertisers paid paid an average of $0.17 for each introduction. GoTo is not yet profitable, but during the period when most other Internet search/portals were downgrading investors expectations and revising forecasts downward, GoTo was exceeding investor expectations. They have announced to the street that they expect to be profitable in Q4, 2001.
All this all the more remarkable, since 18 months ago, GoTo was looked upon with mild levels of scorn by other MonopolySearch players. GoTo’s approach was dismissed as crassly commercial, and few analysts or key industry executives took them seriously. When current CEO, Ted Meisel (then working for CitySearch) heard about Bill Gross’ plan to start yet another search engine using the pay for performance model, he said, “That’s a great idea, but I don’t know that you’re ever going to solve the chicken and egg problem. How are you going to get businesses to participate in the paid search process without any consumer usage? Fortunately Bill raised enough capital to bootstrap the process. By the time I joined the company, a year later, it was on its way to getting past that problem and over 1000 businesses had bid for listings.”
But today, the success of GoTo’s model has fundamentally altered the thinking of the search industry. Says, SearchEngineWatch.com creator, Danny Sullivan “If you go back a year ago, paid inclusion, paid submission, pay for performance and paid placement were alien notions. People would have said ‘We’re not even going to consider doing anything like that.’ But, thinking has changed dramatically. When Yahoo! went with sponsored listings, it was like the Berlin Wall coming down. Now all search engines are coming to realize that the cold war is over and they’re all looking to get their peace dividend through various monetization schemes.”
Suddenly, what seemed heresy to the search purists, was being adopted by all the key industry players. Says Wrubel of Ask Jeeves, “Internet wide search product has traditionally been one of the true editorial services on the Web. There was an expectation amongst users and search executives that you should never confuse the relevance or search results by sneaking in a link that was paid for. But search the second largest activity on the Web behind email. The conundrum is that that search has the potential to be one of the most powerful targeting platforms on the Web. Inherently thought of as an editorial product, and inherently the most powerful advertising platform on the Web, this year, the wall between editorial and advertising came down.”
Even Google (See Sidebar), whose executives view take very seriously the issue of editorial integrity and revere their public responsibility to serve the Internet user, now has text-based advertising at both the top and side of their search results. Says Larry Page, CEO of Google, “Our ads are all text based ads for two reasons: they load more quickly and are designed to be relevant and not to be annoying. They’re designed to benefit both the users and the advertisers.” So, in the aftermath of the stock market corrections and with the harsh recollection of Go.com looming in the background, attitudes have suddenly changed all around the MonopolySearch boardgame.
The four primary approaches to search monetization are licencing, revenue sharing (paid listings), advertising and the rapidly expanding enterprise portal market, that is selling search technology to Global 2000 companies for use on their own sites. The licencing model is best represented by Inktomi, Google and LookSmart, the directory builder. These companies and others sell their technology to major portal sites like AOL, Yahoo! or MSN. These deals are typically done on a cost per search basis, but sometimes also on a cost per impression basis, (Google uses this model.) In the revenue sharing model, represented by LookSmart and GoTo, companies don’t pay for search, but rather pay for click throughs to specific product areas on their sites. They, then, share the ad revenue with the search companies.
The advertising model is the most traditional one, and is essentially selling banner ads on search pages. But this is coming under fire as advertising budgets get squeezed. Suddenly companies are scrutinizing the effectiveness of their spend, and untargeted ads that do not deliver qualified leads are often moved to the bottom of the priority list. Add to that the fact that many of the companies that used to buy the banner ads have burned through their cash reserves and can now only be found in the dotcom rubble heap. It all adds up to ads down.
ClickThroughs Increase With Targeted Leads
In this environment, paid listings start looking like a pretty attractive alternative, because because they enable advertisers to see more precisely how effective their marketing spend is. Says, LookSmart, CEO and co-founder, Evan Thornley, “All the data we’ve seen suggests that conversion rates for paid search listings consistently outperform banner ads.” LookSmart’s marketing brochure claims that a major online clothing outlet can achieve 14% conversion, an online retailer, 12.7%, an online florist, 12.06% and so on down to computer retailers who can achieve a .94%. conversion rate. Since LookSmart has licencee partnerships with Inktomi, AOL, Microsoft’s MSN, Excite@Home, Alta Vista, Warner, Prodigy, Juno, InfoSpace, Sony and other portals, their paid listings will ultimately reach 89% of Internet users. Says Thornley, “This delivers a higher quality of traffic to Websites which result in much higher conversion rates.” LookSmart charges anywhere from 75 cents to 15 cents per clickthrough. Says, Thornley “The real value in search is in the search results themselves. Search, by it’s very nature connects buyers and sellers in huge volumes in incredibly targeted ways. We’re seeing a gradual realization by part of this industry, that’s where the value is created for businesses.”
Conventions Still Evolving
There are a lot of nuances to the “paid participation” model, many of which are still just now coming into focus. To understand the complexities, it’s best to consider a specific example–say Amazon.com. Says Danny SearchEngineWatch.com, “If Amazon wants to have all of their 2 million Webpages listed, they have to pay for the privilege. Before the paid inclusion model became popular, a search engine or directory service would only take a sampling of the Amazon’s Web 2 million pages, randomly selecting what they thought was important. Now, with the paid inclusion variant of paid listings, Amazon can be guaranteed that all their pages will be listed. Not unlike in the lottery, this improves their chances of coming up for a specific search for a specific page, but it doesn’t guarantee a high ranking. Only if they sign up with a paid listing service like GoTo, can they guarantee themselves a high listing.”
Larger Issues, The Emergence of Advertorial Content
The big challenge with all monetization models, is figuring out a way to do it, without alienating the very people they need to attract as repeat customers. All the major search player are now experimenting here, but like GoTo has really been pushing the envelope with so called “advertorial content.” In their search results, there is no editorial content alongside the ads. And variations on the GoTo model have been catching on as GoTo cuts revenue sharing deals with virtually all the major portals. The challenge of creating revenue streams from traffic without jeopardizing the editorial content, is a vexing issue to say the least.
Of special concern is what sort of responsibility the portals have to clearly identify paid listings as such. AOL calls them sponsored links, while their subsidiary Netscape calls them “Partner links.” According to Barry Parr, analyst with IDC, “As an advertising medium, the Internet is still relatively new, and conventions are still evolving. Says Northern Light CEO, David Seuss, “You get into issues of treatment. Is the background color different? Is paid content clearly different from the rest of the editorial content? The key is to clarify what is the result of a relevancy ranking algorithm and those that are paid to be on a results list. If you don’t, it’s clearly a disservice to the end user.”
The Growing Commercialization of the Web
The trend toward paid listings also raises issues concerning the ability of nonprofits, academic institutions and hobbiests to compete for search in this increasingly commercialized Web environment. Is paid inclusion inherently unfair to smaller players? Will the search engines miss valuable content because a hobbiest can’t afford the $200 submission fee at Yahoo!? But before this issue gets blown out of proportion, it is worth noting that many listings in all search engines are still free listings. For example, LookSmart and other engines waive submission fees for “registered” nonprofits. This however, does not guarantee them listings.
While the growing commercialization of the Web should be a cause of concern, in the specific instance of search, the issues are anything but clear. As search engines selection policies evolved, many Web developers became expert at tweaking the system and manipulating the results. Says search guru, Danny Sullivan, “The savvy ones might actually create 1000 different sites, all with essentially the same content, but with different titles and domain names, to improve their chances of getting listed with the search engines. Is the shotgun approach of the manipulators any different in net result from the paid inclusion approach?”
Or, is the issue of paid inclusion any different from the common practices of product placement in supermarkets or bookstores? Is what’s happening now on the Web much different, in essence, from the marketing rules that have come to dominate virtually every other sales and distribution channel; that is, those who spend the bucks on marketing or shelf space are more likely to get their product sold, even if their product is inherently inferior.
Some analysts even see paid inclusion as a sensible solution to a vexing problem for the search engines: a way for them to charge for their time. The search engines never had the time to talk to people before. If they did talk, they were usually just listening to people bark at them for not including their Website. Paid inclusion is a mechanism to open communication channels with customers, and it introduces a commercial pre-qualifying hurdle.
Competitive Landscape Changing
All this begins to subtly alter the competitive landscape, because search liscencees who don’t charge for submission are competing against those who do. It becomes a pretty easy call, for portals searching for revenue streams in these economically strapped times. For example, Alta Vista’s directory partner had been the Open Directory, which is free. But when LookSmart, which does use paid listings, offered to share revenues with Alta Vista, suddenly Open Directory had lost a key contract. Google, which does not use paid listings, may find themselves under pressure to adopt some of these practices as their contracts with firms like Yahoo! and Netscape come up for renewal. But then again, perhaps Google’s technology is so superior that they will be able to withstand the emerging competitive threats.
Search Gravitating Towards the Enterprise Market
As the pressure to turn a profit escalates, search technology is being spun off in the direction of the Global 2000 companies and the so called “enterprise market.” Increasingly search engine Websites are looking to the contracts with large corporations to stabilize revenue streams. Some search engines, like Northern Light have been able to steer clear of the paid inclusion issue, primarily by focusing on this growing enterprise market. Northern Light derives 85% of it’s revenues by building enterprise information portals and operating them on behalf of their enterprise clients. The remaining 15% of their revenue is advertising on their Website. Says, David Seuss, CEO of Northern Light, “Our business model, is targeted primarily to the enterprise market, and it allows us to offer content on our Website completely free.”Says Scott Potter, CEO of categorization software provider, Quiver Inc., “We’re all about identifying real problems that Global 2000 companies are experiencing in managing their information and then solving them with Quiver Technology. If the pain we’re solving is real enough, the budget dollars follow.”
Responding to the market opportunities in the enterprise market, Inktomi acquired Ultraseek from Disney last year. Ultraseek had been the enterprise group within what had been Infoseek. Says Troy Toman, General Manager and Executive Vice President of the Inktomi Search Solutions Division of Inktomi, “Acquiring Ultaseek, was an important strategic move for us. Our vision for what search should be is that any user in any different context should be able to go to one search box and find any information on the network that they have access to. When you do a search you should be able to get information not only from your internal corporation and well as the external world and any specific databases that you might subscribe to. There is no reason that the technology can’t be capable of bringing all that back to you as a single set of results.”
This trend is but one more example of the growing Internet influence of Global 2000 companies. Says David Seuss, Northern Light, “I read in the papers that there’s something going on with the markets, but all we see is rapidly expanding growth.” Indeed, Northern Light’s revenue has tripled in the last year, and their number of corporate clients has doubled from 100 to over 200. Ask Jeeves today derives 35% of its revenues from the Enterprise market, with the remainder coming from advertising at their Website. Even Yahoo!, under pressure to move away from a dependence on advertising revenues, has been developing products for the corporate portal market.
Alta Vista Redefines Itself
Another player moving towards the the enterprise search market is the once proud portal, Alta Vista. In the last several years, they have seen more twists of fate than Odysseus. In 1999, after being acquired by then high roller Internet holding company, CMGI, they grew from 55 employees to 730, and were grossing almost $200 in revenues. Those days were full of optimism as they readied for their IPO. But as word got out on the street that they had lost almost $1 billion on an annualized basis, investors got skittish. When the markets took a dive, then CEO, Rod Schrock, indefinitely postponed their IPO. Soon Schrock was gone, and parent company CMGI saw over 90% of their market value evaporate. Since then it’s been one wave of layoffs after another. Most recently Alta Vista has recognized that they can’t compete with AOL and Yahoo in the portal game, and have been pairing down their site, trying to figure out a better way to monetize their service. Says Danny Sullivan of SearchEngineWatch.com, “ Alta Vista clearly is one of the weaker search firms out there. After Go.com shut down, people started wondering about Alta Vista, especially with CMGI having their own problems. Actually, I’m guardedly optimistic about them because still have some core compentencies in search and, more importantly, they have an enterprise unit, selling search software and licencing search results to other providers.”
The Web’s Hidden Profit Potential
It has long been suspected that the Web’s hidden profit potential lies in the ability to specifically target users with highly personalized offerings and advertising. But only recently have we begun to see the potential realized with products that begin to strike a greater balance between the interest of the user and the advertisers interests. Nowhere is that exploration process in greater evidence, than in the search business, largely because search, by it’s very nature, identifies highly qualified leads and targeted users. Says GoTo CEO Ted Meisel, “We estimate that there are 200 million Internet searches performed every day in the U.S. alone. and over half of them are commercial in nature. Until the introduction of pay for placement search, those searches were provided for free. That has to be one of the great giveaways in the history of advertising.”
So, the move away from generalized banner ads has been accompanied by a move towards “paid listings” revenue models that place value in the search results themselves. The winners in this MonopolySearch game will be those firms who effectively channel their resources towards the creation of better and more creative products to meet the challenge of targeting advertising more effectively.