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Google Takes On Overture With Pay Per Click Ads

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Google is no stranger to advertising, having had paid listings on its site since "text banners" debuted in December 1999. However, last month the company introduced a new pay-per-click payment option for its "AdWords" program that may make Google more attractive to some advertisers -- as well as establishing the company as serious competitor with Overture.

Google AdWords, introduced in October 2000, is a self-serve program that lets advertisers create paid listings that appear in boxes running along the right-hand side of the Google search results page. Until now, these ads were sold on a "CPM" basis, where the advertiser pays each time the ad appears, regardless of whether someone clicks on it.

In contrast to Google AdWords, Overture has always operated on a "CPC" or cost-per-click basis. Regardless of how often your Overture ads appears, you only pay Overture if someone clicks on it. That's why Overture is sometimes called a "pay per click search engine" or "PPC search engine," for short.

CPC Dominant, In Paid Listings

There are pros and cons to both CPM and CPC pricing. However, when it comes to paid listings, CPC has reigned supreme due to Overture's success. Anyone beginning with search engine advertising is likely to open an Overture account, because of the huge distribution Overture offers.

Overture is not the only company selling paid listings, of course. However, advertisers who decide to go beyond Overture have already been made familiar with CPC pricing and may wish to work within that model. This is exactly why Google has added CPC pricing to its own program. Its existing advertisers were demanding it, and the company expects to pick up new advertisers if they can easily compare how much they pay per click with Google versus Overture.

"We keep the benefits of the previous program but open it up to a much wider set of advertisers," said Omid Kordestani, Google's senior vice president of worldwide business development and sales.

Google's particular implementation of pay per click pricing has a number of strikes against it, however (see the sidebar article, Up Close With Google AdWords). The new AdWords Select program costs advertisers much more to bid on some terms than at Overture, due to minimum bid pricing that varies depending on the terms popularity.

In addition, it's difficult to know where you will rank, because Google orders ads by a combination of their CPC price and clickthrough rate. In contrast, Overture's system is easy to understand. If you want to be the top person, you pay the most. And if no one is bidding on a term, then you don't pay more than $0.05 for it.

Building Ad Distribution

Overture also has huge distribution, but Google's working to improve in this area. Google's own sites already have a sizable share of the web search market in the US as well as worldwide. However, the company hopes that gaining new deals will make running ads on Google as much as "must" as many consider advertising with Overture to be.

Earthlink was the first AdWords distribution agreement to be announced by Google, and it was even more significant in that Earthlink had dropped Overture in favor of Google. The news caused Overture's stock to immediately plunge. However, positive earnings from Overture and an extension of its deal with MSN helped Overture bounce back.

The plunge in Overture's stock because of the Earthlink loss was probably a huge overreaction, in the same way that there were concerns about Inktomi, when it lost the Yahoo account to Google two years ago. In both situations, the loss of only one of many clients that both Overture and Inktomi had. They were not knockout punches.

Having said this, the Earthlink deal is still significant. It was a big win for Google in rolling out a combined editorial and ad product, just as Yahoo was a big win two years ago when it was rolling out a pure editorial product. Google also stands alone as the only search provider with a strong "all-in-one" advantage of being able to provide editorial results widely-praised for excellence, along with the ability for partners to monetize those results by carrying its paid listings.

Consider some of the options, for portals and others considering search providers. Overture can serve up ads, but if you want good editorial to go with them, you'll need to find a separate partner.

Inktomi, FAST or Ask Jeeves can give you editorial results and even a share of their paid inclusion revenues. However, the mixture of paid inclusion URLs within the editorial product may be a concern to some of your users.

LookSmart will give you editorial listings, but if you take its straight feed, anyone who's paying for ads or paying for inclusion gets moved to the top of the results. That's great for revenue, but perhaps it's not so great as a user experience.

Enter Google. Previously, the Google pitch was, "We've got great results. Everyone knows we've got great results. Start using our results, and people will love you, too." That certainly worked on Yahoo. Set aside the issue of whether Yahoo got a great deal to go with Google in mid-2000, for some of its results. The fact remains that Yahoo saw some of its own users seeking out Google, so by partnering with Google, it was able to respond by saying, "Love Google? We've got it and more. There's no need to leave."

Cash To Carry

The big flaw to Google's pitch in the past was that it wanted money for its search results, either an amount for each search conducted or a share of advertising revenues that were sold. In a strapped market, that's a tough sell. Sure, you're great -- but I'm going broke. Given this, it's no wonder that failing portals such as Go.com, NBCi and Excite all switched over to Overture last year. Overture didn't want to charge them -- it wanted to give them money.

Now Google's removed that flaw. Just like Overture, Google can offer potential portal partners money for carrying its results. However, unlike Overture, it comes to the table with a great reputation for quality editorial. No consumer group has complained to the FTC about Google's ads, as happened with Overture last year. No lawsuit over trademark infringement in ads has been filed against Google or any of its partners, as happened to Overture and Overture-partner AltaVista in February. Google's bundled ad and editorial should be a compelling offer to portals that want to outsource for search.

What about the idea of Google as a threat to its partners? The argument here is that players such as MSN, AOL and Yahoo won't dump their deals with Overture in favor of Google, because they see Google as a threat. Sure, perhaps. On the other hand, Google has emphatically not added any of the "sticky" features such as free email or personalized stock pages that distinguish the portals. This means that Google might not been seen as a competitor. Certainly Yahoo so far has been happy to partner with the company.

My gut feeling is that MSN and AOL will continue to stay as they are, in the near future. AOL didn't bump out Inktomi in favor of Google last year, when the deal for Inktomi's crawler-based results was up for renewal. This makes it seem likely AOL will continue with a combination of Overture ads and Inktomi listings, for the time being. MSN just renewed with Overture and also does so much work with the LookSmart database that it licenses that I think it will continue to see "rolling its own" results to be an advantage.

As for Yahoo, I think you'll probably see the company continue to carry Overture results on the pages that carry its own editorial listings. However, this summer the deal with Google should be up for renewal. People like Inktomi, Ask Jeeves/Teoma and FAST will all be competing to bump out Google. But assuming Google stays in there, it's possible that Yahoo could carry Google AdWords on the Google results it runs, in addition to the Overture listings it also displays. Indeed, Yahoo could likely make such an addition at any time.

Overall, it doesn't have to be a zero-sum game, in terms of Overture and Google. There's space for both of them to exist, in the ad distribution world. The real pressure will probably be on some of the other major search providers that seek to distribute their listings, the paid inclusion crowd. Inktomi, Ask Jeeves, LookSmart and FAST have products that can be hard to understand for advertisers and users, and with Google more strongly on the scene, they are less compelling alternatives to pure Overture results.

The International Angle

It's also notable that Google is the only paid listing service to have an easy entry into international distribution. Overture's international growth prospects have some analysts excited, but that company has to establish an operation for each country it wants to target. That's been a challenge in Europe, where it faces stiff competition from Espotting.

In contrast, Google doesn't need to establish special operations. Half of Google's audience already comes from outside the US. In addition, Google can target ads to these people by country or language, even if they come directly to the US-oriented Google.com site. This means that Google may be able to build a base of country-specific ads quickly, which would help in its distributions goals.

Indeed, the other major distribution partner Google currently has is Sympatico, a Canadian-based portal. Users there see both Google editorial results and AdWords listings targeted at Canadians. Google's AdWords program already had Canadian targeting, so it could deliver these ads. In contrast, someone like Overture would need to establish an Overture Canada site, build an ad base and then get distribution partners. Alternatively, as Overture has done in Germany, it would need to get the distribution partners, then promise to deliver an ad base in the near future.

Strength In CPM And Fixed Price Ads

Ironically, while Google introduced a CPC program to be more competitive with Overture, it's the CPM-based or fixed-priced "Premium Sponsorship" ads that I think are Google's real killer product.

Premium Sponsorships are the two "text banners" that appear above Google's editorial search results. They are a way for Google to satisfy large advertisers who don't want to mess with a complicated self-serve ad program.

Picture the situation. Let's say Nike wants to always be tops for the word "shoes," both to build brand and drive sales. Nike wants to write a large check to and make this happen, without worrying about monitoring its bids.

Overture can't deliver this type of service to Nike easily at a set price, because someone could always come along and bid higher. In contrast, Google can. If you can afford $7,500 or more per quarter, you can say hello to being at the top of Google's results -- no messing with bids at all. You can also be at the top of the results Google distributes, in the same way. Of course, Google will only let you take these ads if you are relevant to the terms and the program seems to meet your marketing needs.

Overture needs a similar solution to prevent frustration by large advertisers, especially as they begin to want more from search engine advertising. And if Overture can't deliver for these type of advertisers, then its partners will.

Lycos has never stopped selling its CPM-based "Start Here" links and intends to revamp the program, which puts paid listings right along those from Overture, on the Lycos results page. Similarly, AltaVista still sells its own paid listings, in addition to taking Overture's.

AltaVista also brings up another issue. There's no reason that the search engines have to take paid listings from only one player. For example, paid listing service Ah-ha purchases the right hand "skyscraper" ad on AltaVista for some search terms, in order to run its own paid listings there. These appear in addition to the paid listings from Overture.

In the future, we could see more of this, and perhaps in a more organized fashion. For example, Yahoo might automatically pull the most lucrative ads from Overture, Google, FindWhat and other players.

Up Close With Google AdWords
The Search Engine Update, March 4, 2002
http://searchenginewatch.com/subscribers/articles/02/03-adwords.html

A more in-depth look at how the Google AdWords Select cost-per click program operates.

New Google search product hits Overture shares
Reuters, Feb. 20, 2002
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20020220/
wr_nm/tech_google_overture_dc_1

Overture's stock got hit the second time in one month because of Google's actions, this time when the CPC AdWords program was announced.

Who says the dot-com era's over?
News.com, Feb. 19, 2002
http://news.com.com/2008-1082-839855.html

Q&A with Overture to CEO Ted Meisel about the company's profits exceeding expectations. Overture could also "live without" Yahoo and AOL, if worse came to worse on renewing those deals. He also provides the first Overture comment I've seen on the Body Solutions lawsuit.

Margins May Tell Overture Story
The Street, Feb. 19, 2002
http://www.thestreet.com/_yahoo/tech/georgemannes/10009410.html

This is the second excellent article by The Street's George Mannes that I've seen where he goes beyond the usual ra-ra about Overture and takes a harder look challenges the company faces. In this article, he considers whether Overture will be able to continue keeping the high percentage of revenue it gets from essentially selling ads on other people's web sites.

Overture Struggles to Refine Search Terms
The Street, Feb. 13, 2002
http://www.thestreet.com/_yahoo/tech/georgemannes/10009117.html

In this article from Mannes, he looks at how Overture's tightening editorial guidelines can seem arbitrary and unfair to some advertisers.

Overture surprises analysts, extends MSN deal
News.com, Feb. 12, 2002
http://news.cnet.com/investor/news/newsitem/0-9900-1028-8781030-0.html

Details on the highs and lows Overture's had this month, dealwise. Interesting stat that MSN and AOL accounted for 40 to 50 percent of Overture's revenue, last quarter. One analyst also expects Overture's international revenue to be "meaningful" by 2004 and account for 27 percent of revenue by 2006.

Overture Enhances Contract with MSN
InternetNews.com, Feb. 12, 2002
http://www.internetnews.com/isp-news/article/0,,8_973261,00.html

More details on the MSN deal, which means that Overture's listings can be carried through 2003. The company also says it has extended its partnership with Yahoo to run through the middle of this year.

Overture: Who needs EarthLink?
News.com, Feb. 7, 2002
http://news.com.com/2100-1023-831496.html

Overture dismisses the Earthlink loss as having a significant impact on its business, and one analyst puts it at producing only 2 to 3 percent of Overture's business. Instead, it's MSN, Yahoo and AOL that are seen as key players in keeping the company's distribution strong. The MSN and Yahoo deals were tightened, after this article was written. AOL remains expiring in March.

Google challenges pay-for-play search
News.com, Feb. 5, 2002
http://news.com.com/2100-1023-830123.html

Quotes from Overture and Google about the Earthlink deal.

Google Ousts Overture At Earthlink, Begins Ad Distribution
The Search Engine Report, Feb. 4, 2002
http://searchenginewatch.com/sereport/02/02-google.html

My article about the Google-Earthlink deal, and why it is so significant.

Good For Google Does Not Equal Bad For Inktomi
The Search Engine Report, July 5, 2000
http://searchenginewatch.com/sereport/00/07-inktomi.html

Background about how Inktomi's stock plunged after Yahoo dropped the company in favor of a partnership with Google, back in mid-2000.

Europe's Paid Placement Warriors
The Search Engine Update, Feb. 4, 2002

The first story referenced above mentions one analyst's rosy expectations for Overture's international growth. This article look at what's happening in Europe, where Overture faces substantial competition for deals in the form of Espotting.

Sympatico
http://www.sympatico.ca/

Paid Listings Search Engines
http://searchenginewatch.com/links/paid.html

Overture? Google AdWords? Ah-ha? Links to these paid listing programs and others can be found on this page.


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