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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.

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.

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.

Up Close With Google AdWords
The Search Engine Report, March 4, 2002
http://searchenginewatch.com/sereport/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.

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

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

A longer, more detailed version of this article is
available to Search Engine Watch members.
Click here to learn more about becoming a member


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