July 18, 2003

People sneered in 1998 when Web ad pioneer Overture Services Inc. introduced the Web's first all-commercial search engine. The idea of moving advertisers' links higher in search results based on how much each advertiser was willing to pay outraged purists who said paid placement would spoil the search experience.

But in the serendipitous way the Web evolves, the search engine originally known as GoTo.com tweaked its strategy and soon became the Internet equivalent of the Yellow Pages. Its commercial links were presented as enhancements rather than replacements for Web search results, much as Yellow Pages list all businesses in alphabetical order and allow some greater visibility if they pay for special ads.

Rather than marketing itself as a stand-alone Web site, Overture offered its paid listings to big networks on which people already did a lot of searching, such as Microsoft Corp.'s MSN and Yahoo. Thus was born the business that Yahoo said it plans to buy this week for $1.6 billion in cash and stock. The purchase is widely regarded as an effort by Yahoo to gird for competition with Google, the popular search engine that also was born in 1998 and has risen to become the top resource for searching the Internet.

Google last year developed its own advertising system to compete with Overture and began distributing sponsored links to America Online, EarthLink and other Web sites. One clever part of the two systems is that advertisers pay only when users click on their links and visit their Web sites. Another is that advertisers bid against each other for links, setting ad prices in dynamic auctions. The success of the innovation has not been missed by Microsoft. Nearly one-third of the 4 billion Web searches conducted in May were run by Google.com, compared with 25 percent by Yahoo, 19 percent by AOL and 15 percent by MSN. Google's share was only 25 percent as recently as January, according to market researcher ComScore Networks.

Microsoft has announced plans to create its own Web search engine, even as rumors flew that Microsoft was considering making an offer to buy either Google or Overture. Google and Microsoft have been mum on that subject. The jockeying feels so 1999ish, doesn't it? Overture's sponsored search results, after all, are so new that it's hard to explain exactly what the company does. And that, you may recall, was routine in the 1990s, when unproven Internet companies used their price-inflated stock to buy start-ups that were even younger and more unproven. Most investors didn't even understand what the big dot-coms did, much less what the peewees they spent billions to acquire claimed to accomplish.

One difference now is that Yahoo and Overture are profitable and therefore hardly unproven. Yet their pending marriage nonetheless shows how key questions about the Internet media business remain unsettled long after the dot-com bubble burst. It's still not clear, for example, which pieces of the Internet puzzle media networks really need to own, rather than simply "renting" from partners. At one time the hot asset was Internet access -- dial-up lines that propelled AOL to fame. At other times it has been traditional media content -- that stuff that led AOL to its disastrous purchase of Time Warner. These days the asset everyone is scrambling to control -- Web searching -- is the same one that was hot before the Web went commercial. During the dot-com frenzy, sites such as Yahoo that began by organizing directories of Web sites decided it was better to collect content to keep people on their sites longer. Yahoo and rivals paid other companies to display their search results, viewing search as a commodity they didn't need to own.

But after Overture and Google showed how effective ads could be when placed alongside relevant search results, the role of Web searching in Internet commerce seemed bigger. Consider, for example, that researchers at ComScore Networks recently found that people who click on sponsored links in search results are twice as likely to buy something as people who click on unpaid search results after running the same query. ComScore also found that paid search links had four times the click-through rate of unpaid search results for the same queries.

"It shows search represents a viable marketing opportunity that is well suited to the Web," said James M. Lamberti, a ComScore vice president. "It gives marketers an opportunity to communicate with the consumer at the very moment they express an interest or a need." Google and Overture have expanded their sponsored-link systems into areas besides search, attempting to show relevant ads based on what kind of Web page someone is viewing, such as sports scores, stock quotes or news about Chinese politics. That strategy was originally attempted by several big Internet ad networks that delivered banner ads to thousands of Web sites in the 1990s; most died when the stock market crashed.

Safa Rashtchy, an analyst with US Bancorp Piper Jaffray, noted that both Microsoft and AOL, at least for now, have fallen far behind Yahoo and Google in the race to exploit the value of Web search to Internet commerce. "Google and Yahoo are creating a duopoly in Web search and going at it full force," Rashtchy said.

What a turnaround from just three years ago, when AOL was still king of Internet advertising, Microsoft was its key rival, Yahoo was perceived as an Internet lightweight and almost no one had heard of Google. But on the Internet, change regularly rolls through like a tornado and turns everything topsy-turvy. So hang on to your mouse; more twisters are coming.

Source: Biz Report.com

        

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