Vinny Lingham’s Blog

So, if you haven’t heard by now, AOL is receiving their own version of Google Adwords (Private Label deal).

I’m not going to rehash the background and deal info, referenced at SearchEngineLand, but instead, I’ll try to explain what I see the market impact as being.

I’ve long argued the point that we should be able to price keyword by partner on all the major search engines, as they all have quite different conversion rates and “Not every click is created equally”, to paraphrase. The AOL deal has forced Google to make this move, and I think it will probably hurt their margin numbers and not just their revenues. Overall, it’s probably close to a zero sum gain as the money will flow to AOL, but their cut will just reduce. I haven’t done the math, but they might be just slightly worse off on revenues, but definitely down on margin.

Also, this impact will hurt many of Google’s partner sites that relied on high conversions from AOL to “slip” clicks through the door at higher than market value (respective earning or value per click), because of the fact that marketers cannot price each partner differently.

This is quite a complicated post, so please bear with me - I’ll try to explain this as simply as possible.

Currently, when buying Adwords ads, you pay a single price for a click & keyword that goes to Google’s distribution network.

For example (and I’m using hypothetical, BUT REALISTIC numbers here), let’s say that a keyword received 100 clicks and the breakdown by partner is as follows:

25 Clicks from AOL - 5 Conversions
50 Clicks from Google - 4 Conversions
25 Clicks from Google Partners - 1 Conversion

Total Clicks = 100 x CPC of 25c = $25 in costs
Total Conversions = 10 divided by $25 in costs, leaves us with a $2.50 CPA (Cost Per Acquisition)
Assume an average position of 3 and as you can see from above, AOL has the better conversion rate.

Let’s assume that your breakeven point is $2.50 CPA. Now, because Google runs a single blind marketplace, there is no price discrimination, which means that there is cross subsidization of keyword value (you pay an average price for everything, yet some clicks are worth more and others are worth less).

For the record, our logs indicate that AOL has the best conversion rate across all Google partners, and this simple means that if there is a separate marketplace for AOL, that prices across the Google Adwords network (especially direct) should fall, IN THEORY (see conclusions).

Now, let’s assume that we removed the AOL numbers:

50 Clicks from Google - 4 Conversions
25 Clicks from Google Partners - 1 Conversion
25c CPC x 75 Clicks / 5 conversions = $3.75 CPA

By AOL moving out of the marketplace, this would effectively mean that the remaining traffic would become too expensive, because AOL would not be cross subsidizing it (and obviously, they know this already, and that’s why they want their own marketplace). This would mean that prices would drop in order to offset the drop in traffic quality.

What would this mean for AOL?

$2.50 CPA x 5 Conversions = $12.50 / 25 Clicks = 50c CPC - almost DOUBLE what Google was raking in for them by cross subsidizing, is what the merchant would be willing to pay direct on AOL, because of the higher conversion rate.

Now, here are the possible conclusions vis a vis Google CPC’s:

1. Google CPC’s will drop as marketers move their spend directly onto AOL and adjust ROI’s according on Google. This will impact Google’s financials, as they will have to pay out a lot more money to AOL.

2. Google CPC’s will increase as dumb money floods the market because marketers are either too lazy or overworked to load AOL campaigns (highly unlikely in the long term) and instead they make it more profitable for Google to show Adwords direct ads for AOL, than AOL marketplace ads. I doubt this would occur though, but it’s a possibility.

3. Google CPC remain unchanged as AOL take-up rates are too low to impact the overall conversion number in the short to medium term.

So, logically speaking, by removing the “bane of mankind” *according to me* (Cross Subsidization) from the Adwords system, we as marketers will be able to align ourselves far more closely with the value per click.

Where do I get this insight from? Well, as an affiliate marketer, we have to watch the earnings per click very closely. EPC is a key metric and we are also able to distinguish (using our proprietary technology) the different conversion rates and therefore effective EPC’s per network partner for all the search engines. This data allows us to derive very accurate statistical models and also understand how the market is interpreted (well, as best as possible) by other players.

Every cent we spend is our own, so we have to ensure that we’re as closely aligned to value per click or EPC as possible, and therefore we’re very excited about the AOL prospects, but realise equally that it’s a lot of work.

I think this is a great move by Google and I applaud them. They’ve thrown the gauntlet down to the other search engines, and let’s see how they respond!

I has barely finished the eComXpo session and no sooner had James from the InsureMe Blog expanded (stole ) the themes of one of my upcoming blog posts that I was planning! Thanks a lot James! I’m going to write about it anyways!

Basically, James already details what I said during the show, but just to clarify what I mean by Return on Effort, here is my short and simple take on things:

The question was asked as to whether or not it is worth spending time on 2nd tier (non-Google/Yahoo/Ask/MSN) search engines and running campaigns with them.

There are a couple of key issues here, one is market growth (momentum) that Google in particular has, and the second is ROE (Return on Effort)
Let’s make the following assumptions for the US market search engine market (taken from VastPlanet):

Google Market Share = 53% (with AOL)
Yahoo Market Share = 28.1%

MSN Market Share = 10.5%

Ask Market Share = 5%

The Total for The Titans is a whopping 96.6%.

Now, until Snap, Become, Miva & all the other 2nd tier engines send traffic out of the massive :- combined 3.4% market share that they have & I can’t see the logic in advertising with them, and here is why:

If in one of our campaigns at Clicks2Customers, we have to allocate a campaign management resource to setup a campaign on a 2nd tier engine (which we don’t deal with). Now let’s assume for a decent sized researched campaign of 5,000 keywords with dedicated ad copy (as all engines are different and have differing editorial rules), it takes them 100 hours to do (and that’s quick, using our technology and existing processes).

Let’s assume that currently on Google, we are running with 50,000 keywords and generating $100k a month in sales and in our category, we’re getting 5.3m impressions (searches) per month. All things being equal, by the ratios above, the maximum searches we would get out of ALL the 2nd tier engines combined, would be 340,000 searches with 50,000 keywords. Let’s further assume that we went with the largest 2nd tier engine (not even sure who that is) and the engine had a 20% market share, then I’m going after a market of 68,000 searches related to my product/service - if you divide that further with the fact that you’re only loading 5,000 keywords - it would get scary, so I will neglect to include this in my calculations.

Again, ceteras paribus, if you just work out the back of the envelope stuff, then the absolute maximum that this traffic is worth to me if it converted even just as well as Google does is $1,283 in sales (which I highly doubt, as there are large amounts of Clicks Fraud on 2nd tiers). And that’s with a 20% market share which is not even possible in such a fragment tail-end market.

So, assuming I could spend my 100 hours on Google, and push my campaign performance up by just 10% with an extra 5,000 keywords, then I would be pushing the needle on my revenues by $10,000 (a nearly 400% increase in ROE), why would I bother with 2nd tier engines? I know the argument (from the 2nd tiers) is that it’s cheaper, etc - but at the end of the day, spending those hours improving clickthrough rates and other metrics like conversions etc, will translate into greater savings anyways on the majors like Google - so I don’t buy that argument.

Most Google PPC campaigns I have seen are not even 50% at peaking in terms of digging into traffic in the long tail, and most people are so worried being on other engines that don’t matter and waste their time there. Mine the Google keyword gold instead, and when you’re finished making triple digit gains, then go visit Yahoo and then MSN, and then finally, Ask.

Lather, rinse & repeat.
Someone today said to me that no one ever made a fortune by worrying about the numbers after the decimal. I think that this definitely holds true in this case.

For those of you that didn’t catch my Summit TV interview in November 2006 on DSTV, after incuBeta won South Africa’s Top 100 Technology Award, here it is…

Also, my brother recorded the following clip on his cellphone on the night of the awards - he’s understandably quite excited:

In doing our business planing for Synthasite going forward we were lucky enough to be offered the assistance of a great team of MBA students from Georgetown University, thanks to the Endeavor Network. Thanks to Endeavor, we will also be getting the services of a bright young Harvard MBA candidate later this year for 10 full weeks, which we’re very excited about! I encourage entrepreneurs to apply to join the Endeavor program as the support they can offer growing companies is really fantastic.
The Synthasite team got to spend a lot of time with the Georgetown team, both in Washington DC in January and also yesterday in Cape Town, where they made the long trip to come and visit us and present their research to us. It was a great experience, and I highly recommend using these types of resources to assist in business planning in particular.
One of the tools that they prepared for us was this Excel Spreadsheet, which can be used by startups to plan and structure their financial cost projections and courtesy of Trey Davis, who created this spreadsheet, who has given permission to publish it on this blog and offer it to anyone who would like to use it. (Please do not redistribute it, instead please link back to this post).
The costs and calculations for payroll taxes are for California, but can be changed.

For the record - the numbers in there currently are just proxy and no indication of what our financial plan for Synthasite is

I’ve been spending much of my time reading and understanding Startups & Venture Capital, especially in the US markets (which was somewhat foreign to me, in terms of financial structuring - being South African, of course). As many of you know, Synthasite has been under development for a while now, and sits smack in the middle of that over-used catchphrase, Web 2.0. For me, it’s been a great learning curve both from a hands-on perspective (with incuBeta having just raised private equity/venture capital from Mark Shuttleworth’s HBD Fund), but also a theoretical one, where I have been trying to build the mental bridge between what an entrepreneur wants, and a venture capitalist wants.

We’re launching Synthasite Version 2.0 on 1 June 2007 and in terms of the rebuild it will have taken us a total of 6 months from concept to deployment, using a core team of 3 full time engineers, 1 QA/Server infrastructure resource & some very agile methodologies (utilizing Basebamp & Rally) to launch Version 2.0. By comparison, Version 1.0 took the inputs of over a dozen people and about 2 years of development to complete. Couple that, in addition to the fact that we were building an AJAX application way before it was even called AJAX, means that there was a large amount of R&D that went into evolving the product, none of which was wasted, and ultimately led us down the new path that we are walking.

We aim to relocate the Synthasite team (6 people in total) to Silicon Valley in the next few months and run Synthasite from there, spinning it off as a separate entity to incuBeta - which as a Group is growing quickly in many areas, hence the reason to apply a more dedicated and focused team to grow Synthasite. I will be leading the company from there and I have effectively taken over as CEO of Synthasite.

Update: Here is the video embedded for your convenience.

Why are we doing the move? Paul Graham’s article on “Why Startups Condense in America” somehow struck a chord with me. Synthasite is South African homegrown technology, but in order for us to grow the business and stay ahead, it seems like the most obvious move is to base ourselves at the center of the the tech world. That’s not to say that you can’t grow a tech business elsewhere, but for most techies & geeks, at some point in your life, you want to be in a startup in Silicon Valley! Also, I had a meeting with Reid Hoffman, CEO of LinkedIn back in January and he basically said to me that (admittedly biased), it’s no coincidence that global companies such as eBay, Yahoo, Google & YouTube are all within a few miles from each other - good point!
Why have we done the rebuild? In short, when we started building Synthasite - Internet Explorer had a 90% market share and Firefox was a 1980’s movie starring Clint Eastwood. That was then and this is now - the new version of Synthasite will be cross browser compatible and have a host of other great features. Bear in mind that we’re only going with an Alpha launch in June, with Beta expected sometime around Q3, not everything will be in the first build.

Another good reason for the relaunch was that the market has evolved considerably since the original planning and build phase, and it was good to take a step back and create a vision for Version 2.0 before jumping straight in. Much of what has been done up to now has been trial and error - with great feedback from our Version 1.0 Beta testers. We now know where we are going, and in the spirit of all things “Web 2.0″ we’ve gone back into Stealth mode until June 1st.

So, a bit of advice to other Internet startup entrepreneurs that I have either learnt the easy way, or the hard way (not going to say which!):

1. Read Jason Fried’s Getting Real
2. Bootstrap Version 1.0 and get it out there ASAP - user feedback is imperative
3. Talk to other entrepreneurs who have been there, done that
4. Don’t bother the VC’s until you’re really ready with a focused offering - you only really get one shot to do a solid pitch.
5. Just do it! Stop planning and start prioritizing. It’s amazing what we can achieve when we focus and take action.

Here are some of the VC blogs that I read regularly - I don’t necessarily know these guys, but trust me, judging from their content, they know what they are talking about - and it’s worth taking a page out of their book, err… blog.

• FirstRound Capital’s Josh Kopelman - RedEye VC - Most notably, his most recent post.
• Crosslink Capital’s Peter Rip - EarlyStageVC
• Hummer Winblad’s Will Price - Particularly this slideshow/powerpoint that he produced.
• August Capital’s David Hornik - VentureBlog
• Guy Kawasaki’s - How to Change The World
• Union Square Ventures’ Fed Wilson - A VC - I particularly liked this post on widgets.
• YCombinator’s Paul Graham