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!

One of the things I have quickly realized is that the stuff I write about is very much more niche and driven around a very unique community of (very smart) people, many of which I know personally. I seriously doubt that this blog will ever become massively mainstream, which was never the intention, and I’m sure that comes with a whole number of pressures, none of which I could probably deal with right now (including the need to “dummy down” some of my more strategic industry posts). Thanks to my loyal readership I write posts only when I feel inspired to and I try to ensure that they are deep and meaty, something that mainstream blogs can’t often do due to the industry insider knowledge that is required to understand some of them.

A quick roundup of all the most popular posts this past quarter on this blog, based on pageviews (in order), justified my previous statement:

1. The Cookie Report
2. Profit Sharing Report
3. Best Business Books of Our Paradigm
4. HBD Capital invests in incuBeta
5. Clash of the Titans – A Fresh Perspective on how “the others” went wrong
6. Web Apps vs Desktop Apps
7. Affiliate Summit West 2007 – Opening Session
8. The Future of Search Engines
9. Meet the Super Bloggers of Search (Pubcon)
10. Pubcon Keynote Address – Malcolm Gladwell

Funnily enough, only three of these posts are actually from Q1, which makes me happy to know that my readers are still reading the old (and still good ) posts that were written when the readership was not as high as it is now, relatively 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.

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

There is a screencast demo of Synthasite that we produced from the sessions, but also, here is the list of reasons that we came up with as to why Web Apps are superior to (most) desktop apps – and herein lies the future of the web! The clip is available on YouTube here and in higher res format here.
And here are the 20 reasons why Web Apps are superior to Desktop Apps!

Never installed

Browser based software never requires installation processes or hard drive space. It lives in a virtual cloud in the Internet and this means that whenever you launch it, it always has the latest version. Ajax has made it possible to deliver Desktop-like look & feel, and functionality, with no loss of performance!

Updates are seamless

Instead of having to patch each and every individual user, the patches/upgrades are applied to the server and each user received the updated version the next time they log in.

No legacy

This is a big issue for traditional software vendors. Users who purchase previous versions of a software almost always will result in legacy versions lying around which need support (which is costly). The problems relating to legacy software are almost limitless, and often is not efficient for both the vendor or the customer.

No admin rights required

Finally, a world where the network administrator in the company does not have to approve the installation of your software!

Available anywhere, anytime

Ok, so the anytime comment is a stretch, but that’s only until Adobe’s Apollo gets here (here’s hoping!). The same way that people access their email from any browser, web apps are exactly the same.

Platform independent

This opens a wider market for software vendors – no longer do they have to build technology around a specific platform and limit their market (or incur additional costs to build for another platform). The browser is the platfom and therefore I believe you will see increased uptake in OS’s like Mac OS and Linus, due to the increased availability of Web Applications.

Less environmental conflicts

There are certainly going to be a lot less bugs in Web based software, due to the fact that it is not depending on any of the hardware or environment settings in the OS that may usually cause a problem.

Enables social possibilities

Many Web Apps are creating chat facilities and the ability to share your work in real time. This removes the previous “stand-alone” functionality that use to exist with most installed desktop applications. The world is becoming more and more social – people want to collaborate and work online together – Web Apps allows this, painlessly.

Lower cost of sale

No boxes, printed manual, expensive shipping costs, CD’s, distribution channels, middlemen, etc. Desktop apps are going to be more economical to produce and will result in a lower cost of sale!

Usable from inexpensive PCs

$100 Laptops, here we come! What do you need a dual core processor for, if you’re running a thin client application? This opens up a world of cost savings for both companies and consumers, especially in the field of productivity apps (obviously, not gaming!).

Piracy-proof

Here is a big one. Imagine a world without software piracy. That world is here, and Web Applications are the solution to that problem. Next problem, please!

No bad debts

Sofware companies are often owed money from distributors, that invariably go bust from time to time. With Web Apps, the cash is collected upfront and as long as the customer pays, the account is in good stead.

Low-cost support and maintenance

Given that the browser is now the platform, operational support costs and maintenance for Web Application providers will drop substantially. No need to have expensive operating system gurus on hand to help with installation problems. Also, using products like the Amazon EC2 cloud, will allow scalability, without a proportionate increase in costs.

User’s data is kept safe in hosting environment

Although this is probably not going to be true for all Web App companies, but using providers like Rackspace or Amazon’s EC2 cloud will go a long way in reassuring your customers that their data is safer than on their desktop!

No Viruses

No installation, means no viruses. Start shorting all those Anti-Virus stocks! Enough said!

Low cost global distribution

No more channel reliance. Most software companies make it or break it, depending on their channel. Forget that – focus on the biggest channel of all – the 1 billion users online!

Lower software price entry point for customers

Given the benefits above, you will see more products such as Basecamp and Synthasite that will offer far greater value than their desktop equivalents.

Access to the entire assets of the Web (APIs, widgets, messaging, collaboration)

By being wired into the web, Web Apps are able to integrate seamless into API’s etc and are a lot more customizable, than traditional software applications.

Mobile is here

Compiled desktop applications are going to have a hard time being adapted for mobile devices. Web apps are ready made (in most cases).

Widest potential audience

For all the points above, this basically unlocks markets for software vendors that previously were inaccessible due to technical reasons.

As the year draws to a close, I looked back and realised that my readership has grown over 400% this past year – thanks to you all for your participation in the growth of this blog! Obviously, with such growth, I’m reaching readers who have not had the opportunity to read some of my earlier “works of art “. I decided to put together a “Best of 2006″ list (in no particular order – and excluding any conference session posts), so grap a cup of coffee, put your cellphone off, relax, and enjoy a good 30-45 minutes of reading (and commenting!).

1. The Future of Search Engines
2. The Math behind Google’s decision to remove Agency Rebates
3. Clash of the Titans – A Fresh Perspective on MSN, Yahoo & Google
4. Google Launches CPA Ads – Problems with the Model of Cost Per Action advertising
5. The Best Business Books of our Paradigm
6. Google Landing Page Algorithm Changes
7. Web 2.0 Business Strategies
8. Special Report: Cookies Detected by Anti-Spyware Software
9. Special Report: Profit Share – Performance Marketing Model of the Future
10. Search Engine Agencies vs Search Engine Affiliates (via Revenews)

To this end, we have established that the best way for a service provider and a merchant to co-exist is in the performance marketing space, where profit share is ultimately the goal, but an interim measure like revenue share can be a good proxy for profit share, if structured correctly.

When I speak to all but the most sophisticated of search marketers, including merchants themselves, the single biggest issue is that CMO’s, Marketing Managers & others within an organisation do not understand the channel, worry themselves with things like Brand bidding & display URL’s, when in actual fact, they have no real understanding on the impact of decisions made regarding these, but they think they do. And if these are their biggest issues, then they’re doomed to mediocrity in the search world. This reality is that search marketing is in it’s infancy, and during this period of time, education is very important. We’re trying to push the envelope and build the industry by releasing research like the cookie report that we released last month, as well as the profit sharing report mentioned in this post.
Profit shares bring along its own levels of complexity (which is detailed in the report), but suffice it to say that search marketing models with fees based on a either % of spend, hours or fixed fees are becoming as ancient as the Dodo.

Andreas has done a remarkable job of putting together fact, assumption and raw data to establish the argument as to why performance marketing works. Traditional & New Media agencies that offer paid search marketing services are on the backfoot with regard to search, as their metrics are not in line with the search engines themselves and their performance is not linked with their remuneration. I have been to many meetings where all I hear are complaints about their search providers, but they won’t change them, due to fear that the new provider might do even worse. It’s a sorry state of affairs. Often the agency has such a grip on the client due to the fact that they handle more than just search, the opportunity to expand the search side of the business is neglected. This is where affiliates & performance marketers often perform the best, which leads to even more insecurity from the agency standpoint.
What makes our business unique is our relentless belief that satisfying the search end user is of paramount importance and all other metrics will eventually revolve around this. This is the reason why we advocate performance based search marketing as a channel within search marketing. Search engines are platforms for marketing to end users and satisfying the needs of searchers – you still need a partner that is focused on understanding what the user wants, how each engine attempts to satisfy their users, and how to align the merchant’s interests with them. Focusing on the searcher will make any Search Engine Marketers (SEM) successful. Google have done a remarkable job of keeping their eye on this goal, and given their success, it would be a good idea to take a lesson out of their book.

I highly recommend that you read the Clicks2Customers Profit Sharing report!

I believe that Search Engines, in general, need to seriously look at what drives users to search and how to maximize their revenues from search in order to create a virtuous cycle (the more money you make from search driven by user satisfaction, the more it tends to self perpetuate and so on).

In order to seriously compete with Google, emerging search engines (A9, MSN, etc) need to understand what the driving force behind their revenues (or planned revenues are) are, and then apply it to their business in order to reach deeper into the consumer’s mind (and wallets, or so it seems). I believe that PPC and Natural Search (with revenue sharing links) potentially can merge. Issues like Click Fraud still plagues advertisers, rev share removes this risk. The fact that CPC’s keep rising should also tell you that business are underpaying for their traffic on the PPC engines, that’s what allows affiliates like to us to make a lot of money doing the arbitrage work.

Here is an alternative strategy to search:

The 3 cornerstones of a search is generally considered to be (defined by John Battelle in his book, Search):

1. The Crawler
2. The Index
3. The User Interface,

There is, however a fourth, in my opinion: The Customer Interaction. Poor quality results and websites tend to drive more similar searches per user, and less revenue per user. By monitoring the interaction between a user and a website, you can increase both the quality of the listings and the revenue of the search engine. Not enough time and investigation is spent by the major search engines on understanding post click conversion metrics on natural results, and this is the untapped gold mine of the search engine industry.

(Added: 15 November 2005

Google’s recent move into Web Analytics is definitely due to their foresight into this area. )

To understand Customer Interaction, you need to split the traffic intent of the user between Commercial & Non-Commercial. I’m going to focus on Commercial Natural Search Results for the purposes of this post, but the principles of usability would still apply to results that are of a non-commercial nature.

If the quality of websites in an index was monitored with respect to customer interaction, relative to the keyword that was searched on, you would probably find that search engine spam results would be quickly dropped to the bottom of the listings, organically. Search engine spam is almost akin to email spam – high volume, low conversion – high irritation.

Natural traffic should be independently ranked, based on the user experience for a given keyword, however, independent rankings, should not necessarily mean non-monetization of natural traffic. In the past, Inktomi was used to generate independent “Trusted Feed” organic listings, however, the downfall was that advertisers could not control the keywords that they paid on. The market moved to PPC, but in my opinion, PPC is just a pit stop to Cost Per Action – which is the metric that most smart PPC marketers use. Snap is trying to achieve much of what I describe here, although I don’t believe their knowledge of the affiliate marketing space is up to scratch to execute on this strategy without taking years by building direct relationships with each website. The idea should be to build a platform and leverage the platform to build the business.

At the rate that Google is growing, competing search engines like Yahoo needs a solid and ground-breaking strategy in order to reverse this growth trend, and I believe strongly that it lies in “The Customer Interaction”.

PageRank is dead. Links are becoming less important, due to the rise of RSS feeds. Websites are no longer pointing to other sites, they are syndicating the content on their own sites. Google is full of Search Engine Spam, mostly as a result of duplicate content feeds and syndication – can link popularity ever be trusted again? The use of inbound links as a method of determining authority is and will be eroded over time.

The other flaw with link is that by using CSS, which only become popular after PageRank, essentially you can put a link up once on your website and it propagates throughout the website, seamlessly. Search engine spammers are notorious for placing links from PR9 & PR10 sites, by buying them and increasing their PageRank.

Who can we trust?

How about you let the customer decide what they think is most relevant…

Imagine this:

A user searches on the keyword “Star Wars DVD” in Google. Top 3 results are for Amazon, Buy.com & eBay. Currently, you do not know which of the 3 the user actually purchased from. This is a huge slice of data, missing from your databases – can you imagine the potential to optimize the results based on the User Interaction. Firstly, you would find the most relevant results moving to the top of the listings, and secondly – you would be able to begin finally monetize the natural search market – something even Google have not yet achieved. Remember, that I’m not saying that you should change the results from the index – on the contrary – serve the most relevant results, even if the site does not have a monetization program (i.e. no commerce transaction), but if you’re going to send traffic to Amazon, at least use an affiliate link to gather both data and commissions.

There are a number of ways to achieve what is written above, without impacting the quality of the results.

1. Integrate Commercial Natural Search results with Affiliate Programs

This is actually easier done than said. For example, a user searches for “Blink Malcom Gladwell Book” on Google. The #1 link is (as expected) Amazon. Now, instead of sending the traffic to Amazon for free, and trying to figure out if this is what the user was looking for, send it via an affiliate link, integrated into their API (our Catalog Server does this, for instance – pretty easy). The user is then cookied and based on the data that Amazon sends back, you can check to see if there is Customer Interaction.

You can also improve your listings is you realize that users are not buying the book from eBay, but instead from Borders – this way, the search engine will become like a personalized shopping and searching partner – which is what the ultimate goal of search should be. As we know, Google & eBay work closely together, but for no remuneration on the natural side – imagine if this changed?

The idea is not to build two separate indexes, but instead to allow affiliate redirects to rev share on the basis on a natural result click via a particular merchant.

2. Earning Per Click

By monitoring Earnings Per Click on a website per keyword click level, search engines may find that some of their natural results traffic (sent via affiliate programs), have higher customer interaction rates, therefore higher yields than your PPC search program, an in this way, you can either force your PPC advertisers to pay higher amounts, or display Paid Listings, with natural listings.

3. Partner Database

Search Engines can and should start building a search partner database. Some partners, who may not be running an affiliate program, can simply add snippets of Java Script code to their site (ala Urchin) and allow the search engine to track the user through the site. This would greatly enhance your understanding of the customer interaction and increase detection of bots/spiders. You can also prioritize the high volume websites out, and perhaps eventually move them onto some type remuneration basis. This will also add a face to previously anonymous website, which typically are spam site or phishing sites, etc.

Conclusion:

I have just touched on a few of the endless possibilities engulfing our industry – maybe some are way out, maybe not – but if Snap succeeds, I’d be interested in seeing how close they come to this post.

The overall context of this post is that the search engine needs to have more insight as to the usability of a website in it’s rankings, but surely there is an opportunity to monetize natural listings whilst still delivering rock solid search results…?