Microsoft does not understand search monetization.
Yahoo does not understand search monetization.

Combining the two does not mean they suddenly will. The only company laughing at all this is Google…

I’ve written extensively about how to improve search monetization but both Microsoft & Yahoo place both internal and geographical politics above efficient business (running separate bidding marketplaces per country). As long as merchants are making considerable returns from Google – they are not going to use their valuable time on other search engines. Ok, so perhaps this merger will now improve return on effort for running MSN/Yahoo campaigns by combining the traffic, but it’s still a long road ahead for the combined company if it continues to focus on running multiple bidding marketplaces.

On a lighter note, I heard a great joke today:

What do you get when you merge Microsoft & Yahoo? Microsoft

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’m quite shocked at the  value of the deal as I would think that it would have a much higher value over nearly 4 years, but be that as it may – it will be interesting to see how Yahoo counters this move.

Today’s post is about how Google’s market share of it’s different properties do not even step up to Yahoo’s market penetration for similar properties (according to Hitwise).

As an industry “insider”, even I don’t get a chance to play and use all of Google’s toys, nor do I even know about everything. They’ve done a lot in short space of time, and I’m sure the average user is oblivious to what they’re up to.

That said, let the showdown begin…

Here is an article from Business Week entitled “The Counterattack on Google“. This article outlines much of how Google’s Adwords system employs a yield based mechanism to monetize their search results, as opposed to the current bid to position model pioneered by Overture, which Yahoo currently employs. In recent months, Google has added the Quality Score variable to improve the rankings in favour of greater relevance and less price emphasis. The virtuous cycle is that the happier the users are, the more they will search on Google, and this strategy is most definitely working. It’s working so well in fact, that Yahoo has rebuilt the system and relaunching it (currently dubbed Project Panama), which they hope will compete with Google.

I’m not going to go into all the current flaws in the Yahoo system which is being relaunched soon, but I’m going to address the strategic flaws in the Yahoo/MSN battle with Google.

This is something that both companies have really overlooked, and also the analysts trying to figure out how MSN & Yahoo are going to compete, which they need in order to forecast the share prices going forward. The flaw is that these analysts don’t realise that there are some critical flaws in the strategies of the two giants playing catchup. I don’t believe that unless there is a critical change in strategy, that MSN/Yahoo will beat Google in the short term and Google is going to grow very quickly in foreign markets in particular.

So what are MSN/Yahoo doing wrong?

The Internet is the world’s largest economy. What Google does right is that it allows advertisers based in any geographic area, to use a centralised system and buy advertising across multiple countries, without relying on reloading their campaigns, etc etc. Someone targeting all French speaking countries, for a French language product, simply selects Canada, France, Belgium, etc and all IP targeted traffic from those countries are served with the ads in questions.

Google has solidified their position in global markets, including smaller ones such as South Africa, by allowing anyone in the Internet Economy to participate in their global ad marketplace. This further increases relevancy. As a South African, when I search Yahoo.com or MSN.com, I don’t see commercial ads targeting me, but I do on Google. Yahoo & MSN insist on a decentralized model, which makes no sense to me whatsoever and companies in South Africa are unable to target local users on MSN.com & Yahoo.com.

MSN & Yahoo have strong brands outside the US, but they are not able to easily monetize their search, because of this decentralized “region by region” strategy. Google’s has really built a classy system around allowing anyone from anywhere to participate in their global marketplace in any language and any currency. This is where I believe the Yahoo\MSN will fall short in the long term.

By looking at Google’s earnings growth outside the US, I believe that not enough focus has been placed on the global market by the other search engines and also, US advertisers do try to target foreign countries with their products. Kudo’s to Google on this one.

Furthermore, this strategy will leads to other complications in the Contextual products in that Yahoo\MSN are not able to target international publishers very well. If the ads that Yahoo serves through YPN (Yahoo Publisher Network) only have US advertisers – and Yahoo US Advertisers only wants this traffic (i.e. no international traffic) – they will fail to deliver the solution that serves the needs of the publishers and hence does not compete with Google’s AdSense solution. Yahoo needs to focus on taking on Google globally, not just in the US. Many of the Yahoo search solutions are too locally (US) focused. It looks like MSN may follow this route as well.

Google has succesfully used Geo-Targeting to build it’s business, but MSN & Yahoo have gone with proprietary marketplaces – a key differentiator. Google tries to provide relevance while monetizing as many searches are possible, regardless of where they are based.

If Yahoo/MSN wants to take on Google, I do believe that they need to go back to the drawing board and rework their global strategy, and not to focus purely on each geography separately. They need to increase the monetization potential per search. Focus on the Internet as a medium, not a geographic location. In order to be relevant, you must act as a marketplace, connecting advertisers to searchers, by placing restrictions or hindrances such as geographic location, currency, language, etc, they will not maximize the revenue per search.

Take this example:

For every hundred searches on a search engine this could be the sample demographic:

40 US – English
10 US – Hispanic
30 Other Countries – English
10 Other Countries – French
10 Other Countries – Other Languages

For these hundred searches on Google.com – Google could yield a Clickthrough Rate of 100% because it has advertisers targeting every search, in it’s global marketplace.

If you looked at Yahoo or MSN, they would only be able to yield good results past US English, and maybe France. Also, because the auctions are run in multiple countries, they do not get the benefit of overlaying multiple bids and relevancy to get higher CPC’s and a mix thereof. Forget CPC auction benefits for just a second – their listings are now less relevant and have lower yields per search – something their stock prices are reflecting.

This is the brutal truth, whether they like it or not. MSN has got a great new angle with their demographic targeting capabilities and this shows that they are focused on revenue per search, but I’m not happy that the strategy is correct, especially given MSN’s strong international presence and brand. MSN have also integrated Search into MSN Messenger, which gives them an even stronger international base from which to grow their search capabilities. The problem is that when users search, they’re not going to see the local plumber advertising unless MSN has a local marketplace.

The funny thing is that I’ve had this discussion with MSN & Yahoo representatives and both companies are either dismissive or blasé about this particular strategic approach. If you carefully analyse the numbers, you’ll see that search is going to grow alot faster in many smaller markets, and if MSN & Yahoo are going to roll out marketplace by marketplace (slowly) they’re going to have to battle an even bigger Google ( I know, scary though). This is just one of the major flaws in the counterattack, but there are probably more than I can count.

It’s simple math that for every search, you need to display the most relevant adverts which generate the most money across the widest net of advertisers, and if they’re not doing that, they’ll never beat Google…

The only gripe I have is that they are still using the multiple marketplace approach, where you have to reload campaigns into different geographic regions to target different countries, unlike Google – where it’s a click of a button to add and remove countries. Yahoo also loses out on revenues in markets like South Africa, etc with this approach.