Vinny Lingham’s Blog

One of my favourite blogs/new resources is the daily newsletter from Good Morning Silicon Valley, written by John Paczkowski.

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…

Ok, so Danny Sullivan has written a nice post on Google’s latest decision in certain markets to remove the Agency rebate. The real reason behind this move, in my opinion, is that it will increase relevancy.

I personally have a problem with any kickbacks/rebates that are given to advertisers in an auction driven marketplace, as those who receive these rebates effectively have an edge over other advertisers - which is not fair play. Many agencies who receive these rebates, actually refund the costs directly back to the advertiser, or factor it into their bid prices (i.e. increase their prices by up to 10% more as they receive this discount back).

So, here’s the math as to why Google is in the process of removing the agency discount, and why it’s a relevancy issue:

Let’s play our a scenario where 8 advertisers are competing for position on the front page of Google. Let’s also assume that their sites convert equally and they have the same product, therefore the same margins and by chance, they also have the same relative (to position) conversion rate on their site for each position and their max CPC starts at $1 . Let’s also assume that the price that they pay in the positions just below is also the maximum profitable price that they are willing to pay. Due to the quality scores of each advertiser, their ranking & CPC are determined as follows:

1. Advertiser A - $1
2. Advertiser B - $0.99
3. Advertiser C - $0.97
4. Advertiser D - $0.96
5. Advertiser E - $0.95
6. Advertiser F - $0.94
7. Advertiser G - $0.93
8. Advertiser H - $0.92

So, if we assume for a minute that the positions indicated above are ranked in terms of user relevance, then this represents a perfect win-win scenario for Google where all advertisers are ranked both upon their maximum price & user relevancy.

Ok, now if all of a sudden, Advertiser H was given a 10% rebate, he could then effectively offer a Max CPC of $1.11 . This result in the following re-ordering:

1. Advertiser H - $1.01
2. Advertiser A - $1.00
3. Advertiser B - $0.99
4. Advertiser C - $0.98
5. Advertiser D - $0.97
6. Advertiser E - $0.96
7. Advertiser F - $0.95
8. Advertiser G - $0.94

So, what has now occured is that the least relevant advert on a given keyword now receives top position, because of the rebate, even though Google themselves are not earning a higher CPC for that position. I realise this is rather simplistic and that there are other variables not mentioned, but the effect is even more pronounced when you expand it into the real world marketplace (you’ll just have to take my word for it - I have two actuaries in incuBeta ).

Google is not trying to launch an attack on Media Buyers & Search Agencies - what they’re trying to do is remain true to their users & their ranking algorithms and remove any form of bias to any advertiser. The sooner that Media Agencies come to terms with the fact that Google is full of mathemagicians…the sooner they will feel more comfortable with their policies.

I understand that it’s contradictory in some ways, as we look at China, but in essence China is such a different market and from our experiments with the ranking algorithm in this market, it’s being engineered in a slightly different way (or so we think!).

Obviously, as a performance marketing company, we welcome the removal of rebates to level the playing fields, as we do believe that we’ve been at a disadvantage by not receiving the rebates. Our business model is also geared around maximising spend toward a certain conversion metric, not brand marketing or managing client PPC spend as an agency or in-house team would. We also don’t rely on rebates and branded terms to make a campaign “look good” to a client, and in the process just pull wool over their eyes as many agencies and in-house teams do.

Our business is focused on leveraging technology and people to create systems that allow for us to rank high on well researched, niche keyword terms that our clients are not on, or are not ranked as high as they could be. Sure, it makes some agencies & in-house teams concerned and insecure, but the really advanced agencies & in-house teams never have a problem working with us and often give us valued support, because we have a common goal - increasing revenues for the client and maintaining costs to a profitable level for all parties. The removal of rebates will further pressurize the inefficient players in the market, which also benefits all parties concerned.

In closing, I believe it’s just good business for Google to focus on keeping the integrity of their ranking algorithms in line with what the end user wants and in making sure that they keep coming back.

Danny Sullivan has done an in-depth report on Project Panama on the Search Engine Watch Site.
Instead of rehashing his post, I sugges that you have a read through it - very informative. If you don’t have a Search Engine Watch subscription, you can read the short version, but I highly recommend that you subscribe, as they have tons of useful and relevant content which is continually updated.

It’s fascinating to see the press mull over the search wars that are currently being waged.

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…

Forbes has finally caught up with the industry and confirmed the rumours, which we knew to be true already. In truth (NDA prevented me from saying earlier), I have been involved on some level discussing the new features with Yahoo earlier this year and I’m quite impressed with what they were planning to do. I can only say that they’ve dealt with all the major issues that their existing platform faced, and I’m quite excited about their plans.

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.