Yahoo 1, Microsoft 0

I’ve received a lot of e-mails today from people asking me my opinion about the Yahoo MSN partnership announced today. As I see it there are two consequences of the deal: first, I am confident that the partnership will have little to no impact on the market share of either of these two companies when it comes to search. Google is the de facto search engine, and consumers aren’t going to switch to something else just because there may be a slightly better algorithm on another site (and frankly I don’t think Bing or Yahoo has a better algorithm as it is).

So I expect Google’s market share to continue to increase in the coming years. Nothing Yahoo and MSN did today from a technology integration perspective is going to change that. The second point, however, is that I do expect Yahoo and MSN revenue from paid search to increase as a result of this deal. Why? Because the combination of two small paid search players, with two different but equally annoying platforms, will make it much more palpable for search marketers to allocate time and resources to running on these engines. There will be more clicks available from one source and we will only have to deal with one bad user interface and not two. The difference between spending $10,000 on Yahoo and $10,000 on MSN, versus spending $20,000 on one place is huge, so much so that I suspect that advertisers will be willing to increase their overall spent on these search engines.

The stock market reacted to today’s news by cutting Yahoo’s share price by about 10%. The rationale for this drop in price was that Yahoo CEO Carol Bartz did not get any upfront payments from Microsoft. I actually think this is silly reasoning by the investment community. First, as noted, I believe this is a long-term revenue driver for Yahoo, for the reasons stated above. But second, this enables Yahoo to focus on a part of their business that is still a significant differentiator compared to Google. Specifically, I am talking about content creation and development. Yahoo has great content like Yahoo sports and Rivals.com. And channels like Yahoo news and Yahoo finance, which have recently seen pressure from Google alternatives, could use a few bodies and some resources that had probably been dedicated to paid search over the last few years.

So if Yahoo can focus the company on building great content, eliminate unnecessary staff and basically outsource paid search management to MSN, all the while increasing their monetization of their search results, I see this as a great deal for Yahoo. Over time, if the content is really great, there’s a great chance to also increase market share in search, simply because people will start to use embedded search functionality on Yahoo’s content pages.

For Microsoft, on the other hand, I’m more ambivalent. I do think that this will grow their revenue from paid search, just like it will grow Yahoo’s revenue from paid search. But if the folks in Redmond think that this deal will be a big driver for Bing, as a significant competitor to Google in organic search, I think they are mistaken. There is nothing that MSN can do at this point to win the search battle. It seems to me that the announcement today signifies that Yahoo understands this reality, and Microsoft is still living in the 1990s, a time in which any category they chose to conquer was theirs for the taking.

 

"We expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers."

Guess who said that? None other than Larry Page and Sergey Brin in their seminal paper on PageRank, written way back in 2000. I’ve never seen much written about Page and Brin’s pre-billionaire perspectives on search engine advertising, but when you read it, it is pretty fascinating. On the one hand, the paper clearly condemns Paid Inclusion and other ‘hidden advertising’ within the organic search results. But it equally damning of any search engine that accepts advertising, because the authors believe this will inevitably create economic pressures to reward advertisers with better placement (or alternatively, to penalize advertisers with no placement at all, to keep them advertising).

Here’s the complete text of the PageRank paper’s section on advertising. I wonder how Page and Brin might alter this section if they could rewrite it today?

Currently, the predominant business model for commercial search engines is advertising. The goals of the advertising business model do not always correspond to providing quality search to users. For example, in our prototype search engine one of the top results for cellular phone is “The Effect of Cellular Phone Use Upon Driver Attention“, a study which explains in great detail the distractions and risk associated with conversing on a cell phone while driving. This search result came up first because of its high importance as judged by the PageRank algorithm, an approximation of citation importance on the web [Page, 98]. It is clear that a search engine which was taking money for showing cellular phone ads would have difficulty justifying the page that our system returned to its paying advertisers. For this type of reason and historical experience with other media [Bagdikian 83], we expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.

Since it is very difficult even for experts to evaluate search engines, search engine bias is particularly insidious. A good example was OpenText, which was reported to be selling companies the right to be listed at the top of the search results for particular queries [Marchiori 97]. This type of bias is much more insidious than advertising, because it is not clear who “deserves” to be there, and who is willing to pay money to be listed. This business model resulted in an uproar, and OpenText has ceased to be a viable search engine. But less blatant bias are likely to be tolerated by the market. For example, a search engine could add a small factor to search results from “friendly” companies, and subtract a factor from results from competitors. This type of bias is very difficult to detect but could still have a significant effect on the market. Furthermore, advertising income often provides an incentive to provide poor quality search results. For example, we noticed a major search engine would not return a large airline’s homepage when the airline’s name was given as a query. It so happened that the airline had placed an expensive ad, linked to the query that was its name. A better search engine would not have required this ad, and possibly resulted in the loss of the revenue from the airline to the search engine. In general, it could be argued from the consumer point of view that the better the search engine is, the fewer advertisements will be needed for the consumer to find what they want. This of course erodes the advertising supported business model of the existing search engines. However, there will always be money from advertisers who want a customer to switch products, or have something that is genuinely new. But we believe the issue of advertising causes enough mixed incentives that it is crucial to have a competitive search engine that is transparent and in the academic realm.

 

Google and The A Word?

I’ve written numerous times in the past about the possibility of anti-trust actions being levied at Google, but I’ll be the first to admit that I’ve never taken the time to throw all the various anti-trust arguments together into one cohesive post. Fortunately for you and me, a reader recently alerted me to a post he had written that does a pretty good job of outlining many of the anti-trust issues surrounding Google. If you want to read the full article, you can check out Scott Cleland’s article here. For the record, I don’t know anything about Mr. Cleland’s background (for all I know, he could be a lawyer for Microsoft . . .!), but he’s certainly done a thorough job of research.

Among the most salient points he makes:

• Google has dominant market-share of the search market;
• The search market is a huge market with millions of participants;
• There is little to no external accountability of how Google prices their ad auction market;
• Google makes decisions about the price an advertiser pays without full disclosure as to how this price was determined;
• Google is engaged in anti-competitive front running (placing their house ads ahead of the competition, regardless of the actual auction result);

I would add to this the “bundling” of products, such as the “Google Checkout” logo that you see in AdWords when a merchant participates in the Checkout program, as well as the free pricing of many Google products, which could be interpreted as a way to push competitors out of business (i.e. Google Analytics, Google Web Site Optimizer, Google Base).

As to why none of this has apparently bothered federal agencies, Mr. Cleland concludes:

Google appears to have fallen between the cracks of oversight by the FTC, DOJ, SEC and the CFTC — all of which have some responsibility to protect market users and the public from fraud, manipulation, and abusive market practices by dominant providers/market makers, and to foster open, transparent and competitive markets.

For the record, I have talked to lawyers experienced in Internet law who think all of this complaining about anti-trust is totally unfounded. In particular, one friend of mine said (and I paraphrase here): “Google provides an incredible free service to consumers. the DOJ is not going to file an anti-trust suit against them as long as consumers continue to get so much from Google for free. In that respect, there is a huge difference between Google and Microsoft.”

That may be true . . . for now. The question I have is what happens in 2009 if Obama is elected and the eight years of business-friendly regulators at the FTC and the DOJ suddenly become a little less likely to look the other way? It could make things a bit more complicated for Google.

 

Despite FTC Fines & Google’s Quality Score, Incentivized Advertising is Alive and Well on Google & Yahoo

Late last year the FTC fined Adteractive over $600,000 for deceptive advertising practices. At issue were advertisements for FreeGiftWorld.com that promised free Ipods and other hot products, but in reality required consumers to fill out offers from advertisers (many of which required paying money) before getting the product.

Long before the FTC settlement, Google aggressively purged such ads (known as “incentivized offers”) from the ranks of the AdWords search results. Adteractive, for example, went from spending hundreds of thousands of dollars a month on incentivized ads on Google to next to nothing. I know this first hand, as I was managing this spend at the time. If you read Google’s AdWords blog postings about Quality Score, the very first sites they list as having bad quality score are “Data collection sites that offer free gifts, subscription services etc., in order to collect private information.”

This decision by Google (and by Yahoo, who actually acted prior to Google) was no doubt based largely on legal liability issues. In a similar situation, both Google and Yahoo agreed to pay over $10 million each to settle claims arising from online gambling revenue (notice that a search for “poker” on Google today brings up zero AdWords results). A good rule of thumb in civil lawsuits is to always go after the “deep pockets” – the companies with lots of money. If the FTC has decided that incentivized advertising is deceptive, you would think then that relatively small companies like Adteractive would only be the tip of the iceberg. Companies like Google and Yahoo could be much more valuable targets. So by preemptively banning incentivized sites, Google could at least argue that it made a good faith effort to close down such deceptive advertising.

Surprisingly, though, a review of the Google ad network shows that – despite the Quality Score penalties established a few years ago – incentivized advertising is not only still on the network, but it appears to be thriving. A search for “free iPod” brought up 15 advertisers; “free Xbox” had 31. Each of the ads is almost identical. Here’s a typical offer for an iPhone:

iPhone 4 Free – No Catch. No Catch New iPhone Free Worth $597 Go Get it Now While Stocks Last. www-iPhone4Free.com

These are exactly the types of ads that the FTC is now fighting (and on top of the deceptive claim, the iPhone is now $399, not $597!). To give you an idea of the type of advertisement we’re talking about here, when you click on the ad, you are redirected to TopConsumerGifts.com. Read the find print and you’ll soon realize that you need to fill out eight offers – two silver, two gold and four platinum to get your free iPhone.

As with all of these programs, prior to getting to any offers, you need to go through a long “survey” which includes around 100 advertisements. Then you get to the silver, gold and platinum offers, which seem innocent enough – in the case of TopConsumerGifts, it’s things like a NetFlix or Columbia House DVD trial. So in theory you could fill out eight trial subscriptions to these various offers and then get your gift, right? Well, not so fast my friend. The small print in the terms and conditions note: “You will not be eligible to receive a Gift in this Promotion if, within 60 days of your Sponsor Offer Initial Transaction Date, you cancel your participation in more than two Sponsor Offers you have completed as a part of the Program Requirements.”

In other words, for at least six of eight offers, you need to get past the 30 day trial and actually pay for the offer. Assuming that the average offer costs about $30 a month, you are basically required to spend $180 ($30 times six) on things you don’t want to get your “free iPod.” If you don’t follow the terms and conditions to the letter, you don’t get your gift, and even if you do follow all the rules precisely, “Company may, at its sole discretion, terminate any account and deny any Gift without prior notice for . . . any other reason at the reasonable discretion of the Company.”

These ads are all over the Google Content (AdSense) Network. And a few days ago I was listening to a sports radio station and I heard an ad for “RadioFreeZone.com” offering a free Xbox. Judging from the timing of the ad (non-drive time, remnant), I wouldn’t be surprised to learn that this ad was served up via Google Audio Ads. I’ve also noticed that whenever I log on to my “My Yahoo” page, I get “targeted” with Free Xbox display ads.

Something is not right here. Either Yahoo and Google’s lawyers have decided that the legal risk of allowing incentivized advertisers is worth the revenue, or a major smackdown from the FTC is around the corner.

 

AMZN + YHOO + EBAY + IAC + TMX + CRM + PCLN + EXPE = GOOG?

As Yahoo and eBay stock drops rapidly, I decided to compare the market caps of leading Internet stocks. More specifically, how many Internet companies do you have to combine to equal Google’s current market cap of $171 billion? Here’s the tally:

Yahoo (YHOO): $26B ($145B to go . . .);
+
eBay (EBAY): $36B ($109B to go . . .);
+
Amazon (AMZN): $31B ($78B to go . . . );
+
IAC (IACI): $7B ($71B to go . . .);
+
Time Warner, owner of AOL (TMX): $56B ($15B to go . . .);
+
Salesforce.com (CRM): $6B ($9B to go . . .);
+
Priceline (PCLN): $4B ($5B to go . . .);
+
Expedia (EXPE): $7B (Over by $2B!).

Which would you choose – Google or the eight other companies above?

 

Does/Should Google Increase Minimum Bids Over the Holidays?

Over the last few weeks, I’ve received email notifications from basically every comparison

shopping engine with the same message – CPC rates are increasing for the holiday season. The most recent one I received came this week and said: “Effective November 1, 2007, Smarter.com will apply a 20% cost per click increase to base CPC rates across all categories. This holiday adjustment is temporary and will end on December 31, 2007. Our past experience has shown that merchants typically see increased clicks and conversion from leads throughout this period and as such you should expect consistent levels of ROI at the new rates throughout the holiday season.”

To put it another way, consumers are more likely to actually buy something during the holiday season, and thus comparison shopping engines (CSEs) raise their rates to share in the bounty (increased prices but “consistent levels of ROI”). I’m not knocking the CSEs for doing this by the way – they need to make money from the holidays just like retailers need to make money. It’s just business.

What I’ve wondered for some time now is whether Google has a similar way to squeeze more pennies out of their retail advertisers over the holidays. My suspicion was initially aroused on November 6, 2005, when Google made a major enhancement to their quality score algorithm. The thing that struck me about that enhancement was the timing – early November. Because quality score is (and definitely was) a very murky concept, it would be pretty easy for Google to use the ‘quality score card’ to artificially increase bids for some or all advertisers for the holidays.

And unlike CSEs, Google can’t just outright announce “hey, we’re raising bids for the holidays.” Anyone who advertises on comparison shopping engines understands that part of the game is that the CSEs can and will raise minimum bids at will. But Google has always professed to running an automated blind auction, where – in theory – you could get amazingly awesome clicks for $.01 if you had the right combination of quality score and low competition. So if Google came out and announced that the minimum bid on “digital camera” will be $2.50 until December 31st, they’d face a firestorm of advertiser and media backlash. Which leads me back to the “quality score” update theory. It’s the perfect back-door to raising bids without explicitly raising bids.

Now I know some of you are thinking: “Even if bids go up over the holidays, it’s not because Google is secretly manipulating the system, it’s because advertisers are just raising their bids.” I’m sure that this is true – savvy advertisers will anticipate the increased conversion rates over the holidays and proactively increase their bidding. But the key here is the term “savvy.” I suspect that there are a lot of advertisers who don’t make holiday bid adjustments, either because it never occurred to them to do so, or because they just don’t dive into that level of detail on their campaigns. This is likely what the CSEs encounter and why they need to artificially juice the system. So if Google just sits back and let’s the market dictate bids, I’m sure that they would experience a market-driven seasonal CPC lift, just not as great a lift as they could achieve by some behind-the-scenes bid increases.

At the end of the day, I have no way of proving this theory, other than through circumstantial evidence. Over the next few weeks, however, I’ll be looking for two signs that might support this idea: 1) any announced changes to the quality score algorithm and 2) changes to my keywords’ minimum bid prices. In January, I’ll write a follow-up post with the results.

Postscript: I wrote this in early November for the Search Marketing Standard blog. So far, I’ve yet to see any evidence of artificial bid price increases on Google (but the holiday season is still young!).

 

Message from Facebook: Big Brother Has Written on Your Wall, and He Wants to Sell You Something

Those of you hiding under a rock today no doubt still heard the news that Microsoft invested $240 million in Facebook for a mere 1.6% of the company, giving Facebook a hefty $15 billion valuation.

This investment begins a period that will truly define Facebook’s fate. Right now, the company is on top of the world – phenomenal membership growth, massive valuation, and sexy enough to attract Silicon Valley’s brightest – even from Google – to join and grow the company.

But contrarian that I am, I have to point out three major challenges Facebook now has in front of it.

1. Will Facebook Users Embrace Microsoft? With this investment, Facebook is no longer the hip community founded by and for college students. It’s big business. There is no longer anything counter-culture about Facebook. So the question is: how will Facebook’s core users react? Will 20-somethings want to be part of a community that is backed by Microsoft, formerly known as the evil empire?

A potential analogy here might be Barack Obama. When Obama was a ‘potential’ candidate, he was cool, hip and had tremendous buzz. Now that he’s an actual candidate, however, many people see him as just that – a political candidate. It’s hard to keep your ‘outsider’ street creds when you are in the midst of a race to be the ultimate insider. Will Facebook suffer the same fate?

2. Will Facebook Users Embrace Monetization? Despite the good work of the Bill and Melinda Gates foundation, Microsoft as a company is all about money. Suffice to say, to value Facebook at $15 billion, Microsoft is betting that Facebook will find a way to turn eyeballs into dollars.

And it therefore comes as no surprise that Facebook is planning a big upcoming advertising announcement in the near future. While savvy Facebook users have no doubt expected this for some time, it’s an open question as to how they’ll react when part of Facebook’s real estate starts to be paid space. After all, these are the same people who went bonkers when Facebook introduced the “newsfeed” a few months back.

3. How Will Google Fights Back? OK, Microsoft *finally* beat Google out for a deal. Good for Microsoft, it’s about time. Now Google is in a new position as a company – what to do when you lose an acquisition/investment play. This loss is not going to go down easy over at the Googleplex, both because they see Facebook as a threat and because they absolutely hate Microsoft.

Google is going to react to this move, and likely react aggressively. Indeed, it’s already been suggested that Google may be launching an open source platform to rival Facebook in a matter of days. The tenuous friendship between Facebook and Google may be officially over, and Facebook needs to brace themselves for a potential battle.

I’m not suggesting, of course, that it’s all downhill from here for Facebook, merely that the greater your success, the greater the challenges. Google is an example of a company that faced these threats (adding paid ads to their site, grappling with the silly ‘don’t be evil’ mantra, fending off attacks from Microsoft and Yahoo), and has clearly come out the other end quite nicely (market cap bigger than Citibank or WalMart – I call that a success). But once you get to the top, everyone wants to bring you down. In the coming months, we’ll see how Facebook deals with the pressure.

 

Is There Such a Thing as Quality Traffic from a Second Tier Search Engine?

My rule of thumb in buying paid search ads is to buy ads on Google, YSM, MSN, and Ask and avoid everything else. I know that somewhere out there there are diamonds in the rough, but I also know that I would have to pour through a lot of junk (which would cost me a lot of money) to find any gems. As a result, it’s generally not worth my while.

Do you agree? Well, now it’s your choice to have your voice heard! You have two ways to respond:

1. Check out the survey on the right frame of this page (it’s a little hard to see I admit). Vote for your favorite second tier search engine and tell all your friends to do the same.

2. Just respond to this post with a comment about good or bad 2nd tier search engines.

 

Did Google Create Search, or Did Search Create Google?

This afternoon Yahoo released their quarterly earnings. The results were disappointing: “a dip in quarterly profit, weighed down by weak display advertising, and a weaker-than-expected forecast through the end of 2007.” Yahoo’s market cap is now hovering around $35 billion.

That may sound like a lot of money, but consider this: the founders of Google could personally buy Yahoo at this point. That right – Larry and Sergey could become a two-man leveraged buyout team and own 100% of Yahoo. Google’s market cap, by the way, is currently $172 billion – five times that of Yahoo – and rising.

The dichotomy between Yahoo’s ongoing decline and Google’s ongoing ascent got me to thinking about just how exactly Google made it to the top. Had you asked me this question a few years ago, I would have explained that Google was just in the right place at the right time. Yahoo was focused on building their portal and biz dev deals, Microsoft was worried about their next OS release, and Google launched a very useful search engine at a time when consumers were ready for a better search. Combine that with almost 100% euphorically positive buzz and Google’s success was all but assured.

Today, however, I no longer buy into that argument. The fact is, Yahoo and Microsoft didn’t ‘drop the ball’ – there was no ball to drop. When Google was launched, search engines had been certifiably proven as failed business models. Just ask employees (or worse, investors) of Lycos, Excite, Ask, InfoSpace, Magellan, About, AltaVista, AlltheWeb, eTour, or any of the dozens of other search engines that either went out of business or got acquired for pennies.

So there was no reason for Yahoo or anyone else to be worried when some Stanford geeks launched yet another search engine. For that matter, you really can’t blame Yahoo for allowing Google to power their search results. Again, search was just a feature – the real money was in creating cool content and applications.

Google simply made search cool – and valuable – again. Google was so fascinatingly strange (an “I’m feeling lucky” button?) and simplistic that consumers were mesmerized. Moreover, Google actually respected consumers – instead of pop-ups, banners, interstitials, paid inclusion, and extra fees for product usage (read: Yahoo Mail) – Google limited their pages to just a few text ads and everything to consumers was free.

Google created the perfect app – more useful, cool, and free – with a perfect business model (non-obtrusive, highly relevant advertising). It’s not surprising that consumers ate it up.

Had Google never existed, would search engines be important today? Absolutely. But not to the degree that they are now. In other words, I suspect that the absence of Google would have had no meaningfully positive impact on Yahoo’s stock price. Google created it’s own market share rather than taking away market share from Yahoo.

As Google moves into a myriad of other areas (wireless, VOIP, word processing, video, offline advertising, payment processing, etc), it’s quite possible that Google will have the same impact on these industries as it did on search – creating new markets that others had long ago abandoned.

The prominence of search engines in today’s Internet is the result of Google, not the other way around.

 

Does Mobile Matter?

Driving through the heart of Silicon Valley today, I noticed a Yahoo billboard proudly proclaiming market leadership in Mobile Search. To me, this claim is a Pyrrhic victory at best, and embarrassingly desperate at worst. It’s kind of like hearing a coach tell a reporter “we lost six games by less than three points. If we had won those, we would be in the playoffs.”

But as I kept driving, a tried to give Yahoo the benefit of the doubt. Indeed, many prognosticators have been hailing mobile as a virtual Internet killer, and as new devices like Apple’s iPhone start to make it relatively easy to use the Web on your mobile phone, maybe being the leader in mobile really is worth something after all?

Then again, in 2000, Yahoo could have easily put up a billboard proclaiming search dominance, and all of its once great rivals – Excite, AltaVista, Lycos – couldn’t protest the claim. As we now know, however, dominance in any Internet category is fleeting and Yahoo is now in a heated battle for second place in online search.

The problem with Yahoo’s claim of mobile dominance at the moment is – frankly – no one cares. Google, MSN, eBay, etc – they all have mobile strategies but none of them have really decided to throw their hat in the ring. So Yahoo being the #1 mobile player is sort of like being the best ice skater in Alabama.

No doubt, there will come a time when mobile does matter. Maybe the iPhone will usher in that era, or maybe we are still a few years a way. When that time does come, however, you can be sure that Yahoo’s rivals will come up with solid strategies to grab marketshare. If, after the full-scale launch and integration of “GMobile“, Yahoo is still king, then I would agree that they have something to bray about.

Which brings up one final point – exactly when will mobile matter? I remember working at a dot com in 2000 (apartment rentals) and our VCs told us that we had to create a mobile strategy, since it was only a matter of months before consumers would be finding and renting apartments via their mobile phones. Similarly, I actually interviewed in Yahoo’s mobile search department way back in 2003, and I was told that mobile was a core initiative of Yahoo at that time.

And I consider myself pretty much a nerd when it comes to trying out new technology, and the most that I’ve done with my phone is email, very basic Web browsing, and a few text messages. The idea that my phone will soon become my preferred portal for accessing the Internet still seems futuristic to me. Let’s not even begin to talk about how my Parents’ generation feels about this -they are still figuring out the Internet!

Believe me, I would love to see Yahoo be a smashing success – in mobile or otherwise. I bought YHOO shares about two years ago and I will gleefully take any good news coming out of Sunnyvale. And as a search marketer, I think it is good for the entire industry to have healthy competition against Google – no one likes putting all their eggs in one basket.

The fact, however, that Yahoo is #1 in mobile and that they need to flaunt this on expensive billboard space does not give me warm fuzzies inside. Here’s hoping that Yahoo can find something more meaningful to brag about in the near future.

 

Grading Google’s Goods

Man does Google have a lot of products. From mapping the surface of Mars to selling radio ads, Google is everywhere. And with the stock price currently hovering around $515, I guess all of these products that they keep rolling out must driving a lot of revenue, right? Well, some do, but others can only be classified as fun engineering projects that are a long ways away from every generating a cent for the Big G.

I figured it would be fun to grade Google’s various products and services on two factors – first, the current revenue they bring in, and second, the potential for revenue in the future. The scores from both of these factors will then be combined to give each product one overall grade.

For the record, I’m not grading on a curve, and due to the shear number of products Google offers, I’m not even going to justify any of my grades! That being said, if you really want to know the explanation for a grade, wait until after class and then write a comment to this blog.

So, without further ado, Blogation’s Google Grades (Grades are ordered as followed – current, future, overall):

Valedictorians:
AdSense: A, B+, A-
AdWords: A+, A+, A+
Blogger: A-, A-, A-
Domain Park: A, B+, A-
Gmail: A-, A, A
Toolbar: A, A, A

Dean’s List:
Analytics: B+, B+, B+
Base: C, B+, B
Checkout: B, A-, B+
Enterprise Search: B, B, B
Finance: B-, B, B
iGoogle: C, B-, B-
Maps: B, A-, B+
PageCreator: C-, A, B+
Talk: B, B+, B+

Extra Study Hall Time Needed
Adwords Audio: C, C+, C+
Calendar: C, C+, C+
Desktop: C-, B-, C+
Docs & Spreadsheets: C, B-, C+
Earth: B-, C+, C+
Groups: C, C, C
PPA: D, C, C-
Picassa: C-, C+, C
News: D-, C, C-

Detention
AdWords Print: D-, D-, D-
Orkut: D, D-, D-
Web Accelerator: D, D-, D

Overall GPA: 2.65 (C+)

C+ sounds pretty harsh (OK, fine, I’ll give them a C++) but remember that this is the overall score – Google’s great products are brought down by the struggling class clowns.

 

Jerry Yang?

For a long time, I’ve used Jerry Yang and David Filo as the models of smart Internet founders. What impressed me so much about these guys is that they had the confidence to push forward with their idea, despite the many naysayers who said it couldn’t be done. But more importantly, they also had the smarts to know when to let go of the reins. Once Yahoo started to become a “real” company, they took a backseat and let seasoned business leaders take charge

This is really a pretty amazing transition – many entrepreneurs don’t know how to switch from pig-headed visionary to laid-back team player – but Yang and Filo did it and did it well. In many ways, they were the model entrepreneurs that taught Sergei Brin and Larry Page their playbook on going from start-up to mega-corporation.

But now comes the news that Terry Semel is stepping down (or being fired, or both, it doesn’t matter) and Jerry Yang is assuming the position of CEO. Additionally, Susan Decker, the former CFO famous for her quote that Yahoo was essentially battling for second place in search, is now President.

I definitely have some mixed feelings on this move. On the one hand, I think it was long past time for Terry Semel to move on. No doubt he did some great things for Yahoo – in particular the acquisition of Overture, HotJobs, Flickr, and Del.icio.us. But he also presided over Yahoo gradual slide from #1 search engine to #1 outsider looking in. And, throughout it all, collected a lot of money – over $200 million in one year alone.

I do think that Yahoo’s social media strategy will pay dividends in the long-run, but there’s no future if there’s no today, and Yahoo had consistently underwhelmed shareholders, search marketers, and employees. It’s time for a change.

But Jerry Yang as the new head-honcho? This one makes me a little nervous. No doubt Jerry Yang is an incredibly smart guy, he knows Yahoo better than anyone, and he’s a lot more seasoned than he was in the mid-90s when he gave up the reigns to someone else. If nothing else, I’m sure his presence at the top will encourage many smart geeks in the Valley who might have otherwise gone to Google to give Yahoo a second look.

At the same time, however, the guy is 38 years old, he’s only worked at one company – ever, and he has been a senior executive at Yahoo during their losing battle to Google over the last six years. If Yahoo needs some new blood to shake the moss off the log, having the founder return as CEO doesn’t seem to be the right solution.

I would think that there would be plenty of seasoned candidates – perhaps even senior people at Google – who would love the opportunity to come in and take over Yahoo. After all, the stock is pretty low, the expectations are low, and there is a lot of potential going forward (social media, the numerous big companies that want to partner with anyone but Google, the continued strength of online advertising).

Bringing Jerry Yang back seems a bit like the Politburo in the USSR in the 1970s – once the Premier died, they just elected another equally old, equally stodgy replacement who had an equally ineffective and short career at the helm.

I’m hoping I’m wrong here. More competition in the search space is good for everyone. I’d love to see the re-emergence of Yahoo as a major player and innovator. It seems hard to fathom, however, that Jerry Yang is the man to lead Yahoo to the promised land.

 

Keeping Google at (e)Bay

There’s been a lot of chatter this week about the brewing battle between Google and eBay. Google struck first, holding a “protest party” outside of the eBay live show in Boston. eBay responded by removing all of it’s ads from Google. Google backed down, cancelling it’s party in Boston.

I’ve seen this coming for a while now (loyal readers will no doubt recall my “Google vs Ebay” post from about a year ago and my updated post not two weeks ago). In my opinion, Google has long considered eBay – not Yahoo or MSN – as their chief competition. And I have felt that eBay has not taken the Google threat seriously enough – perhaps until now.

What’s clear to me, however, is that eBay is not strong enough to battle Google alone. eBay needs Google more than Google needs eBay. The estimated $400 million Google might lose if eBay stops advertising on AdWords is significant, but not debilitating. But if you assume that eBay is spending an average of $.20 per click on Google, that’s two billion annual visitors that eBay would be losing. That’s a lot of Disneyana and antiquarian book sales.

If eBay really wants to fight Google, they need to enlist some help. My suggestion: talk to Amazon.

Amazon and eBay have something in common that sets them apart from virtually any other company online – both are experts at purchasing “long tail keywords.” Type in virtually any product (or non-product, for that matter) on Google and you’re almost certain to see eBay and Amazon showing up. Add in eBay’s Shopping.com and the chances on any search are close to 100%.

So if Amazon and eBay suddenly stopped all spending on AdWords, this would result in a lot of lost revenue that Google simply couldn’t replace. You see, on many keywords, if one advertiser leaves, this doesn’t have much of an impact on Google, because a different advertiser is waiting in the wings to assume the departing advertiser’s position. But with obscure terms like “first edition leather bound 17th century book”, there are few replacements to eBay and Amazon.

Amazon and eBay, however, don’t just contribute to Google’s coffers via AdWords. Both have huge affiliate programs, and Shopping.com places Google ads on their site via AdSense. eBay also owns major Google spenders like Half.com, StubHub, and Rent.com.

If Amazon and eBay stopped AdWords spending, removed AdSense, and prevented their affiliates from buying ads on Google, this becomes pretty significant for Google. I have no idea how to predict the financial impact, but my guess is that there would be at $1 billion of revenue for Google at play. That kind of lost revenue will have many negative impacts on Google, like a stock price drop and increased difficulty in acquiring companies for stock.

Of course, as noted, this strategy would not be without its impact for eBay and Amazon. You can’t replace billions of users overnight. I do believe, however, that there are ways to spend that extra billion dollars productively.

eBay’s recently acquisition of StumbleUpon for $75 million was a great move that could have significant competitive advantages against Google. Having a couple hundred million dollars lying around makes it easier to acquire strategic technology and sites with loyal customer bases like StumbleUpon.

With mass media channels like TV and radio hurting these days, eBay or Amazon might be able to lock up a lot of non-search exposure at a discount rate. I’ve recently seen eSurance.com plastering San Francisco with offline campaigns (buses, billboards, radio, TV). Not sure how this is working for them, but this sort of campaign could help remind folks to go back to eBay or Amazon to see what’s new.

Finally, there’s always research and development. Google spends a lot of money on their engineering team. An extra billion could buy away Google’s talent, or provide more resources for the in-house resources already there.

If any of Google’s competitors really want to stop the Google train from rolling over them, they’re going to have to join forces. Such a move would be painful for every company involved, but it may end up being the only hope anyone has to level the playing field against Google.

 

Google vs. Ebay, The Battle Continues

Type in any product on Google and you’ll notice something interesting at the top of the page – two links, one that says “web” and the other that says “products.” These links are right below the search box and right above the first three sponsored links.

When you click on products you are, of course, taken to Google Base. Now take a look at the top of Google Base – you’ll notice that there are two prominent sort options “Show all items” and “Show Google Checkout items only.” It should be noted that Google Checkout is also prominently displayed (in some cases, with a full-color logo) on the paid ads of participating merchants on Google itself.

No doubt the combination of prominent placement for Google Base on the search results, and the prominent placement of Google Checkout in search results and at the top of Google Base will lead to a lot more business for both products.

And, as I have noted in prior posts, these are two products that are directly intended to take marketshare away from eBay, with Google Base being a direct competitor to Shopping.com, Rent.com, and eBay (all of which are owned by eBay), and Google Checkout being an obvious attack on PayPal.

Imagine what would happen if Google Base expands its reach beyond new items from merchants and starts to offer used items, sellable by anyone. And perhaps not just ‘buy it now’ used items, but also items that people might want to, oh I don’t know, auction? And since Google could monetize this traffic through a combination of Google Checkout fees and AdWords ads, it wouldn’t be that crazy to think that Google would just offer auctions for free.

And unlike other failed attempts to capture part of eBay’s auction market (Yahoo, Overstock, etc), Google’s immense traffic would enable them to create a marketplace of buyers that past eBay competitors failed to ever accumulate.

As I noted last week, I find it interesting that eBay is considering a purchase of StumbleUpon. Past eBay acquisitions have all seemed logically related to their core business model – the online marketplace. This would include actual marketplaces (StubHub, Rent.com, Half.com), and enablers of online ecommerce (Skype, PayPal, Shopping.com).

So the acquisition of an innocuous Web 2.0 toolbar seems out of place, until you consider the potential for social media search (collaborative filtering) to someday provide more relevant search results than an algorithmic search engine. If that is indeed possible, then suddenly you could see eBay gaining search marketshare at Google expense. And with more marketshare, it becomes possible to further grow eBay’s core businesses.

In other words, Google is trying to grab marketshare from eBay by promoting eBay killers through its search dominance, and eBay is trying to grab marketshare from Google, by gaining search dominance to protect and grow its existing properties.

Meanwhile, Microsoft still controls the browser, Ask spends millions on a bad advertising campaign, and Yahoo loses c-level executives (Yahoo does have a social media strategy, but I have yet to see it really take off in any meaningful way).

The battle for search dominance is really the battle for online dominance. And despite Google’s current catbird-seat position, it’s still too early to declare a winner. Technology, user behavior, and smart competitive moves will make this race very interesting over the next several years.

 

Collaborate or Die

Lately I’ve been playing around with StumbleUpon.com and it’s pretty addictive. For those of you not familiar with this site, it works like this: you download a toolbar for your browser that says “Stumble.” When you click on it, it takes you to a site that it thinks you might like. This is determined by the categories you select as areas of interest, and also by how you rate past sites you have visited.

For example, let’s say that StumbleUpon shows me PayScale.com, an online compensation survey. I rate it as a “I like it.” The site has also been rated by many other users as well. Over time – after I’ve rated maybe 50 to 100 sites – StumbleUpon can match me up with other users that have also rated similar sites similarly. As a result, it can start showing me sites that people like me have already reviewed, making it likely that I will also like these sites. This is known as “collaborative filtering”, most famously seen in Amazon’s “people who liked this, also liked this” box.

Right now, StumbleUpon is basically a fun way to find funny or cool sites. I mostly end up with joke sites, strange pictures, or YouTube videos. The potential of StumbleUpon, however, is much greater. Indeed, rumor has it that eBay is about to acquire the company for $75 million. That’s a lot of dough for a service that sends people to lawyer joke summaries.

But think about StumbleUpon this way: if I rate sites for a few months, I’ll probably have 500 to 1000 sites rated. That’s a pretty good profile of my likes and dislikes. Now let’s say that the Stumble toolbar expands from just the ability to randomly access cool sites to an actual search box. So now I type in “los angeles airplane tickets” and StumbleUpon determines that people like me really prefer Kayak.com over Orbitz. As a result, I get sent to the result that works best for me. Sort of like Google’s “I’m feeling lucky” feature, but much more personalized.

You could even take a regular search engine approach and show me the top ten listings based on my personalized preferences. If you think about it, which would you prefer: results based on sophisticated computers with oodles of complex algorithmic code, or results based on 500 people just like you who have already looked through a bunch of sites and found the two or three that they like the most. Personally, I’d bet on the people.

As much as a lot of Web 2.0 companies seem to be over-hyped, and over-valued, I do think that companies that use the “wisdom of crowds” to personalize results have the potential to provide far more accurate results for users than an algorithm by itself. I count Flickr (photos), Digg (news stories), and StumbleUpon (Web search) as the leaders in this arena.

Granted, as with any technology, the more popular it becomes, the more likely it is susceptible to manipulation. Just as the rise of search engines created an entire industry of “search engine optimizers”, so too will the rise of “social media” create an entire industry of “social media optimizers.”

It may, however, end up being harder to game social media than it is to game a search engine. I can envision closed networks of users that work as a collective to decide the best sites for their group. In other words, in the current social media world, it is possible to “Digg bomb” and generate buzz around a news story simply by spamming the results and voting a site up the ranks. But if users have the ability to approve or reject members of their ‘crowd’, you could truly end up with a spam-free world where you really trust the results that you get back from the social media engine.

The number of people using StumbleUpon, Flickr, and Digg is still very small – probably 90% live within 50 miles of San Francisco! But once these sites reach critical mass, you have to wonder whether traditional search sites like Google and Yahoo will start to seem far less relevant and somewhat anachronistic.

 

None Too Timely Thoughts on Google-DoubleClick

Lots of people have been asking for my opinion on this one, so what better topic to (hopefully) get back into the rhythm of regular blogging.

Without further ado, six thoughts about this acquisition.

1. If MSN had paid $3B for DoubleClick . . . people would have laughed. But because Google bought them, this is a brilliant acquisition.

2. The “A” Word. I’m amazed that only now are competitors starting to band about the “anti-trust” word when it comes to Google. As has been oft-discussed in this blog, Google’s discriminatory pricing and product bundling could have brought up this issue many months ago.

3. Oil and Water. M&A experts will tell you that “culture clash” is often one of the hardest hurdles to overcome for a successful acquisition. This one is no exception. DoubleClick is a people-intensive company, Google is a technology-intensive company. No doubt Google will want to run DoubleClick it’s way. There is going to be some friction initially, trust me.

4. If I was a DoubleClick employee . . . I’d be pretty happy today, as my options are suddenly worth a lot more than they were a month ago. I’d also start polishing up my resume. Google employs computers, not people. There will be big layoffs at DoubleClick.

5. Google must buy their way into traditional markets. There was a time – say two years ago – where Google thought that all they needed to do was come up with cool technology and they would quickly conquer whatever market they were going after. No more. This acquisition (along with deals with TV companies, newspapers, etc) signals that Google recognizes that the old guard isn’t going to just accept Google as their new overlord. Fine, says Google, we have a lot of cash on hand, we’ll just buy our way in. Very smart.

6. Isn’t it a commodity? One thing I don’t understand about this deal is the actual value of DoubleClick technology. To me, ad serving seems to almost be a commodity these days – I’ve looked at this stuff a few times and I have a hard time telling Zedo, 24/7 and DoubleClick apart. In fact, the best argument I’ve ever heard for choosing DoubleClick was “we’re the industry leader.” It’s kind of like acquiring C&H Sugar for their refining process.

7. Overall score card. Overall, I like the acquisition. It just shows that Google is still hungry and that they have no intention of resting on their laurels. Frankly, whenever your company starts to get accused of violating anti-trust laws, you know that your competitors are really worried, and for good reason.

 

Google Sneezes, Part #2

The front page of the San Francisco Chronicle business section, as well as several prominent search blogs, has this breaking news: Google to Launch Data Center in North Carolina. I don’t recall ever seeing this much publicity around, say, United Airlines opening a maintenance center, or even Yahoo opening a regional office. But because Google launched the data center, it makes the news.

I think the best job in the world has to be working for Google PR. In fact, if Google wants to save some money, I have a novel idea: fire the PR team and create a simple “Mad Libs” program that spews out new press releases every day. Here’s an example of how it would work. Let’s say Google launches an application, like Google Calendar. The system uses a template to create a press release in seconds:

“Google today announced an (positive adjective) initiative to provide new (any technology related phrase) to the people of (geographic region). The free service – launched in beta – will be available via invitation only by (three months from today).

The service will revolutionize (aging service industry). To support this effort, Google plans to hire (number) new employees in (impoverished geographic location with good tax breaks and no concept of stock options).

Google CEO Eric Schmidt remarked, “We are proud to be (positive verb) people find information easily and efficiently with the launch of (product name).”

 

Google vs. eBay: All Out War!

I regularly read stories about how Yahoo and Microsoft are ganging up on Google. Whether its the recent announcement of instant messenger compatibility, or the simple fact that Yahoo and MSN are both spends tens of millions of dollars promoting and revamping their search engine marketing offers, there is a lot made of the increasingly bitter fight between these three giants.

My sense, however, is that the real struggle is between Google and eBay. Let’s face it, as much as Yahoo and MSN try, the battle for search (or search engine marketing) is over. Google owns something like a 56% market share, has smarter people, and has amazing brand recognition – such that irregardless of how bad Google’s search might become, consumers will still perceive it is the #1 search engine.

So I think that Google has (rightly) concluded that it is game over when it comes to online search. The focus now is on figuring out the next high margin online business to enter into. There are basically two choices – pure ecommerce a la Amazon, or the “online marketplace model” of eBay. Considering the impressively low (or nonexistent) margins for Amazon, there is actually only one choice – eBay.

How Google is Attacking eBay

Google hasn’t been too stealthy about how they intend to beat eBay. The strategy is quite simple: build competitive products, attract users by pricing the products well-below eBay rates (or even free), and leverage Google’s bully-pulpit – that is, the massive traffic and market share of the Google search empire – to virtually require people to use Google’s products at least as a complement to eBay’s rival products. Let’s look at a few examples of how Google has used this strategy to date:

1. Froogle – Competitor to eBay’s Shopping.com; Offered for free (compared to CPC pricing for Shopping.com); Promoted with one of only five links on the Google homepage. Clearly, if you are selling products online, you would be dumb not to use Froogle. Note that Google monetizes Froogle via its AdSense contextual marketing product (which, ironically, is also how Shopping.com generates a lot of its revenue). Suffice to say, with this monetization in place, Google can forever give Froogle away and forever cause Shopping.com’s margins to compress as a result.

2. Google Base – Competitor to Craigslist and eBay; Offered for free (compared to listing fee and sales commission on eBay and flat fees on certain categories on Craigslist); Promoted by requiring Froogle users to enter their products into Google Base first before they can show up on Froogle. Google Base is definitely a product that Google has yet to perfect and in its current iteration it is a blip on the radar compared to eBay or Craigslist (note: eBay has a 25% stake in Craigslist). That being said, the fact that Google rushed this product onto the market and is continuing to promote it via Froogle indicates that they have not yet given up on the dream of competing with eBay/Craigslist for the ‘classifieds/marketplace’ market online.

3. GTalk – Competitor to eBay’s Skype; Offered for free (Skype charges for some services); Promoted by integrating it into Gmail. Here’s an example of a product that will probably never make Google much money, but could be very effective in reducing eBay’s ability to monetize its $4 billion acquisition of Skype. After all, why pay for Skype when Google is free?

4. Google Checkout – Competitor to PayPal; Offer for free up to a user’s current AdWords spend with Google (PayPal charges a percentage of the sale price); Promoted by giving users a special “shopping cart” logo on all of their Google AdWords placements on Google. As I noted in my last column, the shopping cart logo on AdWords really gives eCommerce sites no choice but to use Google Checkout. And since it is free, there’s actually a strong incentive for advertisers to push purchasers toward Google Checkout as opposed to eBay’s PayPal.

5. Quality Score – Google’s recent update to its “Quality Score” algorithm was allegedly made to ferret out “made for AdSense” (or MFA) arbitrage sites participating on the AdWords network. It turns out that these MFA sites aren’t the only sites that were targeted by the Quality Score update. In fact, Google is directly attacking “incentive sites” like “FreeIpods.com” and removing these from AdWords (or more specifically, raising their minimum bids to $5 or $10, effectively making it impossible to advertise at all). The rational behind eliminating incentive sites is “bad user experience” and “frequent user complaints.” Of course, no one really knows if Google really received lots of complaints about incentive sites, we just have to trust Google’s word on this point.

But let’s play this scenario out a little further. Google has just removed sites that are either MFAs or have “bad user experience.” What other sites could possibly be included in one of those categories? Recall that Shopping.com has publicly stated in its SEC filings (prior to being acquired by eBay) that something like 40% of its revenue comes from AdSense ads on its site. In other words, Shopping.com could very easily be classified as an “MFA” and removed from AdWords by Google.

Similarly, eBay is famous for buying millions of seemingly irrelevant terms like “Nuclear Bomb” and “Belly Button Lint.” Surely there have been tons of user complaints about the poor user experience of clicking on an ad on Google, being sent to eBay, and not being able to purchase the aforementioned nuclear bomb the user had his heart set on. I don’t think it would be a reach for Google to conclude that many of eBay’s ads create a bad user experience and therefore should be banned from AdWords.

And since so much of the Internet’s traffic flows through Google (something like 56%), if Google did indeed prevent eBay and Shopping.com from advertising on AdWords, this would have a very meaningfully negative impact on these companies’ ability to drive new customers to their sites. Food for thought.

How eBay is Responding

eBay has some really nice businesses with high margins – in particular eBay itself and PayPal. Both of these businesses are near monopolies, and both have withstood attacks from strong competitors in the past (Yahoo Auctions, Overstock, and even eBay’s version of PayPal before they just acquired PayPal itself). So eBay is used to the attention and has successfully responded in the past.

As far as I can tell, eBay is responding to Google in three ways today, with a fourth that I predict will occur in the next 1-2 years:

1. Block Google products wherever possible: eBay has made it clear that Google Checkout is not welcome on eBay. This is clearly a defensive strategy. At the end of the day, the only impact it has on Google is that Google can’t make money off eBay transactions through Google Checkout. Of course, considering the fact that Google Checkout will be mostly free for the majority of its users (most of whom already use AdWords), this strategy is mostly a way to protect PayPal revenue than it is to impact Google Checkout revenue.

It should be noted that there are two ways that banning Google Checkout could seriously backfire for eBay. First, it could anger eBay users who would like to save money by using Google Checkout instead of PayPal. Second, it could be grounds for allegations of anti-competitive behavior (read: an anti-trust lawsuit). This point is particularly relevant to my point #4 below.

2. Introduce competitive products to AdWords: eBay recently announced that it is launching a competitor to AdWords called “eBay AdText”. eBay may try to leverage its existing relationships with tens of thousands of loyal eBay sellers to get these folks to replace AdSense on their Web sites with AdText. Perhaps taking a page out of Google’s checkout scheme, I wouldn’t be surprised to see eBay basically give sellers some sort of discount or free listings on eBay in exchange for using AdText instead of AdSense.

Ultimately, for this strategy to work, the overall package eBay proposes to its sellers has to result in more revenue or eCPM than AdSense. Initially, this will be difficult, since eBay’s optimization algorithm will probably be much weaker than AdSense’s right out of the gate. Nonetheless, I do think that attacking AdSense is a viable strategy. In the end, Web site owners only care about the bottom line – if eBay can combine discounts on eBay with an algorithm close to on par with AdSense, the results might be better economics than Google and a big blow to the Google Machine.

3. Gang Up on Google: eBay recently announced a wide-ranging deal with Yahoo to provide co-branded toolbars (competitive with Google Toolbar), combined advertising strategies (competitive with AdWords), and potentially click-to-call functionality (competitive with GTalk). The deal also made PayPal Yahoo’s exclusive payment provider (competitive with Google Checkout). There’s no doubt that this is a smart move by both Yahoo and eBay.

At one point in time, you could argue that Yahoo and eBay were largely fighting over the same space – in particular, eBay’s “buy it now” functionality and Yahoo’s “stores” seemed destined to clash over dominance in the small business “marketplace” space. I think both of these companies now realize that the “enemy of my enemy is my friend” and trading blows doesn’t make much sense now. There is a far greater menace out there.

And there’s no reason to think that this is the last partnership eBay is pursuing. You would think that similar negotiations must be in the works with Microsoft (MSN) and AskJeeves (or all of IAC, for that matter). The fact that Google has been rattling cages in Redmond with ominous announcements of Excel-killers, support of FireFox (Internet Explorer killer), and potential online operating systems has probably only accelerated discussions.

4. Anti-Trust? If Google simply dominated search, I’m not sure that this would be much of an issue. Google, however, has made it clear that they are using their dominance in search to force their way into other lucrative areas, like comparison shopping, online classifieds, and online payment processing. At some point, Google is going to piss enough big companies off that the Department of Justice (DOJ) is going to start getting pressure to curb Google’s growth.

Considering the fact that eBay’s business lines are all in Google’s sights, it wouldn’t surprise me at all if eBay has already started some discussions with the DOJ on this point. There is, however, one problem that needs to be mentioned; in many ways, eBay is a monopoly in its own right. And in many ways, eBay using their own monopoly power to their advantage, as seen in their blockage of Google Checkout on eBay. Imagine if instead of Google Checkout it was “Blogation Checkout” – a small Mom and Pop company trying to compete with PayPal. I think eBay might be in trouble.

The bottom line, though, is that eBay does need to be careful about throwing stones at glass houses here. It’s hard to complain about anti-competitive behavior when you are exhibiting that very behavior.

And the Winner is?

Right now, I have to say that Google is winning this battle. The way I see it, eBay’s moves to date have been entirely defensive and are mostly directed at preserving its own revenue instead of biting into Google’s (I am withholding judgement on eBay’s AdSense killer and partnership with Yahoo. These moves do suggest an offensive is being mounted, but it is too early to say whether these will have any success). Google, on the other hand, has only seen its market share increase in its core business (search) and has launched a slew of products that leverage search to gain traction in eBay’s businesses. Based on what I have seen to date, Google’s efforts will bear some fruit. Google Checkout will be a success, Froogle already has some market share, and Google Base will someday attract a loyal following. All of this adds to Google’s bottom line at eBay’s expense. Do I think Google will destroy eBay and PayPal? Of course not. But if this war continues along its current trajectory, my guess is that eBay will be the company in the end that will cry uncle first.

Tags: ebay versus google, ebay adtext, google checkout, paypal, gtalk, skype, craigslist, google base, froogle, shopping.com, antitrust

 

Google vs. eBay: All Out War!

I regularly read stories about how Yahoo and Microsoft are ganging up on Google. Whether its the recent announcement of instant messenger compatibility, or the simple fact that Yahoo and MSN are both spends tens of millions of dollars promoting and revamping their search engine marketing offers, there is a lot made of the increasingly bitter fight between these three giants.

My sense, however, is that the real struggle is between Google and eBay. Let’s face it, as much as Yahoo and MSN try, the battle for search (or search engine marketing) is over. Google owns something like a 56% market share, has smarter people, and has amazing brand recognition – such that irregardless of how bad Google’s search might become, consumers will still perceive it is the #1 search engine.

So I think that Google has (rightly) concluded that it is game over when it comes to online search. The focus now is on figuring out the next high margin online business to enter into. There are basically two choices – pure ecommerce a la Amazon, or the “online marketplace model” of eBay. Considering the impressively low (or nonexistent) margins for Amazon, there is actually only one choice – eBay.

How Google is Attacking eBay

Google hasn’t been too stealthy about how they intend to beat eBay. The strategy is quite simple: build competitive products, attract users by pricing the products well-below eBay rates (or even free), and leverage Google’s bully-pulpit – that is, the massive traffic and market share of the Google search empire – to virtually require people to use Google’s products at least as a complement to eBay’s rival products. Let’s look at a few examples of how Google has used this strategy to date:

1. Froogle – Competitor to eBay’s Shopping.com; Offered for free (compared to CPC pricing for Shopping.com); Promoted with one of only five links on the Google homepage. Clearly, if you are selling products online, you would be dumb not to use Froogle. Note that Google monetizes Froogle via its AdSense contextual marketing product (which, ironically, is also how Shopping.com generates a lot of its revenue). Suffice to say, with this monetization in place, Google can forever give Froogle away and forever cause Shopping.com’s margins to compress as a result.

2. Google Base – Competitor to Craigslist and eBay; Offered for free (compared to listing fee and sales commission on eBay and flat fees on certain categories on Craigslist); Promoted by requiring Froogle users to enter their products into Google Base first before they can show up on Froogle. Google Base is definitely a product that Google has yet to perfect and in its current iteration it is a blip on the radar compared to eBay or Craigslist (note: eBay has a 25% stake in Craigslist). That being said, the fact that Google rushed this product onto the market and is continuing to promote it via Froogle indicates that they have not yet given up on the dream of competing with eBay/Craigslist for the ‘classifieds/marketplace’ market online.

3. GTalk – Competitor to eBay’s Skype; Offered for free (Skype charges for some services); Promoted by integrating it into Gmail. Here’s an example of a product that will probably never make Google much money, but could be very effective in reducing eBay’s ability to monetize its $4 billion acquisition of Skype. After all, why pay for Skype when Google is free?

4. Google Checkout – Competitor to PayPal; Offer for free up to a user’s current AdWords spend with Google (PayPal charges a percentage of the sale price); Promoted by giving users a special “shopping cart” logo on all of their Google AdWords placements on Google. As I noted in my last column, the shopping cart logo on AdWords really gives eCommerce sites no choice but to use Google Checkout. And since it is free, there’s actually a strong incentive for advertisers to push purchasers toward Google Checkout as opposed to eBay’s PayPal.

5. Quality Score – Google’s recent update to its “Quality Score” algorithm was allegedly made to ferret out “made for AdSense” (or MFA) arbitrage sites participating on the AdWords network. It turns out that these MFA sites aren’t the only sites that were targeted by the Quality Score update. In fact, Google is directly attacking “incentive sites” like “FreeIpods.com” and removing these from AdWords (or more specifically, raising their minimum bids to $5 or $10, effectively making it impossible to advertise at all). The rational behind eliminating incentive sites is “bad user experience” and “frequent user complaints.” Of course, no one really knows if Google really received lots of complaints about incentive sites, we just have to trust Google’s word on this point.

But let’s play this scenario out a little further. Google has just removed sites that are either MFAs or have “bad user experience.” What other sites could possibly be included in one of those categories? Recall that Shopping.com has publicly stated in its SEC filings (prior to being acquired by eBay) that something like 40% of its revenue comes from AdSense ads on its site. In other words, Shopping.com could very easily be classified as an “MFA” and removed from AdWords by Google.

Similarly, eBay is famous for buying millions of seemingly irrelevant terms like “Nuclear Bomb” and “Belly Button Lint.” Surely there have been tons of user complaints about the poor user experience of clicking on an ad on Google, being sent to eBay, and not being able to purchase the aforementioned nuclear bomb the user had his heart set on. I don’t think it would be a reach for Google to conclude that many of eBay’s ads create a bad user experience and therefore should be banned from AdWords.

And since so much of the Internet’s traffic flows through Google (something like 56%), if Google did indeed prevent eBay and Shopping.com from advertising on AdWords, this would have a very meaningfully negative impact on these companies’ ability to drive new customers to their sites. Food for thought.

How eBay is Responding

eBay has some really nice businesses with high margins – in particular eBay itself and PayPal. Both of these businesses are near monopolies, and both have withstood attacks from strong competitors in the past (Yahoo Auctions, Overstock, and even eBay’s version of PayPal before they just acquired PayPal itself). So eBay is used to the attention and has successfully responded in the past.

As far as I can tell, eBay is responding to Google in three ways today, with a fourth that I predict will occur in the next 1-2 years:

1. Block Google products wherever possible: eBay has made it clear that Google Checkout is not welcome on eBay. This is clearly a defensive strategy. At the end of the day, the only impact it has on Google is that Google can’t make money off eBay transactions through Google Checkout. Of course, considering the fact that Google Checkout will be mostly free for the majority of its users (most of whom already use AdWords), this strategy is mostly a way to protect PayPal revenue than it is to impact Google Checkout revenue.

It should be noted that there are two ways that banning Google Checkout could seriously backfire for eBay. First, it could anger eBay users who would like to save money by using Google Checkout instead of PayPal. Second, it could be grounds for allegations of anti-competitive behavior (read: an anti-trust lawsuit). This point is particularly relevant to my point #4 below.

2. Introduce competitive products to AdWords: eBay recently announced that it is launching a competitor to AdWords called “eBay AdText”. eBay may try to leverage its existing relationships with tens of thousands of loyal eBay sellers to get these folks to replace AdSense on their Web sites with AdText. Perhaps taking a page out of Google’s checkout scheme, I wouldn’t be surprised to see eBay basically give sellers some sort of discount or free listings on eBay in exchange for using AdText instead of AdSense.

Ultimately, for this strategy to work, the overall package eBay proposes to its sellers has to result in more revenue or eCPM than AdSense. Initially, this will be difficult, since eBay’s optimization algorithm will probably be much weaker than AdSense’s right out of the gate. Nonetheless, I do think that attacking AdSense is a viable strategy. In the end, Web site owners only care about the bottom line – if eBay can combine discounts on eBay with an algorithm close to on par with AdSense, the results might be better economics than Google and a big blow to the Google Machine.

3. Gang Up on Google: eBay recently announced a wide-ranging deal with Yahoo to provide co-branded toolbars (competitive with Google Toolbar), combined advertising strategies (competitive with AdWords), and potentially click-to-call functionality (competitive with GTalk). The deal also made PayPal Yahoo’s exclusive payment provider (competitive with Google Checkout). There’s no doubt that this is a smart move by both Yahoo and eBay.

At one point in time, you could argue that Yahoo and eBay were largely fighting over the same space – in particular, eBay’s “buy it now” functionality and Yahoo’s “stores” seemed destined to clash over dominance in the small business “marketplace” space. I think both of these companies now realize that the “enemy of my enemy is my friend” and trading blows doesn’t make much sense now. There is a far greater menace out there.

And there’s no reason to think that this is the last partnership eBay is pursuing. You would think that similar negotiations must be in the works with Microsoft (MSN) and AskJeeves (or all of IAC, for that matter). The fact that Google has been rattling cages in Redmond with ominous announcements of Excel-killers, support of FireFox (Internet Explorer killer), and potential online operating systems has probably only accelerated discussions.

4. Anti-Trust? If Google simply dominated search, I’m not sure that this would be much of an issue. Google, however, has made it clear that they are using their dominance in search to force their way into other lucrative areas, like comparison shopping, online classifieds, and online payment processing. At some point, Google is going to piss enough big companies off that the Department of Justice (DOJ) is going to start getting pressure to curb Google’s growth.

Considering the fact that eBay’s business lines are all in Google’s sights, it wouldn’t surprise me at all if eBay has already started some discussions with the DOJ on this point. There is, however, one problem that needs to be mentioned; in many ways, eBay is a monopoly in its own right. And in many ways, eBay using their own monopoly power to their advantage, as seen in their blockage of Google Checkout on eBay. Imagine if instead of Google Checkout it was “Blogation Checkout” – a small Mom and Pop company trying to compete with PayPal. I think eBay might be in trouble.

The bottom line, though, is that eBay does need to be careful about throwing stones at glass houses here. It’s hard to complain about anti-competitive behavior when you are exhibiting that very behavior.

And the Winner is?

Right now, I have to say that Google is winning this battle. The way I see it, eBay’s moves to date have been entirely defensive and are mostly directed at preserving its own revenue instead of biting into Google’s (I am withholding judgement on eBay’s AdSense killer and partnership with Yahoo. These moves do suggest an offensive is being mounted, but it is too early to say whether these will have any success). Google, on the other hand, has only seen its market share increase in its core business (search) and has launched a slew of products that leverage search to gain traction in eBay’s businesses. Based on what I have seen to date, Google’s efforts will bear some fruit. Google Checkout will be a success, Froogle already has some market share, and Google Base will someday attract a loyal following. All of this adds to Google’s bottom line at eBay’s expense. Do I think Google will destroy eBay and PayPal? Of course not. But if this war continues along its current trajectory, my guess is that eBay will be the company in the end that will cry uncle first.

Tags: ebay versus google, ebay adtext, google checkout, paypal, gtalk, skype, craigslist, google base, froogle, shopping.com, antitrust

 

My Guide to Ad-Tech San Francisco

Ad-Tech begins tomorrow, which means that many of us will be sporting new t-shirts, koosh balls, and slightly fatter bellies (from the free dinners) when the week is through.

I’ve never paid for the Ad-Tech speaking sessions; I’m perfectly happy to wander the exhibit hall in the hopes that I find a company I’ve never heard of before. But I’ve been to enough Internet trade shows to be able to pass on some sage wisdom to those of you who actually paid to hear speakers. Here’s my advice on how to spend your time wisely:

1. Avoid “Agency” Sessions. When it comes to TV and magazine advertising, big agencies are worth listening to. When it comes to anything Internet marketing related, agencies have absolutely no clue what is going on. Expect to hear a lot of catchphrases and not a lot of actionable advice.

2. Avoid professional trade-show speakers. You know the type of person I’m talking about, the speaker that manages to show up on the bill at every trade show (often on multiple panels), and does a great job of promoting his/her agency/consulting company. These folks give the same speech over and over again, and I suspect that they spend so much time speaking that they don’t actually have time to ‘get their hands dirty’ and keep up-to-date with changes in the industry.

3. The lower the title, the better the speaker. When I was working for the Thomson Corporation (a 40,000 person company), I remember the day that the CEO of the company came to speak to our team. He gave a very impressive talk about changes in the global economy, trends in organizational behavior, some big building the company was building in Connecticut, and many other points that had no bearing on my daily life. The point is this: CEO and VPs are paid to think about the big issues; as a result, these folks generally have very little practical advice for how to optimize your campaigns, buy media, etc. Look for “manager” or “director” next to someone’s title as a sign of a good presentation.

4. Focus on today. People love to speculate on “what’s next.” Unfortunately, speculation doesn’t pay the bills. Spend your time in sessions with tips for what you can do today to grow your bottom line. Don’t waste your time listening to prognosticators telling you to put all your money and time into mobile-video-local-rss-podcast hybrids.

5. Some good sessions. OK, OK, enough of my kvetching. Here’s a few presentations that look like they could be useful:

• Thursday, april 27, 10:30am – 11:30am
  The Economics of Interactive: Part I Industry Investment and M&A For Fun and Profit
• Thursday, april 27, 11:45am – 12:45pm
  The Economics of Interactive: Part II M&A in Interactive Marketing
• Thursday, april 27, 2:00pm – 3:00pm
  Pay Your Agency On Results: Risk-Sharing Compensation Models
• Thursday, april 27, 3:15pm – 4:15pm
  Click Fraud Debate
• Thursday, april 27, 4:30pm – 5:30pm
  Workshop: Scientific Approaches to Multivariate Testing
• Friday, april 28, 10:00am – 11:00am
• James McGregor—One Billion Customers: Lessons From the Front Lines of Doing Business in China

Also, some exhibitors worth talking to:

• Adteractive (of course)
• Bruce Clay, Inc
• comScore Networks
• Google (if only for the schwag)
• Marchex
• Offermatica
• Optimost
• Revenue.net (If only to meet Jay Weintraub in person!)
• The Search Agency (again, if only to meet Frank Lee in person!)
• WebSideStory

 

What Do You Get for $230 Million These Days?

Imagine what your Internet company could do with $230 million dollars. To put it in perspective, you could buy:

• 460,000,000 clicks on Yahoo or Google (assuming an average CPC of $.50);
• 2500 experienced Internet employees;
• A major acquisition (for example, about 1/3 the acquisition price for Shopping.com or LowerMyBills);
• The gross domestic production (GDP) of the Solomon Islands;
• $230 million of additional profit!

Alternatively, if you are Yahoo, you get . . . CEO Terry Semel. That’s right, in 2005 Terry Semel pulled in $230 million in compensation, according to Forbes.

Let’s be clear, since Mr. Semel became CEO in 2002, he’s done some good things for Yahoo. In particular, I have to give him credit for the acquisitions of Overture and HotJobs. He’s also made some potentially interesting “Web 2.0” acquisitions, like Flickr and del.icio.us. And since Terry joined, Yahoo’s stock has gone up more than 400%.

On the other hand, Yahoo’s success has been more than dwarfed by Google, which was basically a cute start-up with minimal revenue streams when Terry Semel took over Yahoo. Today, of course, Google’s market cap is 3X that of Yahoo’s and growing.

And Yahoo has made some other blunders. What’s up with the “media strategy” that has been in the works for a few years now? And despite the decent profit and revenue from Overture, how come the online user interface hasn’t changed in 4 years (in fact, Overture’s name has changed twice now and the UI is almost as slow as it was in the company’s beginning). Yahoo has also lost its relationship with MSN for paid search, and lost the bidding war against Google for AOL.

I often tell people that making money in online marketing these days is pretty easy. As more consumers come online, and shift more of their spending to online activities, the revenue pie is increasing every year. So, if you made $1000 in online revenue last year, it shouldn’t be too difficult to make $1500 this year, depending on your vertical.

The way you should actually measure your online success is not whether you increase revenue or profit dollars, but rather whether you increase your market share of revenue or profit dollars. If you look at Yahoo from this perspective, it’s difficult to call Terry Semel’s tenure an overwhelming success (or maybe even a success at all).

So why does he get paid so much? Well, the standard argument you’ll hear is that he is getting paid “what the market will bear.” In other words, if we don’t pay him $200 million, someone else will. The argument assumes that a company will rise and fall with it’s CEO and thus it is important to keep top management at all costs.

No doubt, a good CEO can have a tremendous impact on a company. But the problem with this argument is that CEO compensation isn’t really tied to results – this isn’t a zero sum game. If Terry Semel drove Yahoo into the ground for a few years, it’s not like his salary would be $25,000. In fact, undoubtedly, his contract has clauses in it that guarantee him big payouts in the event of early termination. So even if he did poorly, he would still likely get a nice windfall.

And, as noted, you could argue that he has in fact done poorly. Yahoo has completely lost the search race to Google, and some of their other properties (like Yahoo Mail, Maps, and Toolbar) are getting serious heat from Google. No matter, in exchange for taking Yahoo from the #1 search property to the #2 property, Yahoo has coughed up an eight figure annual salary.

So the argument that “we are retaining good leadership” is a bit silly really, both because CEO contracts reward CEOs irregardless of performance, and because even subpar performance can still result in huge windfalls.

My thought is that CEO salaries have spiraled out of control because there are no checks and balances to these salaries. CEO salaries are determined by the board of directors of a corporation. The board of directors is usually made up of – surprise, surprise – executives from other companies and former CEOs. All of these people have self-righteous beliefs that CEOs really do deserve millions of dollars of compensation. Plus, the more they can get for one CEO, the more they can demand of their own board of directors.

It reminds me of the golden rule from George Orwell’s Animal Farm. When the animals initially took over, they wrote “All animals are created equal” on the side of the barn. Toward the end of the book, when the pigs had created a dictatorship and enslaved the rest of the animals, the sign was modified: “All animals are created equal, but some animals are created more equal than others.”

So will CEO compensation growth ever end? Ultimately, I think it will. If you continue to have companies paying their top brass $230 million a year, eventually this will create an opportunity for leaner companies without such insane fixed costs to undercut the bloated bigger companies. As noted at the beginning of this post, $230 million buys a lot of clicks, employees, acquisitions, or pure profit. That’s a nice competitive advantage.

When historians examine the rise and fall of the Roman Empire, they suggest that during the rise, the Romans conquered foreign lands but always made sure to provide something in return to the local citizens (roads, aqueducts, engineering, protection). Over time, however, as Rome became bloated, the Romans neglected this golden rule. Instead, they began to heavily tax their provinces, using this money to pay for massive palaces and statues in Rome instead of roads in Jerusalem. The Senate and the Caesars lived lives of luxury, but their decadence resulted in the destruction of the entire system.

American companies can do what they want, but ultimately a system that gives decadent rewards to a select few without tying this compensation to performance is just a drag on the system. Smart companies will eventually figure this out.

A final note: I have to admit that I really being sort of unfair to Terry Semel. In truth, his salary isn’t all that unusual for the CEO of top company. The retiring CEO of Exxon was awarded a $6.5 million annual retirement benefit (0r a lump sum of $81 million, his choice). In general, CEO salaries have increased from 41 times the average worker salary in 1960 to 301 times in 2003. As this is a blog about online marketing, however, I needed to use an example from an online marketing company, and Yahoo was truly an outstanding example.

 

How To Work with Second-Tier Search Engines

I recently discussed whether click fraud was truly a problem for Google. I conclude that it isn’t really – at least until the hordes of new & naive advertisers stop buying ads on Google and Google is forced to rely exclusively on sophisticated advertisers for their revenue.

For second-tier search engines, however, the story is different. By “second tier”, I basically mean any search engine that isn’t Google, Yahoo, AOL, or MSN. So that includes Ask, Kanoodle, Miva, Mamma, 7Search, Quigo, Industry Brains, etc, etc. On many of these sites, click fraud is the business model as far as I can tell.

As sure as death and taxes, every week I get a pitch from a second-tier company encouraging me to advertise on their PPC network. The pitch always has three main elements:

1. We have X billion searches each month;
2. We cost 50% less than Google and Yahoo;
3. Our traffic is of the highest quality.

Now, as a young and impressionable search engine marketer, I used to fall victim to this pitch. I’d dutifully deposit $1500 into an account, carefully select keywords to upload, and start the campaign right away.

In almost every instance, one of two things happened. Either there was gobs of really bad traffic, or virtually no traffic at all. Mostly it’s the former. I’ve seen campaigns that I know convert at 4-5% on Google or Overture get 1500 clicks on a second-tier site with nary a conversion among them. The odds of 1500 people a) searching for one of my carefully-selected keywords; b) deciding to click on my little old ad, and c) collectively deciding not to buy what I am selling, is slim to none, and Slim just walked out the door (with thanks to Horace Grant for the quote).

Of course, the ad rep who sold me this horrible placement undoubtedly knew all along that this was going to happen. But can you really blame him? He’s got to put bread on his family’s table, and if he doesn’t get my $1500, that’s $1500 farther away from his quota.

I will admit that there are a few diamonds in the rough with the second-tier players. I do work with a few second-tiers that can sometimes generate as much as 10% of my monthly revenue and profit. But it takes a lot of work to separate the wheat from the chaff. That being said, here’s my advice on how to work with second-tier search engines:

1. Talk to other advertisers about the search engine: Read WebMasterWorld, talk to friends at other companies. Have they used GreenBananaSearchFind.com? What were the results?
2. Look at their user interface: Any company that’s in this for the long-haul will have invested some money into an online interface that enables you to change bids, download reports, etc, a la AdWords or (to a degree) Yahoo’s Direct Traffic Center. If it looks like the CEO’s teenage son designed the Web site for extra credit in one of his classes, steer clear.
3. Only work with people you like: There are aggressive sales reps and firm but polite sales reps. A smart sales rep considers the lifetime customer value of a relationship. If he sells you on a bad deal today, two years from now you aren’t going to talk to him when he has a good deal. Account reps who are upfront with you and who manage your expectations are key.
4. Ask for a free trial: The best way to test out a sales rep’s claims is to ask for a couple hundred dollars of free clicks in advance. A lot of reps have the authority to do this, especially if you are already a big spender on the major search engines.
5. Make as small a deposit as possible: If you do have to plunk down some change, make it as small an amount as you can. The goal is to assess the potential profitability of this site as quickly as possible, and with as little financial pain. If an ad rep is pressuring you to put down a larger deposit than what you want to invest, that’s usually a sign of a “slash and burn” mentality, and you should run in the other direction as fast as possible.
6. Track every keyword individually: This is fundamental to any search engine marketing. By tracking each keyword, you can identify where potential click fraud is coming from and where there may be a sweet spot on the search engine.
7. Consider the value of your time: At the end of the day, your job is to make as much profit for your company as you can. If you can make an extra $500 of profit a day by tweaking your Google accounts but only $250 a day working with GreenBanana, the choice is clear. Time is money!

 

Click Fraud – A Concern?

I was walking down the street last week and a charming young lady came up to me and asked “is click fraud a major problem for search engine marketers?” OK, it was actually a co-worker that sits next to me who asked the question, but I thought it sounded more intriguing the other way. I digress . . .

Click fraud does get a lot of hype these days, especially in reference to Google’s seemingly inflated stock price. To me, click fraud is like any other type of online fraud – it is manageable, but it will always be around.

Right now, savvy advertisers take click fraud into account whenever they place a bid on Google or any other PPC advertising network. This is apparent when you look at the bid prices for the same exact keyword on different networks. Let’s say you want to buy the word “refinancing.” If you went to Google (search only) or Yahoo (search only), you’d pay around $6.00 for the top bidded position. Move onto Google or Yahoo contextual, and your bid moves to around $3.5. Try a “second-tier” search engine like Miva or Kanoodle and your bid drops to $1. And at the bottom of the barrel, there are some search engines that would cost you no more than $.10 a click.

Why the difference? In essence, the level of click fraud. The price of a CPC bid is largely determined by the ROI achieved by the advertiser. Every fraudulent click reduces ROI and thus reduces bid price. Thus, if something seems to good to be true (like a $.10 click cost on one engine versus a $6.00 click cost on another), it probably is.

If click fraud gets out of control on Google, bids will drop. If click fraud is contained, prices will rise. A real-life example of this scenario revolves around the word “mesothelioma lawyer.” A person would type this term into a search engine if they were diagnosed with mesothelioma – lung cancer caused by exposure to asbestos – and they wanted to sue an asbestos company for their illness. Lawyers know someone diagnosed with this horrible disease could easily have a claim worth $1,000,000 or more to their lawfirm.

As a result, bidding on this term became red hot a few years ago. So hot, in fact, that the top bids exceed $100 per click. Then, the media caught on and identified this term as one of the most expensive PPC terms around. Suddenly, lots of people without a mesothelioma diagnosis were typing in this term – either out of curiosity or for malicious purposes. Either way, the click quality dropped fast. Today, the top click on Yahoo for this term is “only” $15.25 – a reduction of over 90%.

So Google and Yahoo have a clear incentive to stop click fraud, right? The less click fraud, the more advertisers will pay for click, which means more money for the search engines. Well, not exactly. While it is true that smart advertisers reduce bids as click fraud increases (and ROI decreases), there are still plenty of less smart (to put it nicely) advertisers who don’t have the capability to truly measure their ROI. For example, if you can’t track the performance of every keyword you buy, you can’t measure the ROI for that keyword, you can only measure overall ROI for your accounts. This inevitably means that you will pay too little for some keywords and too much for others. And this often results in high bids on keywords with lots of click fraud.

As a result, there are plenty of situations where click fraud exists and yet bids keep going up, up, up. This results in smart advertisers sitting on the sidelines, leaving the other advertisers to fight for top position. Over time, the dumb advertisers will either run out of money and disappear, and the smart advertisers may be able to get the keyword for the correct price. Right now, however, this is often a short-term victory, because the moment one group of dumb advertisers disappear, another group sprouts up to take their place.

In other words, because PPC markets are so immature, the big search engines really don’t have to worry too much about click fraud or ROI, because there are plenty of unsavvy marketers ready to buy clicks. So, right now, Google and Yahoo probably make more money with click fraud than without.

This will eventually change, probably in the next year of so. As less and less new and inexperienced advertisers sign up for PPC campaigns, search engine revenue will become concentrated in an elite group of top marketers. These are the marketers with highly advanced tracking systems that can detect multiple clicks from the same IP address, or too many non-converting clicks from a particular content site. These advertisers will pay the efficient rate per click – i.e., the rate that makes them money.

At that point, the search engines interests will be aligned with the marketers’ interests. Eliminate click fraud and marketers will pay more; let click fraud fester, and marketers will allocate their budgets elsewhere – either to other search engines or other mediums.

So am I concerned about click fraud – sure, I adjust bids downward every day on keywords where I suspect click fraud. Will this be the demise of Google? Probably not – Google has lots of other problems to deal with – from competitor movements, loss of top employees, customer service and now a Government subpoena – that could be much more detrimental.

 

Google and Enron. Similarities?

I’m in the midst of reading The Smartest Guys in the Room, the story of the rise and fall of Enron and it got me thinking about Google and it’s rapid stock ascent.

There was a time when Enron could do no wrong. From Wall Street analysts to the President of the United States, Enron was the model of corporate innovation and success. In January 2000, the company’s stock hit $88, up from $3 in 1985 – an increase of almost 30X in 15 years (200% a year).

Every Enron innovation was heralded as a move of sheer brilliance. Enron plans to create a market for broadband bandwidth? Brilliant! Enron wants to provide electricity directly to consumers? Bye, bye utilities! Whatever the folks at Enron thought of, it would surely be a rousing success.

Of course, Enron wasn’t a success. In a few months in 2001, the truth about what was happening inside Enron became clear and the stock went to zero.

Obviously, there are some major differences between Google and Enron. For one, as far as we know, Google’s revenue is real, they aren’t cooking the books, and Google has a real, proven financial model.

Second, Google exists in the post-Enron world, where investment bankers and accountants are at least a little less willing to let corporate America get away with lying to Wall Street. So, from a financial standpoint – between real and fake revenue – the two companies couldn’t be more dis-similar.

What I find similar between the two companies is the euphoria that surrounded them at their height. Google, like Enron, can launch any new product and see their stock shoot through the roof. Google Base – it will kill classifieds!; Google Print – the end of publishing!; Google Video – destroying NetFlix and Blockbuster! Every time Google sneezes, Wall Street analysts raise their stock estimates. From $150, to $250, to $400 – some analysts now suggest that Google could rise as high as $2000 a share.

All of this could be possible. What troubles me, however, is that so far, the only thing that Google has really done well – from a financial perspective – is AdWords and AdSense – the two products that they’ve had since 2002. All of the other ballyhooed products unleashed over the last four years have been very neat, very useful, and very cool, but not too impactful to Google’s bottom line.

What is the collective revenue on Google Maps, Google Base, Froogle, GMail, Google Appliance, Orkut, Picasa, Urchin, Google Talk, and Google News? As far as I can tell, not a lot. Sure, Gmail users do see Google ads on their email, but how many actually click on them? And a lot of other Google products have never even attempted any sort of monetization.

Thus, like Enron’s stock jumps when they announced broadband and consumer energy plans, Google’s stock run-up has largely been due to the potential of future revenue, without any evidence that this revenue will ever take materialize.

One salient point that is made in the Enron book is that Wall Street analysts see no wrong when they are high on a stock, but see no right when they are bearish. As long as Google’s core products – AdWords and AdSense – continue to grow in revenue and profit – analysts will continue to laud Google and the stock will continue to rise.

My prediction, however, is this: one quarter of stagnant or even slowed growth will cause these analysts to turn and run as fast as they can in the other direction. And at that point, no amount of clever new products without revenue will be able to stop Google’s shares from going down, and fast. And that day will come, as surely as death and taxes.

So, is Google Enron? Of course not. Can Google stockholders learn from Enron. Absolutely.