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The State of Search-based Online Advertising

The State of Search-based Online Advertising. Vs. Michael Cho Andrew Iskandar Sanjay Kidambi Steve Shepherd Cuong Do Tuan Vuong November 3, 2005. Agenda. Setting the Stage Basic concept History Major players Economics at work Network Effects Complements Lock-In

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The State of Search-based Online Advertising

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  1. The State of Search-based Online Advertising Vs. Michael Cho Andrew Iskandar Sanjay Kidambi Steve Shepherd Cuong Do Tuan Vuong November 3, 2005

  2. Agenda • Setting the Stage • Basic concept • History • Major players • Economics at work • Network Effects • Complements • Lock-In • Where are we headed?

  3. Search-based Online Advertising is a simple process at its core • Bidding process occurs beforehand • Advertisers bid to be displayed by keywords of their choice in auction-like process • User types a keyword into search engine • Advertisements displayed next to search results • The higher the advertisers bid, the higher the placement on the page

  4. In 10 short years, advertising has been changed forever 1995 Timeline 1996 • InfoSeek began to target banner-ads • Yahoo and Proctor & Gamble introduced “pay for clicks” model • Open Text experimented unsuccessfully with targeting text-based ads to search queries • GoTo.com (later changed to Overture) and AdWords (Google) introduced labeled text-ads correlated to keywords • Yahoo! buys Overture • Growth of smaller, specialized firms in tangential business like search engine optimization (SEO) • Google IPO • MSN introduces its own search engine 1997 1998 1999 2000 2001 2002 2002 2003 2004 2005

  5. Search advertising shows huge market potential • Online advertising: fastest growing sector • Universal McCann: increase of nearly 53% (from $4.3Bn in 2000 to $7.1Bn in 2004) • PWC/IAB: $9.6Bn in 2004 • Search-based advertising: 40% • Spending will predictably increase in the coming years • From $11.5Bn in 2005 to $17.6Bn in 2008 • Search-based advertising: $7Bn – nearly 85% increase • Forrester: $11.5Bn on search engine marketing in 2010 Forrester Research, July 2005

  6. Google is currently the clear market leader in search

  7. Overall, Yahoo! is the most visited site on the web Yahoo: most popular website • Sponsored Search • Local Sponsor Search • Search Submit Express • “Cost-per-click” and monthly payment after an initial fee

  8. Best of the rest… • Microsoft: the last in ranking of the three • MSN AdCenter • MSN Paid Search Solution • Cooperation between MSN and AOL/TimeWarner • AOL/TimeWarner: dominance in media • MSN: dominance in desktop application • Main competitor to Google and Yahoo on online advertising?

  9. Agenda • Setting the Stage • Basic concept • History • Major players • Economics at work • Network Effects • Complements • Lock-In capabilities • Where are we headed?

  10. Network effect: Yahoo and Google’s scale will be tough to overcome The Virtuous Cycle Better user experience Technology investment Attracts new users More advertising dollars

  11. Google and Yahoo! have created an ‘ecosystem’ of complementary products The Search “Ecosystem” travel photo sharing games Blogging tools social networking calendar maps Firefox partnership news Fantasy sports shopping toolbar mobile SEARCH personals email images Dell distribution groups IM Hotjobs search engine optimizers Sun distribution sports desktop search finance music

  12. Achilles’ heal to business model: low switching costs for consumer Many tactics aim to overcome this challenge: • “Personalize” search results by tracking consumer behavior and preferences (Y!’s MySearch) • Establish desktop presence outside of browser as a constant reminder (Y! music engine, Google desktop search) • Utilize community in social networks improve search results (Yahoo’s MyWeb 2.0) • Create complementary web products so search box is always in view (email, maps, etc.)

  13. Agenda • Setting the Stage • Basic concept • History • Major players • Economics at work • Network Effects • Complements • Lock-In • Where are we headed?

  14. Matching a specific ad to a specific sale is the holy grail of advertising 1998 Pay per impression 2005 Pay per click 2008 Pay per call 20?? Pay per sale

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