Online Advertising: Search-based Online Advertising - 2

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Lock-In Effects in Search-based Advertising.

Unlike most software products, the switching cost of search site is minimal. Firstly, it does not take much training for the user to learn how to navigate or do his search in a new search site. In addition, it is extremely easy for an Internet user to open several browser windows and do the same search on different search sites. Similarly, the switching cost for advertisers who decide how much to bid for their keywords for which search sites is also minimal. Hence, search sites provide many free add-on services to increase this switching cost.

Yahoo! has recently taken on a novel approach by entering the world of social networking in order to increase the lock-in effects of their search engine.  In their MyWeb product that was in Beta in 2005, they encourage you to log in with your Yahoo! ID when you are using Yahoo! products or search feature.  Because of this tracking capability, you can go over your search history of past websites you found regardless of what computer you are on.  In addition, they encourage you to share your good results with your friends.  Their Friendster-like networking site, Yahoo360, allows you to recommend good sites to anyone in your circle of connected friends.  Thus, when you input a key word into the search box, you will get a few extra "personalized" results that are favorites of your friends.  Although this service is not widely used at this point, if it becomes popular, it could dramatically increase the switching cost of moving over to a new search engine.

In addition, an email account serves as a vital connection between the Internet user and the search site. At the same time, the email account provides the search site with important personal information that is valuable to advertisers who may be looking for better targeted advertising based on certain demographics. While these added features help garner customer loyalty, the switching cost involved is not a significant competitive advantage that any search site can claim to. Rather, management of customers' expectations might be a more crucial factor. Google has done extremely well based on its reputation to generate the fastest and most relevant search results. A continued effort either through technological advancement or marketing strategy to maintain this perception would be crucial for a search company like Google to continue to stay ahead of the game

Future of Search-based Online Advertising

'Pay-per-click' model has driven efficiency and lowered the customer acquisition cost of advertisers but it is far from perfect. There is "click fraud"- bogus clicks generated by software-powered websites set for just this purpose. Furthermore, people who search and click often stop short of buying. Hence, the next step: 'pay-per-call' advertising. Most people first heard this term last month, when eBay, the world's largest online auction site, bought Skype, which makes free software that lets people, make free computer-to-computer phone calls. Meg Whitman, eBay's CEO, explained that one rationale for the deal was to "monetise" Skype's internet telephony by placing little Skype buttons on the web pages instead of sponsored text links. A potential customer might actually click on such a button and talk live to the advertiser's salesperson, at which point eBay would charge the advertiser.

A San Francisco company called 'Ingenio' pioneered this approach in 1999 by placing toll-free numbers of local businesses on the result pages of search engines. This April, AOL, one of the big four internet portals, signed up as Ingenio's largest partner. The other three-Google, Yahoo! and MSN- will also launch pay-per-call programs sooner or later, according to Greg Sterling at The Kelsey Group, a market research company, because small businesses and service providers like lawyers or plumbers find it much easier to close deals on phone (many do not even have a website) as faking calls is harder than faking clicks. Mr. Sterling reckons that pay-per-call will be worth between $1.4Bn and $4Bn by 2009, on top of pay-per-click revenues.

But even the pay-per-call model may turn out to be only an intermediate step to the ultimate in advertising efficiency - the 'pay-per-sale' model. This is what Bill Gross has recently started offering at SNAP, a search engine that he founded. United Airlines, for example, places text links on SNAP's search pages, but it pays (about $10) not when somebody clicks or calls, but only when somebody buys a ticket. Eventually, argues Mr.Gross, 100% of the advertising will follow such a pay-per-sale approach-although he won't guess how soon-because this is the "holy grail of advertising."

A bold claim, but credible, since it was Mr. Gross who incorporated the pay-per-click model in 1997, by launching the company that would become Overture, now a part of Yahoo!, and whose business model Google imitated with spectacular success. According to Mr. Gross, his first innovation, merely liberated advertisers from the old "cost per thousand" model, in which they targeted audiences and then blindly threw their money in their general direction. In the future, with the 'pay per sale' model advertisers would be liberated off all wasteful spending, by tying their costs directly to real sales.

Conclusion

This paper has provided an overview of the background, limitations and potentials in the search-based advertising industry. Basic economics concepts such as network effects, complements and lock-in effects are used to explain the mechanisms involved in the industry. Finally, we ended our discussion with a look into the future trends of this dynamic market.

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How to Cite this Article:

Cho, M., Iskandar, A., Kidambi, S., Shepherd, S., Vuong, C.D.T. (2005). Search-based Online Advertising. Also available at people.ischool.Berkeley.edu
 
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Reference Materials

History of Search-based Online Advertising

1. Bruner, Rick. The Decade in Online Advertising, DoubleClick, April 2005. Found at: http://www.doubleclick.com/us/knowledge_central/documents/RESEARCH/dc_decaderinonline_0504.pdf

Market Potential

1. Bruner, Rick. The Decade in Online Advertising, DoubleClick, April 2005. Found at: http://www.doubleclick.com/us/knowledge_central/documents/RESEARCH/dc_decaderinonline_0504.pdf
2. VanBoskirk, Shar. US Online Marketing Forecast 2005-2010, Forrester Research, May 2, 2005

Major Players in Search-based Online Advertising

1. Hansell, Saul. Microsoft Plans to Sell Search Ads of Its Own. The New York Times, September 26, 2005. Found at:  http://www.nytimes.com/2005/09/26/business/media/26soft.html?ex=1285387200&en=261a83498651bc75&ei=5090&partner=rssuserland&emc=rss
2. Markoff, John. Microsoft Preparing Challenge to Google and Yahoo for Ads. The New York Times, March 16, 2005. Found at: http://www.nytimes.com/2005/03/16/technology/16soft.html?ex=1130299200&en=b6c5ca7ac9905692&ei=5070
3. comScore Reports July 2005 Search Engine Rankings PR Newswire, August 19, 2005. Found at: http://sev.prnewswire.com/computer-electronics/20050819/CGF00519082005-1.html
4. Google AdWords Help Center: How much does AdWords cost? Google, 2005. Found at: https://adwords.google.com/support/bin/answer.py?answer=6382&hl=en_US
5. Yahoo! Sponsored Search. Yahoo!, 2005. Found at: http://smallbusiness.yahoo.com/marketing/sponsoredsearch.php
6. The Battle of the Portals, The Economist, vol 377 no 8449, pp 73-74, October25, 2005. Found at: http://www.economist.com/printedition/displaystory.cfm?story_id=5065558

Future of Search-based Online Advertising

1. Battelle, John. The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture. Portfolio Hardcover, September 8, 2005.
2. Bruner, Rick. The Decade in Online Advertising, DoubleClick, April 2005. Found at: http://www.doubleclick.com/us/knowledge_central/documents/RESEARCH/dc_decaderinonline_0504.pdf

3. Mills, Elinor. MSN Takes on Google AdWords. CNET News.com, September 26, 2005. Found at: http://news.com.com/Microsoft+plans+to+sell+search+ads+of+its+own/2100-1011_3-5881650.html
4. Online Advertising. The Economist, September 29, 2005

Other References

1. Hyland, Thomas The Global Outlook for Internet Advertising and Access Spending, 2003–2007. PriceWaterhouseCoopers, 2004. Found at: http://66.102.7.104/search?q=cache:r85q0KpaHL4J:www.pwcglobal.com/extweb/newcolth.nsf/docid/1670AFF327F223E385256E9900608E1D+%22search+advertising%22+history&hl=en
2. Markoff, John and Ives, Nat. Web Search Sites See Clicks Add Up to Big Ad Dollars. The New York Times, February 4, 2005. Found at: http://www.nytimes.com/2005/02/04/technology/04click.html?ei=5090&en=da83c0a917e07950&ex=1265173200&adxnnl=1&partner=rssuserland&adxnnlx=1129784933-HhpBitsOEt5SlEyiQQSJrw
3. Tedeschi, Bob. A Drop in Search Engine Supply. Advertising Educational Foundation, July 19, 2005. Found at: http://www.aef.com/06/news/data/2004/3029
4. Online Advertising Boom. The Age, September 27, 2005. Found at: http://www.theage.com.au/news/breaking/online-advertising-boom/2005/09/27/1127586822032.html
5. Why Search Advertising Works. AWSM Technology, 2004. Found at: http://www.awsmtechnology.com/marketing/online-advertising.htm