The revenue side of search engines

The New York Times says "Yahoo Is Unleashing a New Way to Turn Ad Clicks Into Ka-Ching" MSNBC says "Yahoo unveils overhaul of online advertising". Wow, it must be a slow news day. There is nothing new about Yahoo's advertising model, but it does point out the importance and revenue impact of subtle changes to the system. Google gets twice as much revenue from each ad click than Yahoo or MSN. It is all about the algorithm. This is why Microsoft created its own ad network and software called AdCenter to compete with Google's AdSense.

Search is a huge business. Google, Yahoo, and Microsoft are battling for bigger share of the $20B, and growing, online advertising market. There has been a lot of focus on the quality of search results and user experience. Building a loyal user base is step one in building a search business. Brand loyalty is critically important because the reality is that search results are just about the same from each of the three major search engines.

The real key to business success lies in the advertising network pricing model and targeting algorithms. The old GoTo.com which became Overture, now owned by Yahoo, invented the  CPC (Cost Per Click) model, and the keyword auction model. Google adopted both approaches but modified the auction model to run the most profitable ads, not just the highest bid ads. For example, if one advertiser bid $1.00 for a keyword and another bid $0.50 for the same keyword, Google will dynamically measure the CTR (Click Through Rate) to determine which ad is more profitable. If the $1.00 ad gets clicked 30 times per thousand views, and the $0.50 ad gets clicked 100 times per thousand, Google will put the $0.50 ad at the top of the paid search results. This results in revenue to Google of $50 per thousand versus $30 per thousand. Doesn't sound like much but multiplied by billions of page views every day, times thousands of ads....it is a ton of money.

Yahoo and Microsoft have recently introduced their own ad networks and targeting systems in an effort to better monetize their page views and clicks. Just like search results, ad targeting is dramatically different based on very subtle tweaks to the algorithm. At Internet scale (think billions and billions) small tweaks matter.

Comments

[Dharmesh Shah]

Another opportunity for Microsoft and Yahoo! is to strike a better balance between advertisers and publishers. Currently, Google seems to lean *strongly* towards the advertiser as evidenced in this great article:

http://business.timesonline.co.uk/article/0,,13129-2123601,00.html