Microsoft, Yahoo or Google, who will win the paid search battle in 2010? Recent acquisitions might add $10 billion in revenue to one company’s pocket

admin    Google     2010, acquisitions, Battle, Billion, company's, Google, Microsoft, might, Paid, pocket, Recent, Revenue, Search, Yahoo

Microsoft plus Yahoo vs Google, Microsoft vs Yahoo and other variations of names in the paid search game seem to make all the headlines these days. A week ago, StatCounter Global Stats reported that Microsoft’s new search engine, Bing, has passed the market share of Yahoo’s engine. Since Bing’s launch, both companies have tried to secure their positions in the market, but obviously none of them can overcome Google’s dominance in the search industry, which commands over 70 per cent of the market.

While Microsoft has made a significant effort to compete with Google in the search space, Google is coming up with a new operating system that might put Microsoft behind in another market. Microsoft’s online search revenue is insignificant when compared to its total revenue ($86 million in revenue for online search vs $16 billion total for the last quarter). The operating system has been Microsoft’s cash cow. Now Google is invading the space and the market looks forward to see how Google’s Chrome OS will change the landscape in 2010.

Yahoo seems to be way behind in all business segments and its stock has drastically declined, especially since the deal with Microsoft fell apart and the recent acquisition offer was withdrawn.

After several back and forth dramatic scenes involving Icahn, Microsoft and Yahoo, no deal was made, and Yahoo’s stock kept going down, and now, coupled with the dramatic market crash, it is even more pronounced.

It was obvious that the Microsoft-Yahoo M&A deal could not go through in any case, as it could not win government approval unless Google had achieved near-monopoly leadership in paid search. Therefore, for Yahoo the hope for Microsoft’s acquisition rescue seemed to be naïve.

But!

But the latest move of Yahoo reminds me of an ad campaign of Mini Cooper that, a few years ago, made the brand’s image – a little guy finds his way and gets ahead of giants.

According to rumors that I picked up in Yahoo’s office cafeteria while visiting a friend the other day (truly never eat alone if you want to hear the latest news first), Yahoo seem to have come up with a strategy that is shockingly simple but might look phenomenal in its post-acquisition grandeur.

The content of the rumor is interesting – Yahoo intends to make an amusing defensive acquisition and buy the IdeaMama Ad Network, the ad technology division of a Canadian company with its office in Silicon Valley. At first I was puzzled why Yahoo would need this small funky company, but here is my take on it.

This acquisition can put Yahoo in the leadership position by allowing it to introduce a radically new category of on-line advertising.

Let’s explore it. The success of search companies hinges not so much on relevance of search and quality of search algorithms (yes, Yahoo will always remain behind there); their success at the end of the day depends on advertising revenue. The bottom line is all that matters.

Up-to-date search engines use CPC as the main advertising model. Some include affiliate marketing with CPS, but not everything is that simple there. CPC has no chance to win a considerable portion of advertisers’ budget for a number of reasons; one is that the conversion rate of clicks delivered by content partners along with MROI sometimes is questionable. On the other hand, many publishers won’t advertise with Yahoo or Google for the low compensation that CPC can offer. Research webmasters’ forums and you will see how much negativity AdSense receives; publishers hate it as it is a lousy media monetization option, but there are not many alternatives out there.

The Pay Per Sale model is always preferable to search engines. Google seems to provide affiliate marketing options, but only for selected advertisers. Not everybody can jump on the bandwagon. You have to accumulate a significant amount of clicks first and then demonstrate a high conversion ratio, that, by the way, Google’s algorithm doesn’t calculate very well – there are plenty of holes that prevent stats from displaying real numbers.

But even that is not the main challenge. The problem lies in vertical coverage. This model can serve only ecommerce companies, those that sell goods online. The gate is not wide open for every company – if you sell business services, complex technologies or highly priced consumer products and your sales is mainly made off-line, you are totally out of options – the current processes and technologies don’t support affiliate marketing for such companies, end of the story. But it is a shame.

Even if Internet ad spending grows to over $100 billion worldwide by 2010, it still could be increased significantly if only publishers could tap into the sales commissions that affiliate marketing offers. As an example, if a company’s online marketing budget is $100,000 a year, no marketer can ever get over the hump to spend $200K for CPC instead – no way, but advertisers can easily take a portion of $1M+ sales commission and reallocate to publishers, which now increases publishers’ revenue many fold.

If the rumor proves to be true, the reason why I think Yahoo decided to bite on IdeaMama’s PPD (Pay Per Deal) model and use their ingenious deal tracking process is that it enables Yahoo to chip sales dollars from the growing B2B segment that is not so keen to pass to Yahoo’s CPC their marketing dollars. In simple math, if Yahoo can attract 100,000 small to medium sized service and technology companies that currently spend their dollars on CPC with Google and lead generation programs with other vendors, and if each advertiser pays a 10% commission on sales generated by Yahoo ads with content partners’ participation, Yahoo can add annually $10 billion in revenue to their P&L, assuming that average sales added to advertisers’ balance sheet is as little as $10M annually.

Even if my math is half off, the move with this acquisition is absolute genius as Yahoo will be positioned as the only search engine that offers PPD as an advertising option and will finally have a competitive edge and some identity instead of crawling behind Google.

Yahoo could probably develop the technology in house and launch it, bypassing acquisition, but a lawsuit resulting from infringing on IdeaMama’s patents would probably cost them more than the price of the acquisition itself, plus the hassle of explaining to its shareholders about corporate integrity. From what I heard Yahoo will be paying nothing for this deal, something under $20 million. Taking into consideration that the time factor is critical, bringing people knowledgeable in the PPD model from IdeaMama’s team to integrate the technology into Yahoo’s operation sounds like a smart move.

$10 billion in additional revenue for Yahoo will cost all together less than $30M (buying price plus system integration)? Hah? Someone might not like it. Yes, in the last few years Yahoo have clearly lost mind share and market share to competitors, but as I see it with this exquisite turnaround move Yahoo by definition can become the most important player in search marketing sphere as now the company can tap in into verticals that neither Google, Microsoft or AOL can reach (unless one of them places a higher acquisition bid I guess).

For Yahoo, more relevancy in search results and social media innovations won’t solve the problem of Google’s dominance in paid search advertising. Yahoo was behind and will remain behind even despite its acquisition by Microsoft if it ever happens. But Yahoo’s strategic acquisition of IdeaMama’s ad system will scale Yahoo’s online advertising platform and branch it into a new online advertising category with untapped and uncapped revenue potential. Now it is not social media innovation that everybody is talking about, but innovation in media monetization.

I find all that to be a very interesting development of the search game. I can’t wait to hear more about 2009 M&A activities and especially the M&A deal “Yahoo plus IdeaMama” and all the post-acquisition events. What happens next in the battle between search giants can be simply fascinating; you never know who pulls the next trigger and what it might be.

Why Facebook Is Worth Over $10 Billion

admin    Facebook     Billion, Facebook, Over, Worth

Yahoo! have been in talks with Facebook for over a year now and apparently recently got shy at Facebook’s $1 billion asking price but as I will explain here Yahoo! have missed out on an absolute bargain.

Facebook have 18 million users, plenty. However MySpace has 100 million + and sold for a mere $580 million to News Corp’s in 2005. YouTube sold to Google for a reported $1.65 billion in 2006 but it serves over 100 million video’s a day and has over 25 million visitors a month. So what makes Facebook so valuable? It gets relatively huge traffic levels but not on par with YouTube or MySpace. Despite now being available to anyone it began life as an exclusive network for students (you needed an educational email to register) and this is still its primary user group.

So where’s the money?

Currently Facebook displays conventional banner advertising on users’ homepages and selected pages through the site. Adverts are unobtrusive and random in so much as they’re not targeted at any particular user- they’re just served to the entire site on a random basis. Facebook are doing ok out of this arrangement on the basis of the number of page impressions they receive, although in reality they’re keeping advertising at a minimum in order to build up the value of the site for its eventual sale which will almost certainly happen in 2007/8. Smart guys!

The power of information

Register with Facebook and quickly you can find yourself giving away huge volumes of valuable personal information. Think about it… Facebook know your name, they know how old you are (actually your D.O.B which is infinitely more valuable as I’ll go on to explain), they know if you’re male or female, they know your hometown, your postcode if you choose to give it away (although I doubt many users choose this), they know if you’re single, in a relationship (and who with), married, divorced etc, they know your sexual orientation. Ok so you can answer all these questions as honestly, dishonestly or vaguely as you like but from what I’ve seen people happily give accurate information about themselves as it’s their friends and potential friends who are going to see it- and no one else right?

But what else do Facebook know? Well they know where you went to school, where you work, more sinisterly your religious and political views. From this we can start to build up a pretty valuable market profile. As I’m telling Facebook I may as well tell you I’m Male, 22 (born in August), Straight, in a relationship, conservative, atheist from Brighton, England. Went to school at Blatchington Mill Secondary, college at a place called BHASVIC, University at Bournemouth. From this information we can draw further assumptions- I live in Brighton and based on the location of my schools catchment area we could pretty accurately map places in Brighton I know about, visit, and live in (think Google maps API). I’m a straight; conservative from a reasonably wealthy area in full time employment therefore I’m probably white, middle class with a decent disposable income.

So what else? Facebook know what you look like, they probably know what you used to look like a few years ago as well. Probably most significantly they know who your friends are, they know how you know them, they know when you talk to them, what they look like and ultimately they know exactly the same information about them as they know about you- you’re interests, likes and dislikes and your friends tastes as well.

They know your email address, so they know if you use Hotmail, Yahoo! Mail etc. They know your phone number so they could pretty easily work out your phone provider. They have your IP address so they could work out your ISP. They know where you’ve arrived at the site from so they know what search engine you use (enter Yahoo! And Google to the bidding war), what browser you’re on, they know if you’re visually impaired or have learning disabilities from the settings on your browser.

Facebook know when I’m logging in and from where so they know the hours I work, if I’m using the internet at work, the pages I leave Facebook to go to or the pages I come from so they know what other sites I look at. I can set my current status and tell Facebook exactly what I’m doing or feeling right this second.

Ok so you get the picture by now, one last thing though, is your Facebook password the same as your email account password, your internet and telephone banking password, every other password you use in your daily life (because until I wrote this post mine was!) how much more information do you want to give away?

What’s the risk here?

Realistically it’s pretty slim. Facebook are a nice bunch of guys and a great site, I love using it and despite knowing what I know about information security and the like I choose to give away a big chunk of the information I’ve talked about here.

Yahoo! And Facebook

So if Yahoo!, Google or god forbid Microsoft successfully purchase Facebook (as I say I’m reasonably confident this will happen this year) the Orwellian lucid dream proposed by this post becomes a perpetual nightmare. Imagine a company who have made billions and dominated the fastest growing market in the world by developing algorithms which crawl hundreds of millions of pages of random information (the internet) and categorize that information with the ultimate goal of matching it to businesses and selling advertising.

The search algorithm let loose on Facebook

Imagine the search engines let loose on Facebook. An algorithm tuned to pick out profile information (John, born 13.08.84). Map it to keywords in personal interests i.e. football, Manchester United. Plot your location on a map i.e. Brighton, England. Follow links to your closest friends with similar interests i.e. Bob and Dave who live round the corner and serve me an advert something like:

Happy birthday for next week John.

Did you know its Dave’s birthday the week after?

Why not book tickets for Brighton and Hove Albion vs. Manchester united on 12.08.07

Click here to book now and get 3 tickets for the price of 2 (why not ask bob to come along- he supports Brighton and you haven’t spoken in a while).

Book today and we’ll give you a half price limo from your house to the game with trashy-limo’s.com.

Now that’s powerful advertising and it’s just around the corner. If Facebook has 25 million registered users by the time it’s sold, half of whom visit every day that’s a minimum 12.5 million page impressions a day. Serve the advert above at $1 a click (which is far less than its worth based on the current AdWords CPC model) expect a click through rate of up to 10% based on the precise nature of the advertising and that’s $1.2 million minimum a day- almost $½ a billion a year. Grow that user group to 50 million (realistic if Google or Yahoo! can tap into their existing user database) and sell ad space on an affiliate basis say the football tickets at $300 with a 10% affiliate kickback and a 10% conversion rate =$3 per user x 25 million users =$75 million a day or $2737500000 in year 1! OK lets not get carried away people aren’t going to spend $300 every other day but the logics there and so the cash.

Will the audience except it?

Better quality advertising means less advertising- less websites rammed with banners so you can’t find what you’re looking for, less popups, less low quality products. This is the main driving force behind the success of search marketing programs and profile based advertising is already in place with Google’s personalized search returning more targeted AdWords ads than previously possible. If it falls into the hands of Microsoft then people may be more wary but with the image of Google or Yahoo! and Facebook profile information is seen as soft information as the company doesn’t sell you products directly and he service is free. It’s the way the internet is going and I believe it’s where we’ll be in 5 years.

Identity theft

The point I’ve been making tediously through this post is that we should be more careful about what information we give up and to whom. If the internet was a county it would be Nazi Germany and Facebook would be the Gestapo! Social utilities like Facebook are afforded the sort of privileged information fascist governments the world over would and have killed for. We moan about identity cards being introduced in the UK (ironically there’s several Facebook groups dedicated to the cause) but we happily give up personal details to a bunch of college geeks in the states who are ultimately planning on selling our details to the highest bidder (the value of any site is based on the volume, quality and amount of information they have about their traffic- but best of luck to them) possibly to the company who already control the majority of world business systems through the windows platform.

This post is not meant to scare- it’s simply a recognition of the power of new internet technologies, their possibly applications and to pose the question- if your Facebook friends are your real friends shouldn’t they know your birthday? Are Facebook really going to buy you a present?!