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Disarray in the Search World

  |  July 19, 2001   |  Comments

Search-generated traffic is among the most-qualified and best-converting traffic that can be driven to a Web site. But just as with all good things, this service has changed dramatically over the past few years as the ad industry has developed.

It has been proven repeatedly that search-generated traffic is among the most-qualified and best-converting traffic that can be driven to a Web site, as those users are actively looking for information or relevant products or services. Because the users are proactively seeking information, it is the ideal time to reach them and bring them to a site. Best of all, natural search traffic is free and works on unbiased search criteria, which is why companies work so relentlessly at optimizing their search result placements within the major search engines, almost creating arbitrage opportunities for them.

Just as with all good things, this service changed dramatically over the past few years as the ad industry developed. Although search sites are unique in their service offerings compared with other content sites, the majority of them began under pure-play ad-supported business models (i.e., dependent on advertisers to sustain them). And because many did, they were sustainable throughout the overly hyped economic phase. But they have struggled over the past 18 months, with overhead costs far greater than that of the average content site or portal, and with demand by advertisers declining.

Go.com, owned by the Disney Enterprises, is a good example of those facing hard times. The portal was burning cash at such a rate a few months ago that it shut down completely; it then reopened under more feasible conditions, with affiliated companies providing content and other portal services.

Through these times, search providers have had to cut costs and increase their revenue channels. Many pushed their customizable search function by providing independent sites with a search service, and others began offering advertisers paid links within the search results on relevant keywords.

Sponsored search links have become one of the most popular forms of acquisition-based online ad vehicles, as they have virtually no creative costs associated with them and yield some of the highest conversion rates of any ad strategy today. Furthermore, most paid search offerings operate on an auction basis and on a cost-per-click performance basis. It's an excellent strategy that continues to reap benefits.

GoTo.com, the leading paid search provider on the Web, is a major provider of sponsored links to many of the top search engines. GoTo.com's business model is an excellent system; its advertiser and revenue bases are growing continuously, advertisers are seeing returns on their ad dollars, and affiliated search partners have created a new revenue stream by hosting sponsored links. All parties, except perhaps the end user, get good value from the service, which contributes well to the company's profitability forecasts.

In an industry filled with turmoil, it is important to recognize creative search-based ad strategies as a solid case study and try to apply some of the same principles to other ad strategies. However, this week, efforts by a consumer group, Commercial Alert, encouraged the Federal Trade Commission to investigate eight of the major search engine companies for allowing misleading advertising on their sites. Commercial Alert claimed that the paid search results on those sites are unethical, not providing enough awareness of their paid nature and misleading users into thinking they are naturally derived search results.

The search providers involved are AltaVista, AOL, Direct Hit, iWon, LookSmart, MSN, and Lycos. GoTo.com, ironically, had no part with the complaint because it lists the cost to advertise under each search result.

Commercial Alert is requesting that these sponsored links be given clearer labeling as ads rather than their current titles of "sponsored" or "featured" listings. It would like regulations put in place that force sites to label these listings directly as advertisements. Consequently, search sites will find it much more difficult to generate as much revenue from this stream as they otherwise might.

With the industry at a low point, it can be discouraging to see companies that were starting to turn a corner financially take hits like these. Sure, the consumer groups help protect consumers and help maintain the integrity of the search results, but at the same time they are putting the search engines back in a tight predicament financially.

Consumer groups such as these may have good intentions, but they are making it a tougher market for companies to maintain themselves in and achieve sustainability. Such movements will push the Internet toward paid subscriptions, with content no longer free. Search services may be forced to give up their free services in the near future and to charge users for them.

Paid content is not something we are used to seeing online (there are, of course, many exceptions); we are used to receiving free information quite regularly. For years, paid content has been the standard in most successful offline publications, and it will begin to constitute an important part of the Internet's services and information.

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Adam Posman

Adam Posman is a strategic planner with BAM Strategy, a leading digital agency with offices in Montreal and Toronto. BAM's core services include strategic planning, media buying, creative production, online contests, email marketing, and customized marketing technologies.

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