What's Behind Google's Purchase of Applied Semantics?

Last week, Google acquired Applied Semantics, a company that provides domain name, contextual advertising, and enterprise search solutions.

The acquisition gives Google new traffic for its paid listings and new strengths in the contextual advertising space, which the company entered only last month. It also potentially hurts one of Google’s major competitors — Overture.

“We think this will be a valuable way to enhance some of our ad products and build out an engineering team in Santa Monica [CA], as well,” said Susan Wojcicki, director of Google’s product management, of the purchase.

Google’s Gain Could Hurt Overture

Applied Semantics is one of Overture’s top 10 partners, generating traffic for Overture’s paid listings through its DomainPark program. It’s unlikely Google will allow Overture’s paid listings to remain part of the DomainPark program long term. The move would deny Overture traffic and simultaneously give Google new exposure.

The purchase gives Google presence in Southern California, where it hopes to recruit new engineering staff. Overture is already based in the area. Its Pasadena, CA, headquarters is a mere 30 miles from Santa Monica-based Applied Semantics. The close proximity means if Google and Overture are both wooing a particular engineering candidate in the region, accepting Google’s offer will no longer mean relocating to the northern part of the state.

Overture said Applied Semantics is no longer one of its top 10 affiliates nor does it expect the sale to have a “material impact on revenue.” The company also does not see Google opening an office in Southern California as hurting its recruiting efforts.

Google had no comment about the potential impact of the purchase on its rival, nor would it say if this was a purchase consideration. Instead, Google played up the “fit” between itself and Applied Semantics in terms of technology, ad programs, corporate culture, and even a personal connection. Google cofounder Sergey Brin is a longtime friend of Applied Semantics cofounder Gil Elbaz, Google pointed out.

Domains Make Money for Applied Semantics

Google and Applied Semantics (until two years ago, Oingo) had similar beginnings as search engines with funky names launched in the late 1990s. They soon pursued different paths. Google focused on Web-wide search and developed into today’s incredibly popular service. Oingo remained a relatively unknown showcase site to demonstrate the company’s categorization technology to would-be enterprise search customers.

Applied Semantics still provides enterprise search products. The company also found a new and apparently profitable service — applying its content-classification and taxonomy technologies to domain names. Throughout 2000 and 2001, Applied Semantics signed agreements with various domain registrars to help those services suggest good domain name alternatives to customers when their top domain choices were already registered.

Domains provide revenue to Applied Semantics in another way. The company uses its technology to help Web sites with good domain names but that lack real content of their own. Through the DomainPark program, paid listings from Overture (and perhaps other providers) are shaped into directory-like categories. This gives Web sites in the program revenue-generating content, money Applied Semantics shares with its partners.

DomainPark Program Means Big Traffic Gain

Google has no products like the DomainPark. Acquiring Applied Semantics means Google will have the opportunity to insert its own paid listings into the network’s Web sites.

Better disclosure of paid listings offered through the DomainPark program is a challenge facing Google. Sites I’ve reviewed using the program fail to follow U.S. Federal Trade Commission (FTC) recommendations for paid listings disclosure. Google has always complied with these recommendations — even before they existed.

“There have been some differences in the philosophy there, but the approach will be to work together and come up with the right solutions,” said Wojcicki.

Adding disclosure is a simple change to make, one I expect will happen soon. A bigger change will be what happens to the current partnership between Overture and Applied Semantics, which runs through August 2003. For the moment, Google isn’t saying anything on the subject.

“It’s too early for us to comment on any specific deal or set of deals. These are all things we’ll need to work on as it rolls out,” Wojcicki said. “They [Applied Semantics] have a number of complicated contracts in the space. Those are things we’ll have to work forward to be beneficial to everyone.”

What About Contextual Ads?

To some degree, the DomainPark program can be considered contextual advertising. Applied Semantics recently moved more decisively into the contextual space last October, when it launched the AdSense program. The program places paid listings into Web pages by analyzing the pages’ content, then selecting ads that seem most appropriate. A test deal signed in February has placed ads on USA Today’s site. In March, ads appeared through pilot programs on Excite and iWon.

Google’s contextual program has been up only since early March as a formally announced endeavor. It already has much wider distribution than Applied Semantics’s program. Google was obviously comfortable launching its own program without Applied Semantics technology. So what does Applied Semantics bring to the table for Google as far as contextual ads are concerned?

“We already have a solid product, but there’s a significant amount of manpower required to power and reach the goals we have,” explained Wojcicki. “Bringing on additional engineering support is also a key component.”

So by acquiring Applied Semantics, Google gains employees versed in the contextual ad space, an engineering team with its own unique ideas and methods of powering contextual ads, plus a few existing partnerships.