The Bumpy Road to Maximum Monetization, Part 1

Last week, the mainstream press gobbled up the battle between Overture and Google for AOL’s hand as a search partner. Google won that engagement, causing a plunge in Overture’s stock price and a renewed recognition of just what big business paid listings represent.

Overture alone expects to generate over half a billion dollars in revenue this year. Add in revenue from all other types of search engine marketing (SEM) activity, and the SEM industry figure probably approaches, if not exceeds, $1 billion.

Clearly SEM is no cottage industry, though it continues to be largely overlooked, beyond what Overture is doing. An example is how little coverage was expended in the mainstream press on LookSmart’s unprecedented move last month to a pure cost-per-click model for its commercial listings. The change could potentially cause LookSmart’s revenue to eclipse Overture’s.

Currently, most search engines come nowhere near monetizing all the links displayed on their search results pages. However, the quest for greater profits is likely to change this, especially if the search engines think it can be done without hurting the relevancy of their products. LookSmart intends to be the pioneer in maximizing monetization, and the other search engines will be watching to see if the company is successful.

Giving Away Prime Link Real Estate

To understand how much more search engines could monetize, let’s examine the major links presented on the search results pages of the three biggest portals — AOL, MSN, and Yahoo All three have areas where they make money directly by selling links through internal ad programs or where they indirectly benefit by promoting their own content, such as AOL’s “Recommended Sites,” MSN Search’s “Featured Sites” (editorial results also appear here), and “Inside Yahoo”

Next, all three players display sponsored links. Overture provides these to MSN and Yahoo while Google will now power them at AOL. Finally come the “editorial” links, where money is not supposed to influence how sites are ranked for particular queries. For the moment, think of these as “free links” that earn the portals no money (though they actually do earn some money, as we’ll see).

Here’s the link breakdown for a search on “book stores” at each portal. Bear in mind for more unique queries, the number of sponsored links might drop or not appear at all. However, the figures below are fairly representative for any generally popular query.

Links	AOL	MSN	Yahoo	Average
Total links	13	18	27	19
Internal links	8%	22%	7%	12%
Sponsored links	15%	17%	19%	17%
Free links	77%	61%	74%	71%

As you see, sponsored links only take up, on average, 17 percent of the available link real estate on the results pages for these portals. If this relatively small percentage of links can generate so much money for the portals, then imagine how much the portals might earn if they could convert the remaining 71 percent of free links into revenue generators.

Some of this already happens. For example, Yahoo requires commercial sites to pay an annual fee for review and inclusion into the commercial portions of its directory. If accepted, these sites have a chance of appearing in the editorial “Web Site Matches” area of Yahoo’s results. It’s important to note they aren’t guaranteed to show up for any particular query terms, but by being included they have a shot at getting traffic via Yahoo

Similarly, both MSN and AOL (until summer) get some of their editorial results from Inktomi. In turn, Inktomi has paid-inclusion programs that allow site owners to pay either an annual fee or use cost-per-click (CPC) pricing to get their pages included in its database. The portals that carry Inktomi’s results share in some of the paid-inclusion revenue.

Appeal of Recurring Income

Annual or CPC pricing is attractive to search engines because it represents more value to them for the link real estate they provide. For example, Yahoo previously charged a one-time review fee for commercial sites to be included in its listings. If accepted, the site never needed to pay again. The site might receive thousands, if not hundreds of thousands, of clicks over the period since acceptance — all for having paid between $200 to $300 at some point in the past.

So much traffic for such a low price meant despite paying the submission fee, Yahoo still represented a huge source of essentially “free” traffic to site owners. Yahoo felt it deserved more for providing so much, so it rolled out new annual pricing in December. The company wisely chose not to make this retroactive to sites already listed. For new sites, Yahoo has increased its potential income in one swoop.

LookSmart — a major provider of listings to MSN — was in a situation similar to Yahoo’s. Until last month, it charged a one-time fee for sites to be reviewed for inclusion in its commercial listings. If accepted, you got “all you can eat” traffic. LookSmart also had a different program, “LookListings,” aimed at large businesses. This program gave you greater representation in the LookSmart database and thus greater potential traffic, but those participating in it had to pay continuing cost-per-click fees.

Now the one-time fee program at LookSmart is over. The company bypassed the annual fee choice Yahoo made and went instead to cost-per-click pricing for all commercial listings. In doing so, LookSmart hopes to greatly decrease the amount of free traffic it’s given to commercial sites in the past. In short, you “pay to play” in LookSmart.

First Real Test of Pay-to-Play Editorial

What makes the LookSmart move unprecedented is never before have we seen such a wide range of businesses be told they need to pay a substantial amount of money to be included full time in a major search engine’s editorial listings. If LookSmart is successful with this transition, we’ll probably see other search engines follow suit by taking a much harder line in monetizing their editorial results.

LookSmart would dispute the “substantial amount” part of my statement, saying sites are only required to spend $230 to be included the first year, with the fee dropping (assuming no price increase) to $180 in subsequent years. In contrast, Yahoo charges a $300 annual fee.

The “full time” in my earlier statement is crucial. Minimum charges at LookSmart only get a site included in its listings until 100 clicks have been registered in a particular month. Many sites might find these are used up in only a few days, if that long. After that, sites must either pay more or risk disappearing until the following month. How much more? Many report LookSmart is telling them they need to pay in the hundreds of dollars per month.

No paid-inclusion program feeding editorial results is as draconian as LookSmart. Yahoo still provides “all you can eat” traffic for a low price. The major crawler-based search engines, such as Inktomi, FAST, and AltaVista, typically list home pages of Web sites continuously for free. On the off chance this doesn’t happen, you could pay these crawlers in the range of $30 to $80 annually to be included in their respective databases and receive unlimited traffic in return.

Where other search engines may charge small businesses $30 to $300 per year for full-time inclusion, LookSmart’s change shifted it to charging the same group $180 to $30,000 or more per year. LookSmart’s attitude is the traffic it has delivered to sites for free is worth at least this much, if not more. Therefore, a company would be foolish not to maximize its revenue — especially if it wants to continue providing listings to MSN and other partners.

LookSmart is correct in that traffic it has given away in its editorial listings has been undervalued. That holds true for the other search engines, too. Commercial sites have indeed gotten a free ride on search engines in years past. Now, the fares are going up and will likely continue to rise, as long as sites see value in paying.

Next: Monetezation begets confusion, and a cry for standards.

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