The State of Search-based Online Advertising Vs.
Michael Cho Andrew Iskandar Sanjay Kidambi Steve Shepherd
Cuong Do Tuan Vuong
November 3, 2005
SIMS/Haas School of Business, UC Berkeley
Agenda
• Setting the Stage
– Basic concept – History – Major players
• Economics at work
– Network Effects – Complements – Lock-In
• Where are we headed?
SIMS/Haas School of Business, UC Berkeley
Search-based Online Advertising is a simple process at its core
• Bidding process occurs beforehand
– Advertisers bid to be displayed by keywords of their choice in auction-like process
• User types a keyword into search engine
• Advertisements displayed next to search results
– The higher the advertisers bid, the higher the placement on the page
SIMS/Haas School of Business, UC Berkeley
In 10 short years, advertising has been changed forever
1995 1996 1997 1998 1999 Timeline
• InfoSeek began to target banner-ads
• Yahoo and Proctor & Gamble introduced “pay for clicks” model • Open Text experimented unsuccessfully with targeting text-based ads to search queries • GoTo.com (later changed to Overture) and AdWords (Google) introduced labeled text-ads correlated to keywords • Yahoo! buys Overture
2000 2001 2002 2002 2003 2004 2005
• Growth of smaller, specialized firms in tangential business like search engine optimization (SEO)
• Google IPO
SIMS/Haas its own search • MSN introducesSchool of Business, engine UC Berkeley
Search advertising shows huge market potential
• Online advertising: fastest growing sector
– Universal McCann: increase of nearly 53% (from $4.3Bn in 2000 to $7.1Bn in 2004) – PWC/IAB: $9.6Bn in 2004 – Search-based advertising: 40%
14 12 10 8 6 4 2 0
Search Engine Marketing in US
11.57
$US Billions
7.07 5.67 4.27
8.29
9.46
10.53
• Spending will predictably increase in the coming years
− From $11.5Bn in 2005 to $17.6Bn in 2008 − Search-based advertising: $7Bn – nearly 85% increase − Forrester: $11.5Bn on search engine marketing in 2010
2004 2005 2006 2007 2008 2009 2010
Forrester Research, July 2005
SIMS/Haas School of Business, UC Berkeley
Google is currently the clear market leader in search
Search Market Share, July 2005
Ask Jeeves, 6.10% Infospace Network, 0.90% Other, 0.60%
Time Warner (AOL), 9.90%
Google, 36.50%
MSN, 15.50%
Yahoo!, 30.50%
SIMS/Haas School of Business, UC Berkeley
Overall, Yahoo! is the most visited site on the web
Yahoo: most popular website
– – – – Sponsored Search Local Sponsor Search Search Submit Express “Cost-per-click” and monthly payment after an initial fee
SIMS/Haas School of Business, UC Berkeley
Best of the rest…
• Microsoft: the last in ranking of the three
– MSN AdCenter – MSN Paid Search Solution
• Cooperation between MSN and AOL/TimeWarner
– AOL/TimeWarner: dominance in media – MSN: dominance in desktop application
• Main competitor to Google and Yahoo on online advertising?
SIMS/Haas School of Business, UC Berkeley
Agenda
• Setting the Stage
– Basic concept – History – Major players
• Economics at work
– Network Effects – Complements – Lock-In capabilities
• Where are we headed?
SIMS/Haas School of Business, UC Berkeley
Network effect: Yahoo and Google‟s scale will be tough to overcome
The Virtuous Cycle
Better user experience Technology investment More advertising dollars
SIMS/Haas School of Business, UC Berkeley
Attracts new users
Google and Yahoo! have created an „ecosystem‟ of complementary products
The Search “Ecosystem”
travel photo sharing games Blogging tools social networking calendar maps Firefox news shopping Fantasy partnership sports toolbar mobile SEARCH personals email images Dell groups IM Hotjobs distribution search engine optimizers Sun sports desktop search distribution finance SIMS/Haas School of Business, music UC Berkeley
Achilles‟ heal to business model: low switching costs for consumer
Many tactics aim to overcome this challenge:
• “Personalize” search results by tracking consumer behavior and preferences (Y!‟s MySearch)
•
Establish desktop presence outside of browser as a constant reminder (Y! music engine, Google desktop search)
Utilize community in social networks improve search results (Yahoo‟s MyWeb 2.0) Create complementary web products so search box is always in view (email, maps, etc.)
SIMS/Haas School of Business, UC Berkeley
•
•
Agenda
• Setting the Stage
– Basic concept – History – Major players
• Economics at work
– Network Effects – Complements – Lock-In
• Where are we headed?
SIMS/Haas School of Business, UC Berkeley
Matching a specific ad to a specific sale is the holy grail of advertising
1998 Pay per impression
2005 Pay per click 2008 Pay per call 20?? Pay per sale
SIMS/Haas School of Business, UC Berkeley