My History of Paid Search

Google Circa 1998:

“The whole thing. Now which keyboard do I use?”

Tonight Majestic is hosting a dinner for its investor clients and select industry executives focused on Paid Search. John Battelle will kick the evening off. In preparing for this dinner I have had the opportunity to think back a bit over the past 10 years (!) since I first became involved with Internet marketing.

With the imminent public offering of Google, many investors see search engine marketing as the next great frontier for the Internet. The fact is that as early as 1995, advertisers were looking to connect to consumers through the search medium. At the time I was helping out my friend Scott Heiferman to connect advertiser’s web sites to media web sites through what we called “link marketing.” We spent a lot of time managing Excel spreadsheets that listed various media sites and the formats that they accepted for “banner” advertisements. This was before there were keywords to buy, much less common banner standards to run.

One of our first media clients was Kevin Ryan at United Media which ran the Dilbert Zone. There was no standard media format or pricing methodology, not to mention agreed upon traffic metrics, at the time. I remember calling up one of Intel’s advertising agencies, DSW in Utah, and negotiating a $10k monthly placement fee on top of the Dilbert strip. This was in July of 1995 and clearly shows how far the web has come in terms of accountability. Marketing on the web is now far more science than art.

* * *

In terms of the emergence of Paid Search as a discrete phenomenon, I was fortunate to be an innocent bystander at its inception. It was the middle of 1996 and Bill Gross had recently sold Knowledge Adventure to Cendant and had then launched a new kind of Internet company that was going to incubate his ideas called Idealab! It was modeled after a company outside of Boston called Thermo Electron that pioneered the concept of corporate incubation.

Steve Glenn introduced me to Bill when I was the CEO of SiteSpecific and we were developing some innovative Internet marketing techniques using syndicated content and direct response. I remember going to visit Bill in Pasadena, and when I walked into his office he was standing at an large 20" monitor using AltaVista. This was early, when Digital had just released AltaVista as a speedier version of a search engine. I remember Bill raving about how good the engine was, before we hunkered down to business and tried to figure out a way for Idealab! to invest in SiteSpecific. While I was not able to figure out a deal that would work for the rest of our shareholders, I remained in touch with Bill.

In the middle of 1998, after I had sold SiteSpecific to CKS and was winding down an outsourced concierge service that didn’t scale properly (ie www.root.net) I met with Bill and Idealab! again in Pasadena and discussed getting involved. Bill was raving on and on about wanting to reinvent search and had this crazy idea for allowing advertisers to pay for having their search results appear first. How crass, I thought. Bill asked me if I wanted to help him run his new search engine company and I politely declined.

As it happened, Bill found another (albeit longer haired) entrepreneur named Scott Bannister who had created a nifty little app called SubmitIt. SubmitIt was a simple web page where one could list a web site and have it registered at multiple search engines. Bill partnered with Scott to create the underlying business model and pay for placement algorithm that became Goto.com and later became Overture. As far as I can tell, this was the genesis of Paid Search.

It took Goto.com/Overture a few years to prove that consumers’ interests in high quality results could be served alongside of the commercial interests of advertisers. Insofar as advertisers only pay for the clicks, in a traditional direct response fashion, this made the model that much more enticing than the banner model where advertisers were paying on an impression basis.

* * *

When I look back to 1998-1999 and the advent of Goto.com as a business model and Google as an emerging search monopoly, it now feels as if this was the tipping point between the Web as a publishing medium and the Web as an advertising medium. Not that the two aren’t interrelated, but simply that what was once implicit (commerce drives content) was now being made explicit. At SiteSpecific in 1996 we worked with a number of our advertising clients (Travelocity, N2K, NECX) to buy media on a pay-for-performance basis. We ourselves felt that we should be paid commissions on success, not guarantees for placement. We were young and fiscally reckless, I guess, and thank G-d that the online media outlets wanted CPM guarantees and would not go for performance based pricing. In retrospect it is pretty clear that if SiteSpecific were around today, we would be a SEO optimizing keyword campaigns as opposed to an agency creating interactive advertisements.

It is now mid 2004 and the Web seems to be about to move through another key phase. Only days ago Google began offering image ads. Key word prices are going up across the industry. Large consumer package goods companies such as P&G are reported to be getting re-engaged in web marketing in a big way. All of this points to a shift away from direct response and towards branded impressions as a driver of online value. In the same way that the best investors “buy straw hats in Winter,” it would seem that the equivalent is true online. Some of the more successful online commerce businesses (ie Netflix, Expedia, EDiets) succeeded in recent years because of the inefficiency of key word prices for their categories. Now that the Paid Search marketplace has become more efficient, that arbitrage opportunity is gone and yet at the same time the perceived value of an impression (not a click) is at a lowpoint. With the massive adoption of broadband, the free impressions offered by the search engines and some of the innovations in multimedia advertising, it would not surprise me if a new group of lifestyle brands (as opposed to commerce engines) take advantage of the opportunity and build valuable franchises in the next few years.

In the Spring of 2002, when the market was in the process of capitulating, I wrote a few pieces of investment research focused on the Internet sector. This was before I came up with the idea for Majestic Research and before I met Tony, Eric, Jim, Yan, Michael, Don and the rest of the team I am lucky enough to work with now. One of the analyses I did was on Overture, and specifically on the competitive dynamics with the nascent Google. As you will see, I was wrong in a number of ways: Overture not only grew in value but arguably has been the number 1 driver of Yahoo's market cap going from $10b to more than $40b in the past 2 years. Bill Gross, regardless of how much stock he unloaded in Overture, must be credited as the inspiration for Google's Ad Words program. Finally, as you will see, I am a much better prognosticator than stock picker. Even though Overture dropped more than 10 points within a week after I wrote the short-biased report, it ended the year significantly above the $10 price I anticipated. I have since learned not to get involved with research that has price targets or stock recommendations, and leave the equity analysis to members of my team far more capable than myself. Click here for the report I wrote in April 2002 on Overture.

For the past few months I have been using another Idealab! application called X1 which indexes all of one's email, files and contacts locally and provides a superior search experience than Microsoft. It does a better job as a search interface to my Outlook mail than Outlook itself. I wouldn't be surprised if Yahoo buys X1 and integrates it as a premium, client side extension of Yahoo's core search and directory offering. At PC Forum a few months ago, Bill also discussed a new search engine he was working on. Will have to keep up with this development as well.

In closing out this post, and before turning back to my normal Wall Street rants, I thought it might be useful to describe as succinctly as possible the key drivers of the Internet sector:

Amazon is the best single merchant on the web and understands how to sell better than anybody else.

EBay offers the broadest selection of merchants and therefore guarantees the greatest amount of choice for consumers.

Google is taking on the role of Kinkos, a convenient, self-service outpost for businesses big and small to market their products and services.

Yahoo is the AOL of today.

AOL is the ATT of today.

Microsoft is Microsoft

Comments

[John Furrier]

Good post. There were three companies in 1996 pioneering paid search. Labrador Software (which I founded), Centraal (RealNames), and GoTo. Bill won that battle big time. I remember because I walked out of VC meetings either in front of or behind Bill Gross and Keith Teare.

Google was an innovator not a pioneer in paid search. It basically fell on their head from RealNames and GoTo.

[Tony Fagan]

Nice post.