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A Brief History Of Pay Per Click Search Engines
A Brief History of Paid Search
While you don't need an understanding of the history of pay-per-click search engines to implement your website promotion strategies, you can still benefit from a historical perspective of the ever-evolving world of sponsored search listings. Understanding the evolution of Paid Search puts you in a better position to implement effective promotional strategies. This article will take you from the first pay-per-click search engine through the rise of Google's Adwords system and explain the principles behind the success of quality score search engines.
The First PPC Search Engine
In the beginning, there was Goto.com (Old NASDAQ Symbol: GOTO). Goto.com came from Idealab, a business incubation company that provides entrepreneurs with the resources to develop starter businesses. Goto.com was the first online company to succeed in creating a paid-positioning online advertising program.
While Goto had a large amount of online advertisers that were willing to pay for advertising space, it also faced the standard challenge for a new online company: a lack of exposure. Without substantial traffic, the advertisers made little money and Goto collected little revenue.
Goto solved this problem by developing partnerships with high-volume search engines. The search engines would display Goto.com brand sponsored listings in the best space of their search results (as shown in the illustration below). In return, Goto.com would split their ad placement revenue with the search engine. This partnership strategy worked so well that Goto.com decided to focus their entire business strategy on partnerships with search engines, rather than trying to create their own traffic. With the change in their business model, Goto.com decided to change their name to Overture (Old NASDAQ Symbol: OVER).
Overture continued to develop search partnerships, growing to include Yahoo, MSN, AOL, Alta Vista, Ask, and dozens of other well known search engines. At their peak in 2001, Overture's advertisements appeared above 85% of all online searches.
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(While Overture couldn't close a deal with Google among its original clients, you should remember that, at the time, Google's total market share was less than 10%, rather than the more than 50% that they control today.)
Overture & Google
Despite Overture's aggressive offers, Google (NASDAQ: GOOG) decided not to display Overture listings on their search results. Instead, Google created a paid search system that was based on cost per impression, rather than cost per click. Their system charged advertisers a CPM (Cost Per Mil, or Cost per 1000 times an ad is displayed), breaking from Overture's model and proclaiming Google's independence in the paid search engine market.
After six months, Google abandoned their impression-based system and developed their own cost-per-click bidding model, using a sophisticated method that Overture couldn't match. As time went on, Google's steadily increasing market share and ever more attractive CPC paid search engine attracted several of Overture's former partners, including AOL and several smaller search engines. Analysts predicted that Google would become a formidable competitor in the paid search market.
Yahoo & Overture
With Google's quick growth, Yahoo (NASDAQ: YHOO) realized that they needed to own and control their own paid search engine. Yahoo was faced with two choices: they could build a paid search engine, or they could buy an existing paid search engine. So, in 2003, Yahoo acquired Overture for $1.7 billion. This deal also worked to Overture's advantage, as they needed Yahoo's resources to compete with Google. After the acquisition, Yahoo began the process of re-branding Overture as Yahoo Search Marketing.
Google Goes Public
Prior to 2004, Google was a privately owned company. Market analysts and competitors could only guess at their profits, as Google wasn't required to report any earnings, but their performance in other areas had already made waves in the industry. Then, in the spring of 2004, Google became a publicly traded company and began to submit quarterly reports to the Securities and Exchange Commission. These reports publicly disclosed all of their financial details, including the statistic that their competitors craved: their paid search network revenue.
Legend has it that Google's first quarterly report landed on the boardroom table at Yahoo like a nuclear bomb (and that Yahoo is still suffering from the atomic fallout). To Yahoo's amazement, Google was generating three times more revenue per search than Yahoo was. Controlling a larger share of the market was one thing, but the statistics showed that Google was generating three times as much revenue as Yahoo was using the same search terms.
Linear Bid Systems vs. Quality Score Bid Systems
The initial shock of Google's profitability quickly became a rush to imitate Google's success. How did Google generate so much money per search? The difference was in Google's innovative new bidding system, which was more sophisticated than Overture or any other engine then available.
Up to this point, Overture had used a Linear Bid System to determine their paid advertisement positioning. In this system, the advertiser with the highest bid was guaranteed the top position in the search results, giving the advertisers total control over their search engine placement. Because this system only factored cost per click, irrelevant and poorly designed ads were often listed in the top positions.
Google understood that poor ads generated fewer clicks and, therefore, little revenue. To control poor ads, Google created a Quality Score Bid System. This system judged advertising by their Click-Through-Rate, or the percentage of total viewers that actually clicked through to the advertised sites. Because more clicks translated to more revenue, Google rewarded ads with higher click-through-rates with top positioning on their search results and discounted keyword bids. They also measured and rewarded other relevancy factors that predicted high click-through rates in the future, and penalized keyword spammers and other abusers.
By applying sound economic principles, Google's stunning secret method had created a system that was three times better at generating revenue and given the company an advantage for many years.
MSN & Yahoo
After Google's incredible announcement, Microsoft was faced with a troublesome decision. Microsoft could never join forces with their arch-rival Google and display Google listings on MSN Search. But, on the other hand, Microsoft couldn't continue with Overture when Google had proven that it was possible to generate three times the revenue. So MSN began building their own quality score bid system, which replaced Overture's listings when it was launched in 2006.
Yahoo Reinvents Itself
While Yahoo had also announced that they were scrapping their old linear-bid engine within a few months of Google's public announcement, they faced many lengthy delays in updating their bid system. By early 2006, Yahoo had lost all of their big search partners and was coasting on their former popularity. Yahoo finally launched their own quality score engine in October of 2006, but it would be February of 2007 before all of their linear bid based accounts were migrated to the new system.
By this time, however, Yahoo's shareholders had begun to realize that Yahoo's management had squandered Yahoo's lead over Google. In response to this strategic catastrophe, Terry Semel was forced to resign as CEO of Yahoo in July of 2007. As of this writing, Yahoo is desperately trying to regain lost market share, both in consumer searches and search engine partnerships.
The Paid Search Engine Market Today
The following is a breakdown of 2007's paid search engine market: Quality Score Systems
. Google Adwords - 60% reach
. Yahoo Search Marketing - 25% reach
. MSN AdCenter - 10% reach
Linear Bid Systems
. Everyone Else - 5%
While linear bid systems control a seemingly insignificant 5% market share, it is worth your time to learn linear bid strategies and implement them. Ultimately, however, your main focus should be on how to succeed on quality score bid systems.
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