MetaMuse

How Search Engines Limit Ad Inventory to Optimize Revenues

In classic supply and demand analysis, increased supply will result in reduced prices and decreased supply in increased prices -- at any given level of demand. Similarly, at any given level of supply increased demand will result in higher prices and decreased demand in lower prices. This is why CPC rates for search campaigns have become so damn high -- demand is high, and supply is being limited.

The reasonable question is "if search engines want to make the most money, then why not always list 10 ads on every search engine results page?" I always knew that the search engines (well, Google anyway) used scarcity tactics to make the most money, but I'd never actually done the math. It seems Brad Libby at The Search Agents has. You should really check out his post for the details, but here's the punchline:

Note how in his model, search engines maximize clicks with 3 ads yet optimize revenues with only 2 ads.

Google Targeting Ads by Credit Score

Neal forwarded me the MediaPost article "Google Tries Hand At Targeting Consumers With Good Credit" which describes how Google has been testing the ability to lay consumer FICO scores on top of its Google Content Network to identify/target people with good credit. Some interesting takeaways:

• will be offered to Google text and display advertisers.
• partnered with Compete.com and their panel of 2M opt-in users, which means it will not be "explicit" FICO score information but rather paneled data (Web sites which index well for high credit scores). Compete's sister company integrated the FICO data with searches done by participating consumers who applied for a credit card between January and March 2009.
• According to their marketing person, "Google's Content Network can reach 70% of credit card applicants with a high FICO score, 87% of mortgage applicants with a high FICO score, and 90% of the people who visit small business sites who have a high FICO score."
• Consumers with high FICO scores use non-branded search terms more than branded -- approximately 60% of high FICO searchers.

Top Search Advertisers on Google

Interesting stats found this morning at AdQuants, a company that does a lot of SEM analysis. They list the top advertisers for Google, Yahoo and Microsoft by number of advertisements, and by average daily ad spend.

What's most interesting to me is the volume of ad arbitrage revenues Google takes in. I looked at the top 100 advertisers on Google (by daily ad spend) and did a quick SWAG on how much is pure ad arbitrage (they advertise to get traffic, which they monetize thru ads themselves) or affiliate arbitrage (they advertise to get traffic, which they monetize thru affiliate relationships), versus real businesses (United, Nordstrom, HomeDepot, Chase, etc.). Based on this rough analysis, appears that:

• >19% of Google's ad revenues are based on pure ad arbitrage.
• >39% of Google's ad revs are based on affiliate arbitrage.
• Which would mean that the majority of Google's ad revenues are based on arbitrage! For instance, AOL, Yahoo and Ask.com are all in the top 12 advertisers.

Full lists below. And if you click on the links, AdQuants gives you more info.

Recent Tidbits: Online Advertising Blogs

Just catching up on a slew of posts from blogs that cover the online ad space. Here are some tidbits that caught my eye.

Interesting comment from a recent Adotas blog post regarding targeting people instead of pages:

In a recent eMarketer study, 90% of advertisers said they plan to use ad networks in the coming year and the top two factors that they will use to differentiate networks were the quality of inventory and the audience targeting. Networks that have quality inventory and rich audience targeting capabilities should be some of the first places marketers and agencies look in 2009 and beyond to keep revenues flowing at lower costs and greater efficiency.

From Fred Wilson summarizing the comScore whitepaper on the unseen benefits of display advertising, compared to search:

It’s clear that display advertising, despite a lack of clicks, can have a significant positive impact on:
- Visitation to the advertiser’s Web site (lift of at least 46% over a four week period)
- The likelihood of consumers conducting a search query using the advertiser’s branded terms  (a lift of at least 38% over a four week period)
- Consumers’ likelihood of buying the advertised brand online (an average 27% lift in online sales)
- Consumers’ likelihood of buying at the advertiser’s retail store (an average lift of 17%) 

The whitepaper also reminded readers that while search advertising was far more effective than display, display ads have 10x the reach that search ads do. I've pointed out before the difference in volume  and eCPM rates of search vs display advertising and comScore points out that marketers ought to utilize both for maximum effectiveness.

I also noted in the comments two specific quotes from Gian Fulgoni, comScore chairman:

• Ffour independent studies (one of them conducted by comScore) have now shown that at least 30% of Internet users delete their cookies in a month.
• Average click through rates on display ads have dropped to under 0.1%

4th Quarter Click Fraud Data

According to Click Forensics, click fraud (illegitimate clicks on per-per-click ads) for 2007 increased 15% over 2006.  Key findings from data reported for Q4 2007 include:

• The overall industry average click fraud rate rose to 16.6 percent for Q4 2007. That's up from the 14.2 percent click fraud rate for the same quarter in 2006 and 16.2 percent for Q3 2007.
• The average click fraud rate of PPC advertisements appearing on search engine content networks, including Google AdSense and the Yahoo Publisher Network, was 28.3 percent in Q4 2007. That’s up from the 19.2 percent average click fraud rate for the same quarter in 2006 and 28.1 percent for Q3 2007.
• Q4 2007 click fraud traffic from botnets was 15 percent higher than click fraud traffic from botnets in Q3 2007.
• In Q4 2007, the greatest percentage of click fraud originating from countries outside North America came from India (4.3 percent) Germany (3.9 percent) and South Korea (3.7 percent).

A couple pretty bar charts and click fraud "heat map" of the world can be found here.

Search Engine Trust Declines

Found this post very interesting regarding the decline of trust in search results.  Source was USC research. Findings:

The survey found that only 51% of people trust information provided by search engines, down from 62% in 2006. Google, as the most popular search engine in the United States, isn’t trusted by nearly half (49%) of the people who use it, an interesting result.

... this despite ...

The Internet is perceived by users to be a more important source of information for them — this over all other principal media, including television, radio, newspapers, and books.

I would expect a fairly strong indirect correlation between search result trust and the extent of SEM/SEO and rank gaming. Maybe Jason is right.

CPM Rates Will Rise. They Have To.

It's been more than a week since I first read about JPMorgan's forecast "Nothing but Net". The key takeaways for me were that (a) average CPMs bottomed in 2007 at $3.31, and (b) 83% of graphically advertising in 2007 sold for less than $1 CPM.

What's it going to take to increase CPM rates? Will average CPM rates continue to decrease, or was 2007 truly the bottom?

JPMorgan forecasts increasing CPM rates. Andrew Chen feels that CPMs will decrease over the next year, possibly quite a bit. Pat McCarthy believes 2008 will result in average CPMs for display ads about the same as 2007. The viewpoints rightly center around the following points:

• Use of technology and targeting improving, enabling a more efficient market and better performance, which increases the rates. (behavioral advertising, exchanges, etc.)
• Growth in online advertising market stimulates increased demand and therefore increased rates.
• Available ad inventory is increasing, which softens/decreases rates. Much of the increase in ad inventory is in social media, which has been notoriously hard to monetize.

I think in 2008 we'll see two overall market factors that will initially result in some correction to the graphical advertising market within 2008, but then by early 2009 give way to ongoing increases in CPM rates:

1. Economic uncertainty -- this will result in brand marketers, who over the last couple of years incurred negative ROI on CPM advertising campaigns, to pull back their spending and focus on ROI.
2. Escalating CPC rates -- the search engine advertising market has been on a tear for the past several years. CPC rates will only get more competitive (unreasonably so?), which will encourage advertisers to reconsider display advertising.

Escalating CPC rates and better targeting/technology (IMHO) will be the major forces behind a rebirth in display advertising, rate increases, etc. Think about this. If you're a marketer seeing your bid rate for keywords exceeding $2 per click, the effective CPM rate you're paying is high. At .25% CTR, you're paying $5 CPM. At 1% CTR, it's $20 CPM.  If you're paying $2 CPC rates , all you need is a measly .05% CTR to put $1 CPM inventory on par (which is what 83% of the inventory is selling for, and also 5-10x the price of most social media inventory these days)! As CPC rates escalate, new targeting techniques for CPM ads will shift dollars back towards the display market -- assuming ad networks rise to meet the market opportunity. I think they will, slowly but surely. They have to, in order to grow their business.

The display advertising market is frought with inefficiencies. I continue to see leggings ads on Facebook, Tallahassee (Florida) ads on Yahoo, and credit repair ads on MSN -- none of these are even remotely interesting to me. It doesn't work!! Yet these are leaders in today's online advertising market. At the same time, advertisers are increasingly demanding ROI, as they should be. CPM rates have to go up at some point, as the market finds and corrects the inefficiencies, and balances ad spend between search and display.  There's just too much of a gap right now, which represents too much of an opportunity for the online ad market to pass up.

Online Ad Spend Increase - 2008

Interesting forecast on 2008 global advertising market, according to GroupM. Some key takeaways:

• Internet ad spending is expected to exceed 10 percent of global ad investment in 2008 for the first time ever.
• Search will comprise 65-70 percent measured online advertising in 2008, up from 50 percent in 2005.
• Another first, in one country - Sweden - online advertising is expected to be the largest single medium. The U.K. and Denmark are likely to be the next in line.
• Advertising spending in newspapers is expected to continue to suffer, and new softness is already evident in some large categories such as automotive, airlines, and retail. The continued heavy loss of classified advertising to the internet continues to do the most serious damage.

Google Search Share Increases

Recently read that the percent of US Web searchers who use Google increased from 57% in September to 58.5% in October. While each of the top five Web search providors all showed at least 5% growth in the number of searches, Google was the only to increase its share of the market.

Yahoo had 22.9% of the US search market. Microsoft slipped to 9.7%. Ask was flat at 4.7% and Time Warner / AOL fell to 4.2%

What If PageRank Didn't Exist

What if PageRank didn't exist? Wouldn't that solve a lot of problems if there was no longer a "score" for people to manipulate, and bitch/whine about?

This morning I woke up to find that everyone seems to have a PageRank of zero. It was after reading  Tony's post on what PageRank says about Google. I used 3 different tools, such as Check Page Rank, What's my Page Rank, and Smart Page Rank. I checked 5-10 different sites, including my own and popular sites such as WSJ and Techcrunch. All zero.

I suppose this is only an anomaly -- perhaps the PR algorithm is having a bad day.