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Engine of Change

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Has it really come to this? After decades of catchy jingles, snappy taglines and big-budget, celebrity-filled 30-second TV spots, has the ultimate in advertising come down to an online search box and a pastel-colored, text-only ad with less visual appeal than a Sunday circular?

Walking the floor of the Search Engine Strategies conference two weeks ago, it was an easy thing to wonder. The four-day event, held at the New York Hilton, had the air of some electric online carnival, with companies ranging from Yahoo! to search-engine marketing specialist iProspect handing out tchotchkes and peddling their wares. Keynote speakers drew crowds of up to 500 people, and the halls were atwitter with what search executives like to say is the truth about online advertising: that the medium's recent growth spurt comes almost entirely from search. By October, the traveling conference will also have visited Tokyo, Toronto, London, San Jose, Calif., and Stockholm.What a traditional marketer might notice is that walking amid this Kool-Aid drinking crowd is Procter & Gamble's Ted McConnell, who carries the title of information-technology fellow at the company but who is also global marketing chief Jim Stengel's point man on search. As attendees course through the halls, looking for the latest in bid-management tools and search-engine optimization strategies, McConnell opines, "Search is a 'This changes everything' phenomenon." If he's right, search may be every marketer's dream come true—and every art director's worst nightmare.

When McConnell says such a thing, he's not talking about the hype—and anticipated spring IPO—of Google, which, with 39.4 percent reach among Internet users, according to Nielsen NetRatings, may be the sum total of what most people know about search. He's talking about search's place in a continuum that includes the fragmentation of media, the rise of DVRs and other changes that threaten marketers' ability to push messages to consumers. Now, McConnell says, "consumer-pull reigns."

Yes, something big, profound and potentially bubble-inducing is going on inside those little search boxes. The Google IPO is only the most high-profile example of a number of recent strategic moves by the major online players to make a search land grab, starting with Yahoo!'s $1.6 billion purchase last year of Overture, which is No. 2 after Google in distributing sponsored links to major sites. Year-on-year, Yahoo! reported an 84 percent rise in marketing-services revenue in 2003—a phenomenon the Sunnyvale, Calif.-based company attributes largely to search.

While that deal secured Yahoo!'s place in search advertising, the company recently unveiled its natural search service, jettisoning a partnership it had with Google. One reason for that soon became clear when the company announced a "content acquisition program," or, as it's more commonly known, "paid inclusion," a controversial practice in which sites must pay to be included in organic listings. What makes it controversial is that users aren't tipped off that money has changed hands, unlike in sponsored search, where the clearly marked text ads run on the top and side of search pages. Piper Jaffray estimated additional annual income for Yahoo! at $100 million; Google stands firmly against the practice.

Then there is Microsoft, which uses Overture to distribute its sponsored links. The Redmond, Wash.-based software giant plans to enter the fray with its own proprietary search tool, but the initiative is so tightly guarded, company executives won't come to the phone to talk about it. When the company does make its play, it is almost certain to drop its affiliation with Overture, and stop putting money in Yahoo!'s pocket.

America Online, meanwhile, which licenses search from Google, wants to get the message across that "we are Google, but we're a whole lot more," says Jim Riesenbach, svp of the search and directional media group. Through a strategy of incorporating search into nearly everything the service offers, Riesenbach says the Time Warner unit has doubled its search revenue.

The second-tier players are making moves as well. Earlier this month, Ask Jeeves bought little-known company Interactive Search Holdings, owner of Excite.com and iWon.com, for $328 million; its stock shot up 43 percent. Ask Jeeves also said it would cease its paid-inclusion program.

Most of the major online properties have done minimal advertising about their search offerings—a combination of post-dot-com-bubble conservatism and the fact that Google got where it is today without ever running a consumer ad campaign. When the whole object is to attract online users, there's little to suggest a $100 million offline ad budget will send people to their keyboards. "For the most part we're going to be business as usual," says a Yahoo! representative when asked about marketing plans for its new search service.

Those who lost millions in the dot-com downturn—advertisers or individuals—may look at all the activity with a skeptical eye. Why should search be hot now, when it's been around since the earliest days of the Web? Those in the search industry cite a number of reasons, from improved technology that produces more relevant results to increased broadband penetration, which shifts computer usage from every now and then to day-in, day-out. In the last four years, Google usage has grown from 10 million to 200 million searches worldwide per day. While some of that is no doubt a market share shift, most of it has to do with increased search usage.

The biggest difference? With search, advertisers put information in front of people who are actively looking for it, and they know the value of their investment. That makes money for everyone. "The banner business could not provide the same relevancy that a Google or an Overture could provide," says Dave Carlick, a former Poppe Tyson executive and DoubleClick founder who now sits on the board of Ask Jeeves.

Here's how it usually works: In a case study presented at the Search Engine Strategies conference, IBM wants to sell ThinkPad laptops. First, the company identifies a number of search terms it believes prospective customers might type into a search engine as they research their purchase. The terms vary from the general, such as "notebook computer," to the specific, such as "ThinkPad G40 2388-7RU." Then, since advertisers pay only when someone clicks on their ad, IBM determines how much a click on each keyword is worth and begins to bid on each of them against other companies who covet the same search terms. Those who bid the highest get the top spot among the sponsored links on the search page; the others fall in line below it, based on how much they paid. It's as transparent as media buying can be. "[It] weeds out any advertising that's bubble-esque," explains Tim Armstrong, vp of advertising sales at Google.

That transparency, says Dave Morgan, CEO of online targeting firm Tacoda Systems, makes the search category worth watching. "If online advertising in general starts understanding that, or advertising starts understanding that, then we can see that kind of growth in all sorts of categories," he says.

Unlike the first iteration of online advertising, when advertisers shelled out millions of dollars with little idea of what they'd get in return, this model is all about proving the worth of ads—and refining or scrapping them if they don't deliver. "We never did upfront multimillion-dollar contracts," says Overture president Ted Meisel. "So in that sense we never engaged in trying to grab a big part of the [venture-capital] money."

Meisel knows of what he speaks. In 2001, he re-engineered an also-ran consumer portal, GoTo.com, into a company focused solely on providing search advertising to other sites. As the rest of the online ad business was tanking, dropping by more than 14 percent in 2001, according to TNS Media Intelligence/ CMR, Overture posted 154 percent growth and turned a profit. Today, the Yahoo! unit claims 100,000 advertisers. (Google says it has 150,000.)

Those six-figure client tallies indicate two things: that the two main competitors in paid search are wildly successful, and that most of their advertisers are mom-and-pop companies. This is not Cedric the Entertainer's milieu. Type in "cat food," and one is much more likely to see an ad for "Dr. Jane Bicks' Health Food for Pets" than a coupon for cents off Friskies at Stop & Shop. In fact, P&G was one of the only major advertisers at the Search Engine Strategies conference.

A just-released study from Jupiter Research supports the point. Large marketers—defined very conservatively as those spending more than $1 million—are expected to account for only 24 percent of all search marketing in 2004. But their interest is increasing. ConAgra Foods has been experimenting with Google, with an eye toward driving traffic to its myriad sites, which include Hunts.com and Orville.com. "People don't intuitively go to these sites," says Kate Riddell, manager of online marketing at the Omaha, Neb., company. "They need a reason to go."

It takes only minimal research to see how many big advertisers aren't in search. Type in "caulking tile" on Google, and the lead advertiser is Home Depot, but Lowe's is nowhere to be found. On the Overture-managed listings on Yahoo!, the lead advertiser under the same search term is Sanit-Red, an obscure Plymouth, Ind.-based company. On one day in early March, the phrase "plasma-screen TV" brought up no sponsored listings on Yahoo!, even though the TVs are among the hottest consumer-electronics offerings.

The category now is a small company's paradise—cheap, trackable advertising with no production costs. Some industry experts report three- or fourfold increases in the price of some search terms; it seems only a matter of time before smaller companies are priced out of the market. "When the bidding and price for keywords increases, larger advertisers may still have a positive ROI, while smaller businesses [may] have a negative one," says Jupiter analyst Niki Scevak.

But larger advertisers have work to do first. "We've had conversations with Fortune 100 companies and said, 'What would be [your] cost per lead?' " says Dave Carlson, CEO and founder of Go Toast, a unit of online media company aQuantive that automates tracking and bidding. "It's fascinating to me how many people don't know the answer to that."

But when they do know the answer, search can go from a simple buying and bidding proposition to a complex, surgically targeted ad medium that is constantly improving its performance. It's given rise to an entire substratum of companies whose entire business is to give clients the best search ROI possible. Tacoda's Morgan describes startups where rows of employees are "banging away on their keyboards and constantly bidding and optimizing."

Take IBM. In the aforementioned case study, the company revealed just how complex its search initiatives are. It has indeed bought "ThinkPad G40 2388-7RU," along with as many as 50,000 other terms. (The list might include every ThinkPad model, where to buy the computer offline and so forth.) It has also bought between 100 and 500 terms to describe basic product attributes a user might want and some 50 other terms at the broad level of "notebook computer." It is a constant process of refinement, and it's not even the most complex effort out there. Carlson claims one of his clients manages 437,000 different terms. You can bet it's not Dr. Jane Bicks who bought all those.

No wonder a whole ecosystem has built up around search. There are marketing boutiques that deal in nothing but search—companies such as WordTracker, which provides software that helps marketers develop a list of keywords, and online ad-management firms such as Go Toast, which automates the bidding and optimizing process. There are also companies like Kanoodle.com, which is pushing the concept of sponsored links into other parts of the Web, signing up affiliates such as CBS MarketWatch to run the ads. (Called contextual advertising, it also has been adopted by Google and Overture.) As of late August, the search industry even has its own trade group, the Search Engine Marketing Professional Organization (SEMPO), which claims 170 members.

If you won't find many traditional clients in the search mix, you also won't find many traditional agencies. Publicis' Saatchi & Saatchi in Los Angeles, agency for interactive-heavy Toyota, has a media planner, Bryan Alexander, devoted entirely to search. "I can't imagine that other agencies are not doing this," he says.

Chris Theodoros, director of worldwide agency relations at Google, just returned from what he saw as an encouraging 17-city, 50-agency road show aimed at demystifying search. But agencies, he says, are still wrestling with what their approach should be. "More and more, agencies are trying to determine whether they should outsource this or tackle it by gaining the expertise," he says.

Outsourcing may make sense. While some clients, such as airlines and computer makers, will rely heavily on search, it's not like McDonald's is about to sell Big Macs online. Besides, no one is saying brand advertising is about to disappear.

On the other hand, search presents a unique window into the consumer mind-set, which is why someone like P&G's McConnell would spend several days at a search conference. Search, he says, reveals the "incredible diversity in the way people address their concerns and their problems."

If that's hard to believe, look at Google's zeitgeist section (www.google.com/press/ zeitgeist.html), which offers a weekly snapshot of what interests Google users. While marketers spun out Atkins-branded products in January, Googlers showed more interest in the South Beach Diet, which hasn't jumped on the low-carb bandwagon. Since the search engine has a 40 percent reach, that's a potentially powerful fact.

The search has only begun.

Search Terms You Should Know

Bid management software—Programs that automate the process of bidding for search terms.

Contextual advertising—Sponsored links that appear next to related non-search-engine-generated content, such as news articles.

Cost-per-click—Price an advertiser pays each time a user clicks on a sponsored link, usually determined in bidding against other advertisers. (On Google, placement is determined through a combination of pricing and click-through rates for each ad.) Also referred to as "pay-per-click."

Keywords—Words a user types into the search box when doing online research on a search engine; in a commercial context, these are the words that are bought by advertisers through a bidding process. Also referred to as "search terms."

Keyword generator—Software that helps Web sites determine keywords related to their content.

Natural search—Search listings that are determined by relevancy to the search terms, not by paid placement. Also referred to as "organic" or "algorithmic" search.

Paid inclusion—Method used by Web sites to ensure that they are included in a search engine's results. Unlike paid placement, paid-inclusion listings are included as part of natural search results, not as part of sponsored links.

Paid placement—Term for online search advertising in which an advertiser's rank in the sponsored links is generally determined by how much it pays.

Search engine optimization—Process of placing keywords in a Web site to secure prominent placement in a search engine's results.

Sponsored links—Text ads that run alongside natural search content on a search engine.