Search engine revenue models - Article

Search and rescue
Search engine providers face very real cash concerns. The fiscal pressure waves of the dotcom bubble bust have only been amplified by the recent stock market slump. Lack of profitability has caused several familiar names to disappear from the industry; RealNames, WiseNut, WebTop, Go.com (formerly Infoseek) and Excite (although this has recently re-emerged in Europe via Internet Service Provider Tiscali).

This contraction is not limited to search services - more and more publishers are charging for what they once provided for free (often labelled as 'subscription services' or 'premium content'). It is against this background that search services have been 'monetising' searching.

Flowing revenue streams?
Search engines and web directories have typically had three main revenue streams: advertising, providing search results at third party sites and, in some cases, adopting their technology for internal company networks, usually referred to as 'enterprise search'.

Historically, online advertising was dominated by dotcom firms (accounting for 70% of all online ad spend in 2000 according to www.emarketer.com) - typically using simplistic banner ads. However, despite the sharp contraction in ad revenues experienced last year, new advertisers are returning to the web, attracted by its measurability. Three significant changes have occurred in this area:

sites delivering content customised to a niche target audience are attracting greater advertising spend than generic portals such as AOL and Yahoo.
it is large established corporates that have integrated new media activities as part of the overall marketing mix that are driving ad spend.
several new forms of advertising have been widely adopted. Whilst most of these are quite intrusive (e.g. pop-up windows, vertical 'skyscraper' ads, floating 'shoskele' animations etc.), it is the simple text-only ads that appear within search engine results that have attracted the greatest criticism.

Paying for performance
Over the last two years, search engines and web directories have increasingly been charging companies to be considered for indexing. Whilst paid inclusion merely guarantees that a site will be crawled or reviewed and then listed somewhere within the index or directory, paid placement prominently places some promotional text and a web link within the search results. Integrated with the editorial content of the search results, these advertorial links were usually euphemistically disguised as 'featured' sites or links.

For paid placement, (also known as Pay-for-Performance or P4P) marketers sponsor a keyword that's relevant to their company/product/brand. In the UK alone this market has grown from nothing to £25M - £35M over the last two years. There are currently only three providers of P4P - market pioneer Overture Services Inc. (acquired by Yahoo in July 2003 for US$1.6 billion), E-Spotting and Google's AdWords Select. If using Overture (US and UK) or E-Spotting (Spain, Italy, Germany, France, UK) (E-Spotting merged with US company Findwhat.com in February 2004, and rebranded as MIVA in June 2005),marketers pay per click for each visitor visiting their site. If using Google they pay for their ad to appear in the right hand margin of the search results page. The ad only appears within the search results if it matches the keyword the user has been searching on.

Whilst paid placement delivers targeted advertising and relevant site traffic for marketers, it is the innocuous integration of these ads within the editorial search results that prompted US consumer watchdog Commercial Alert, to file a complaint of 'deceptive advertising' against several major search engines with the US Federal Trade Commission in July 2001. A year later the FTC upheld the complaint and recommended that search services improve disclosure of paid content within their results; for example changing the presentation or placement of paid-for search results so that they become more clearly differentiated from editorial search results. Several search providers such as AltaVista and FAST subsequently implemented such changes to the paid-for results they received from the P4P providers. Of the three P4P search providers, only Google was found to already sufficiently differentiate results.

This pay-for-performance philosophy has also extended to web directories. In May, BT Looksmart (separated from BT in December 2002 to form independent ad network LookSmart.com) switched from charging a one-time review fee to be included in its commercial listings to charging customers continually according to a cost-per-click programme. Needless to say this caused uproar with existing customers, and a proposed class action lawsuit claiming breach of contract and misleading advertising has been filed against LookSmart. In February, a US weight loss company launched a $400M claim against Overture and others, alleging that Overture had allowed competitor firms to bid for keywords associated with the company's Body Solutions brand name. This is reminiscent of earlier lawsuits concerning keywords incorporated within web page meta tags.

Having experienced spectacular growth over the last two years, the three main P4P providers are likely to experience tougher legislation and legal challenges that will increase their operating costs whilst such a lucrative market will undoubtedly attract new market entrants (possibly MSN), thus increasing competition and eroding profit margins. Increasingly they will have to pay to maintain their own performance.
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Portals search
With much fewer dotcom companies to licence search engine solutions the market for providing search results at third party sites has also sharply contracted. Large portal sites such as AOL and MSN are now a mature market, with only slow future growth prospects in the area of industry or subject-specific vertical portals. The BBC bucked this trend to launch a major new Google-powered search service on its site that was free from paid-for listings. In a recent interview in the Financial Times, Inktomi CEO, David Peterschmidt admitted that most of the company's 60 to 75 small website customers have disappeared in the last year. The company also lost out to Google to provide search results at web directory Yahoo! Hardly surprising that it has been focusing its efforts on the market for enterprise search. (Inktomi was acquired by Yahoo in 2003, for US$235 million)

Enterprise surprise
Enterprise search is the application of technology developed for web-wide searching to company intranets and systems. Not long after its acquisition by Divine Inc, popular search engine Northern Light shut down public access to its search engine and the company now focuses exclusively on the enterprise market. Along with Inktomi, it is providing new competition to established stalwarts such as Verity and Autonomy. However, at this stage, Verity and Autonomy enjoy a comfortable lead over new rivals, both in established client base and product sophistication (Autonomy acquired Verity in November 2005 for US$500 million). UK-based consultancy and research organisation Ovum, has forecast that the global market for enterprise search solutions will be $15 billion this year. Certainly there has been a big uptake in enterprise search by various departments in the US Federal government since Sept 11th. back to the top

Future growth
Whilst Google has launched a new paid for research service, Google Answers, that will possibly make a nominal contribution to profits. Others have tried similar services in the past without much success. LookSmart Live was launched in 1999 only to be gradually phased out whils Yahoo's 'Expert Site' has had little success. Future growth will most likely be in providing search results via new channels - TV-based web access, wireless Internet and particularly 3G mobile phones with their anticipated geo-location services. Norwegian search provider FAST wants to be the market leader in mobile searching and has already developed services to be integrated into mobile portals operated by Nokia and SonyEricsson. Google has existing relationships with Palm, Vodafone and Japan's I-Mode.

Semantic web
Of the above three revenue streams, advertising is perhaps the most vulnerable if the semantic web takes off. Whilst I will be covering the semantic web in more detail a future article, automating low-level information retrieval such as using search engines with 'intelligent agents' and machine-to-machine information interrogation and processing will severely threaten an advertising business model that depends on 'eyeballs'. Today users conduct a manual search for a particular term they have entered to a search engine. Tomorrow they will be issuing high-level requests to agentware on their Internet-connected device. Each request will be broken down into a set of discreet search instructions that will be conducted automatically by agents on the web in an 'information value chain' that results in a compiled high-level answer rather than today's list of possible matching results. In the semantic web, directories will be used extensively by agents so its possible that paid inclusion at directories such as Yahoo and LookSmart would become more attractive to advertisers - after all humans would not need to actually visit search sites.

The recent stock market falls have accentuated the desperate need for surviving search companies to attain consistent profitability, after such long periods of losses. Combined with growing user concerns over the editorial integrity of search results and a tougher legal environment it is hardly surprising that the search engine industry is facing its greatest crisis of confidence in its seven year history. Whilst the search market has matured to the point that there are now sufficiently high barriers to entry for any new incumbents, expect further casualties amongst the remaining survivors.

Information World Review is Europe's leading information industry publication. This article is reprinted in its entirety with permission from Learned Information Europe Ltd. All material copyright Learned Information Europe Ltd.