June 4th, 2001
Clicks for Sale; Paid Plaement Is Catching On in Web Searches
By Saul Hansell
New York Times
Even for Bill Gross, the impetuous Internet impresario who created short-lived
concepts like Free-PC.com, the idea for GoTo.com seemed far-fetched. In 1998,
Mr. Gross’s Idealab introduced GoTo.com as a search engine with a difference
Web sites would pay to be included in the search results after a user entered
key words. If someone conducted a search for "roses," for instance,
the florists who paid for a listing would be sure to be included-the higher
the fee, the higher up the list. The idea was widely ridiculed and reviled as
tantamount to having politicians pay to place flattering news articles on the
front page of a newspaper. But three years later, as most other companies that
depend on Internet ads are foundering, GoTo is thriving-not as a search service
itself, but as a provider of search results to other sites. Its paid search
listings are now featured on 7 of the top 10 Web portals and search sites, including
America Online, Lycos, Alta Vista and parts of Microsoft’s MSN. GoTo’s revenue,
which it shares with these other sites, is expected to more than double this
year to $227 million. And its stock, which closed on Friday at $23.43, up $1.07,
has tripled since the beginning of the year, making it Idealab’s best investment
by far. Even more remarkable, perhaps, is that Mr. Gross’s concept that Web
sites should be able to buy their way to the top of search listings is being
copied in one way or another by every major search and portal site. As they
do, the search engines, which are still the most popular gateways to the Web,
are transforming themselves from infinite electronic encyclopedias to the more
prosaic, if profitable, role of universal commercial directories.
Yahoo, the biggest search service, has started listing five sponsored sites
before its normal results. MSN, Excite, Ask Jeeves and About.com also charge
businesses for featured positions in search results. Google offers advertisers
"sponsored links" above and to the right of its search results, set
off by colored backgrounds that may make the paid listings look more like ads
than they do on the other sites. And two of the biggest providers of search
technology- Inktomi and LookSmart, which are both used by Microsoft and dozens
of other big services-have started listing many more pages from Web sites that
pay than from those that do not. And Inktomi and Looksmart collect a fee every
time a user clicks on links to those preferred pages. This growth in paid placement
has done nothing to quell questions about whether they are useful or ethical.
"It’s getting very difficult to tell whether a site paid to be listed or
not," said Danny Sullivan, editor of Search Engine Watch, an online newsletter.
"I’m not opposed to paid listings, but people don’t only want only paid
listings, and that is where we could be heading." The paid search providers
insist that their services are, in fact, handy and honorable. But lately, any
debate tends to be drowned out by the din of Internet companies clamoring for
any source of revenue they can find. "We think the marketer’s interest
in targeting is equal to the user’s interest in relevance," said Ted Meisel,
GoTo’s chief executive. "But our job is not only to enhance search results.
It is also to provide a revenue stream to our partners."
From the outset in the mid-1990’s, Web searches seemed a great medium for advertisers
because inquiring users indicate precisely what they are looking for. Placing
an ad on prime-time TV, Dr. Scholl’s can only hope the foot-weary are watching.
But the Web surfer who types in "bunions" is what marketing folks
call a hot prospect. Initially, the search sites would present the results based
on objective criteria-like the independent classifications of editors, as Yahoo
does, or computer programs that index relevant Web pages according to popularity,
as Alta Vista does.For a while, advertisers were eager to place their messages
above and to the side of these objective search results because they could key
their messages to the search terms. But the effectiveness, and thus the prices,
for such ads have plummeted as users have trained their eyes to ignore them.
"The money is in the search results themselves, not the billboards on the
side of that road," said Evan Thornley, chief executive of LookSmart. "The
question is how do you profit from the search results, when they have been given
away free." LookSmart, he said, is trying to find even more ways to charge
fees for sites listed in its searches, like offering boldface listings as many
telephone directories do. In the case of GoTo, Mr. Gross’s original impulse
stemmed not from any disillusionment with online advertising but from his frustration
with the searches themselves. "At the time, search was horrendous,"
Mr. Gross said. "If you typed ‘books’ on Lycos, half of the top 10 results
were porn, and four of the rest weren’t about books.’ In 1997, Mr. Gross had
bought the GoTo.com Web address. But his efforts to use both human editors and
computer programs to make a better search engine fell flat, he said, because
they would not work across the breadth of topics people are curious about. So
in a meeting at Idealab’s headquarters here, Mr. Gross proposed the idea that
would turn into GoTo. "I said the best way to clean up search results was
to use money as a filter," he said. "Everyone pooh-poohed it and said
it was obscene to charge for placement in a search." But Mr. Gross ultimately
convinced himself that GoTo could be more akin to a commercial telephone directory,
where users accept that the plumber who pays the most has the biggest ad. To
avoid criticism, GoTo.com would even disclose, next to the search result, how
much the advertiser had paid for the listing. The GoTo concept quickly proved
that it appealed to the advertisers-the owners of Web sites, who pay for placement-especially
small businesses. Larger companies had all sorts of ways to promote themselves
on the big portals like Yahoo and AOL, but such deals were too expensive for
smaller sites. GoTo let operators of small sites buy listings, by credit card,
from GoTo’s Web site, initially with a $25 minimum purchase. With GoTo, moreover,
the advertisers pay only when users click on the link to their sites. Most other
sites at the time were charging simply to display the ads, although GoTo’s pay-per-click
structure is much more common now. Despite Mr. Gross’s assessment that GoTo
produced more relevant search results, the site at first had a hard time attracting
users. A $20 million advertising campaign in 1998 and 1999 was not much help,
although the site was able to buy some traffic through deals with the Netscape
and Internet Explorer browsers. Indeed, as if to underscore how little regard
the established players had for GoTo, Walt Disney renamed its Infoseek search
engine Go.com and introduced a logo modeled after a green traffic light that
looked remarkably like GoTo’s green disc logo. (GoTo sued and eventually forced
Disney to change its logo and to pay a $21.5 million settlement.) The company
grew and went public in June 1999. But when Mr. Meisel was promoted from chief
operating officer to chief executive at the beginning of 2000, he decided GoTo
would not succeed by trying to pull traffic to its own site. The future, he
reasoned, lay in placing the company’s listings on more popular portals. The
time was right, and sites that had scoffed at GoTo a year earlier were suddenly
very receptive to any ideas that might attract fresh cash. "Things changed
last summer," Mr. Meisel said. "Investors were asking for real profits,
and we were telling sites they could double the money they were making from
search."GoTo’s big break came in the fall of 2000, when it persuaded America
Online to place the top three listings from GoTo above its other results on
the AOL and Netscape search pages. AOL’s CompuServe service went even further,
replacing its entire search service with GoTo’s listings. This opened the door
for GoTo’s deals with the other portals. And in a delicious turn of events for
the GoTo executives, after Disney gave up on the search and portal business,
it began sending all the residual Web searchers on Go.com to GoTo. These deals
did not come cheap, though. GoTo promised AOL and Netscape $50 million for a
year and a half. And in total, it now kicks back an average of 67 percent of
revenue to the sites that display its listings. Costly they may be, but GoTo’s
relationships are driving phenomenal growth. In the first quarter, the company
collected payments for 314 million mouse clicks by users on its results, up
from 88 million in the 2000 quarter. And the traffic, in turn, is attracting
more listings. GoTo now has 42,000 advertisers, up from 25,000 a year ago. GoTo
is still losing money, although it expects to break even in the fourth quarter
of this year and start making money next year. Analysts say that for the company
to thrive it needs to raise the average payment per click, which is currently
16 cents. Mr. Meisel insists that over time that average will rise to more than
50 cents to $1. The site just raised its minimum bid to 5 cents, from a penny
previously. But its auction-style pricing, in which the highest bidder gets
the best listing, is mainly a function of supply and demand. "Right now
the top listing for aluminum siding is 6 cents," he said. "It’s ludicrous
that a lead for aluminum siding is only worth 6 cents. We just haven’t attracted
enough attention from the aluminum siding folks." (The top category, data
recovery-which computer users turn to in desperation-often exceeds $20 a click.)
More important, GoTo will need to convince its partners not to build their own
paid listings, as some others are doing. About.com, which was one of GoTo’s
earliest advertisers, has also become a competitor, with a competing listing
service called Sprinks that has attracted 7,000 advertisers.
Yahoo’s approach to this market has been more cautious. It allows only what
it calls "sponsored links" on portions of its directory that list
products and services for sale. Yahoo sets the prices, which range from $25
to $300 a month, rather than holding an auction. Separately, two years ago,
Yahoo began charging sites $199 to be reviewed quickly by its editors for possible
inclusion in its directory, rather than waiting in a six-month-long queue for
an editor to look at the site with no charge. Now there is no way for a commercial
site to ask to be considered by Yahoo other than to pay that fee. Both Inktomi
and LookSmart initially followed Yahoo’s lead and started charging about $200
to sites to be included in their databases; the databases are mainly used by
portals and other services that want to offer Web searches without building
their own search systems. More recently, both of those companies have also started
charging bigger companies to index additional pages from their sites. So rather
than having only its home page indexed, Banana Republic, for example, can pay
LookSmart to create separate, individual index entries for pages about khakis,
polo shirts and so on. LookSmart charges 15 to 75 cents every time a user clicks
on one of these extra pages, and also shares the revenue with the partner site.
For now, these fees simply get pages from a site included in the LookSmart and
Inktomi indexes. Their computer programs still use databases of both paid and
unpaid pages to select those that are most relevant to the user’s query. But
executives at both companies say they are developing tools that would allow
portals to specify that paying links get the most prominent display. Proponents
of the paid listings say that the involvement of the advertisers makes for more
relevant listings with more precise descriptions. But Mr. Sullivan of Search
Engine Watch argues that paid searches have gaps. "If you search for Star
Wars, most people would expect the official ‘Star Wars’ site to be listed first,"
he said. "And on Google it is. On GoTo, you have to go through five pages
of people selling ‘Star Wars’ merchandise before you get to the official site."
Even Mr. Gross, GoTo’s founder, says he does not use the service for all his
searches. "If I want information, I use Google," he said. "But
If I am looking for a product, GoTo is significantly better."
No matter how good the results may be, there is also the question of how information
about the payments should be presented to users. The explicit disclosure on
GoTo’s own site has not been copied by most of the other services that use its
listings. AOL simply calls them "sponsored links" while its Netscape
search engine calls the same listings "partner search results" and
on CompuServe they are "premium Web pages." Lycos, which is owned
by Terra Networks, calls GoTo’s results "featured listings." "Calling
something ‘sponsored’ is fairly clear, but ‘featured listings’ and the others
are confusing," Mr. Sullivan said. Moreover, none of the sites that use
Inktomi and LookSmart results provide any disclosure that some Web sites have
paid to be included in the index, let alone which links involve payment by the
advertisers. All of the portals and search services say that their surveys show
that users do not care what money changes hands, provided they can find what
they want. "We thought long and hard and decided it doesn’t matter if we
are paid for a link, so long as the results are what the user wants," said
Mark Stoever, a vice president at Lycos. Indeed, he goes further to say that
explicitly labeling the listings from GoTo as paid or sponsored may keep users
from relevant sites. "The industry has trained users to avoid anything
that looks commercial," he said. "By calling them paid listings, it
hurts the user."