JayWeintraub.com - Internet Advertising Analysis and Growth Insights

Upsetting the Status Quo

Competition can sneak up on a company when they don’t expect it and from a direction they would not have seen coming. One example, which may only illustrate my appreciation for Revenue Science, as opposed to point being made, involves how that company has become a force to reckon with in the online ad space. Revenue Science didn’t enter the online advertising world with intentions of becoming an ad network. They, instead, focused on building technology that would help sites such as the Wall Street Journal, New York Times and other content, category deep publishers make more money.

The example I always use when describing this form of behavioral targeting involves The Wall Street Journal always selling out of certain inventory, e.g., the Technology section. The site knows that many of its technology readers also visit the Weekend Journal section, which because of its less upscale content (movie and book reviews), commands a lower CPM. The Journal is right though in believing that readers of one do read the other, but the Journal can only target contextually, i.e. what the content talks about. If they could target to the user and not the content, then they could show a technology ad to a technology user regardless of that user’s location on the site. And, this is exactly what Revenue Science can do.

Revenue Science provides a tool that lets The Journal slice up its readers by the content they see and show ads to them wherever they are on a site. Having done this for enough sites, Revenue Science, all of the sudden, has access to a network of sites and can now sell behaviorally targeted ads across many sites in addition to that site selling its own inventory. There is no way a company could do this if they had been tasked with building an ad network of the top content sites; they would have thought along traditional approaches and missed the opportunity to become a network by beginning life almost as a tool for that site.

The low barriers to entry that existed in 2001 when a Fastclick could grow organically don’t exist today. A company has to find a way to build in new efficiencies, as cliché as that might sound. Having had experience in this space, I don’t envy any company trying to break into the ad network space, especially if they want to do so in the established areas – display ads. Companies looking to do this will almost surely have money at the outset to fund the optimization expertise as it looks to create a better way to target ads.

This isn’t to say companies couldn’t get far on their own, but it will take a slightly different approach to do so. Think of him what you may,  Philip Pud Kaplan did a good job creating AdBrite, which is effectively an ad network, but it operates with text links and a self-serve environment rather than display ads and traditional sales. Chitika, a second example, managed to get good distribution of their display ad product. Their unique ad unit, a mini-comparison shopping site inside a banner set them apart from other providers. The ad’s interactive, non-intrusive, and almost value-adding qualities saw great viral adoption among publishers looking for a Google AdSense supplement, one that didn’t violate Google’s T&Cs. Not being run by network guys, Chitika made some grave publisher management mistakes that have almost assured them of being a niche player.

Ad network are not alone in this science driven, inside-out approach to online advertising. Even lead generation, which to many seems so straightforward, has felt the affects of companies entering the space and doing things differently. Some companies in lead generation made their margin through one-sided agreements that they fought to uphold when the other side wised-up. Others kept their place near the top because they had such built in distribution and higher rates, that it made it difficult for anyone to come close. Those types of companies, though, struggle to see growth in lead generation.

A new breed has seen the opportunity in lead generation and has decided to invest resources in areas that stalwarts took for granted. They treat lead generation much the way an Advertising.com did their ad network by trying to match the right ad to the right user, and repeating this for every step in the chain. And similar to the world of ad networks, a surprising number of new entrants come into lead generation equipped with a war chest with which they can not only hire talent but build a better mousetrap. In the end, that seems to be the biggest trend, more and more new companies having success following an approach that early companies did not have to, and that is investing in value-creating technology first. Certain aspects might still resemble the Wild West, but those who end up creating the big cities today aren’t afraid to pave the road and create the sewers before opening up shop.

Google versus Yahoo by the numbers - Part 2

This post, we continue the fascinating look at performance differences between the two engines in “Google versus Yahoo by the numbers – Part 2.” In a more ideal world, other search marketers would share similar data so that we could all help keep the engines honest not to mention our sanity in check. In the interim, enjoy this other perspective of comparing Google versus Yahoo.

Similar to Part 1, the data in these examples comes from lead generation campaigns. Again we compare Google versus Yahoo, but this time, instead of line graphs that look at the engines’ conversion rates over a period of time, we take a more holistic view for quality. The charts below look first at Yahoo Search Traffic, then Yahoo Content Network Traffic, onto Google Search Traffic, and finally Google Content Network Traffic. Each chart depicts traffic in three buckets based on the conversion rate. Traffic above a certain conversion rate is considered great (green); traffic below a certain conversion rate is bad (red), with traffic in between the two as fair (yellow).

Chart #1 – Description: This chart shows Yahoo Search traffic performance during a two-week period in February. It is a period where, for these particular campaigns, Yahoo performed below their metrics for most of 2005.

Chart #1 – Explanation: Yahoo Search traffic consisted primarily of “Great”, which made up 44% of all visitors with Fair being next at 31% and Poor being 25%. Overall, the traffic is fairly balanced, and were we to do a comparison between this time period and November of last year, the biggest difference would be the percentage of Poor traffic. If you remember, it was the overall decline in Yahoo conversion rates that prompted this series of analysis in the first place.

Chart #2 – Description: This chart shows Yahoo Content Network traffic performance during a two-week period in February. Last week’s comparison did not include data from the Content Network.

Chart #2 – Explanation: This one is a little harder to read but the color dispersion tells the whole story. There is a strong amount of Great traffic (43%), but much more Poor traffic than was seen on the Search side. More than half of the traffic qualified as Poor (56%), and surprisingly virtually none fell in the generous Fair bucket. The takeaway here, is that there are some high quality content sites, but certainly not all. It shows why paying the same click price per partner site is not a good deal and the benefit of right pricing on a granular level.

Chart #3 – Description: This chart shows Google Search traffic performance during a two-week period in February. It is a period where, for these particular campaigns, the engine actually performed slightly better than their metrics for most of 2005.

Chart #3 – Explanation: A sea of green, that is what Google Search looks like for these campaigns. More than two-thirds the traffic qualified as Great (68%) as opposed to Yahoo’s 44%. The levels of Fair traffic were close – 24% for Google and 31% for Yahoo, which means that it’s the Poor traffic where Yahoo had more – 25% to Google’s 8%.

Chart #4 Description: This chart shows Google’s Content Network traffic performance during a two-week period in February. Last week’s comparison did not include data from the Content Network.

Chart #4 – Explanation: Another interesting chart, especially when compared to Yahoo Chart. Google content had a much lower Great percent than Yahoo – 11% to Yahoo’s 43%. Instead of Great, the vast majority of the traffic, 64% was Fair, which might not look so good, but consider that Great plus Fair equals 75% with Google Content Network and only 44% with Yahoo Content Network. The big difference again was the Poor component – 25% with Google but 56% with Yahoo.

This makes two posts in a row where performance data points in Google’s favor. Objectively it helps validate the engines lead in the search race and shows the value of moving towards a right pricing model. But, just because Google converts well and charges variable rates in a more sophisticated manner than Yahoo doesn’t mean they work better for marketers. This might sound confusing, but it’s because of Google’s efficiency that making money on them becomes tougher. There are simply fewer gaps of opportunity, fewer areas where pricing is below the maximum market value. As a result, you get good traffic, but it costs you, often to the detriment of profitability, at least as far as immediate marketing goes. Hats off to Google there for extracting so much out of so many, but I’d personally settle for a little bit more inefficiency, or at the very least their stock price to rebound.

A Tulip by Any Other Name

Seeing as pixelmania has made its way into an article by the WallStreetJournal, I've decided to post one that I've been holding on to.

Students of history will remember the Dutch Tulip Mania that swept the country from 1634 through the beginning of 1637. At one point in time, a single tulip bulb went for the equivalent of 1000 pounds of cheese or even four tons of wheat. The rise of the tulip bulb made many rich but left many more financially devastated, and it took years before the market as a whole fully recovered. The beauty and curse of capitalism is that key players are people, who by nature are not rational, especially during a frenzy. We saw this same bubble mania take hold during Internet 1.0 in the late 90’s, and like tulip mania, many people made exorbitant amounts of money, but not without many more losing almost everything. Internet advertising successfully weathered the bubble. The value of the medium took a hit, but unlike tulip bulbs, it not only has value, but room to grow. Internet advertising has such upside remaining that even today’s feverish acquisition market is not indicative of a bubble. Then again, maybe it is…

While many of the activities seem bubblicious, perhaps none summarize the zeitgeist of the moment as well as Alex Tew’s Million Dollar Home Page. Not that Alex needs any more publicity as the student turned entrepreneur quickly parlayed a simple idea to help pay for school into a million dollar plus enterprise. By now, almost everyone has heard of the story. Student Alex needs a way to pay for school and knows that the answer lies with the Internet. His solution involved taking a simple homepage and converting it into one massive billboard where for a buck anyone who wanted to could buy space on the billboard. Think 468x60 only bigger, and instead of one advertiser, it’s more than the eye can see.

When I first learned of the Million Dollar Home Page, young Alex had already sold more than 600,000 pixels, and today, he’s assured of not only reaching his million pixel goal but surpassing. In a smart move, the college student showed he was a student of the Internet and decided to put the last 1000 pixels on eBay. Six days remaining on the auction and the price for the last $1000 worth of pixels is already at more than $30,000. If past human behavior is any guide, we can expect the final amount to more than double. (Note: the auction has closed, with the final price topping $160k - a 5x jump) If the homepage itself doesn’t qualify for bubble behavior, the remaining pixels surely will. Then again, perhaps not.

No less than  two thousand copy cat sites have sprung up, but fortunately, none of them has caught on. Why fortunately? Because as clever and great as Alex’s Million Dollar Homepage, there is no actual business model. That’s not to say that the investment was a complete waste of money though as the two are very separate. Thanks to a good story, and really good timing, the million dollar homepage is really the million visitor homepage. This month, the site will see north of five million unique visitors and generate as many as ten million page views. At a $10 combined RPM, a site with those stats could earn $100,000 or more a month. It won’t top his $1.16 million gross revenue in five months, but given that he will almost surely generate 50,000,000 page views, what Alex has done is simply found a way to generate and monetize traffic.

The Million Dollar Homepage might just be a wacky idea that could only work on the Internet; or, perhaps it’s just the online equivalent to the vanity bricks, those pieces of concrete that people can claim so that those who pass over the area can read their inscription. They dot university walkways to libraries, and now, they dot the Internet. Whether it can be a sustainable business will depend on whether any underlying principles exist in the model. Were this truly the bubble days, people would flock to the copycats. Those flocking though aren’t the people buying the pixels just those looking for a quick buck but missing the story. And, unlike tulip mania, those looking to invest have a variety of options and the experience to look for some justifiable return. Anyone can create ad space, but not everyone can generate traffic. Is owning a block of pixels on the Million Dollar Homepage really akin to owning a piece of Internet history? Unlikely. It’s helped make a poor student wealthy and his site a blip on the radar, but not an unrational blip.

Lead Generation - The Year Of The Customer

Three weeks ago, collaborator and friend Cliff Kurtzman, creator and maintainer of the wonderful Online Advertising Industry M&A Deal Flow, sent me a link to a PDF white paper created by Ken Sonenclar, Managing Director of the Digital Media & Technology Group within media investment bank DeSilva + Phillip titled, “Lead Generation: Digital Media's Killer App?”  The paper didn’t start to make the blogosphere rounds until a week or so later when posted by PaidContent.org and Greg Yardley. As Greg points out, the paper is by no means perfect, but it represents the first of its kind to gain traction. Many of us have been working in and covering the lead generation space for years, so hearing of the attention being paid to it by the outside world comes not as a surprise but as a confirmation of our efforts.

If 2003 and 2004 was the rise of the networks – beginning with the display ad networks and moving on to the cookie cutter affiliate networks – 2005 showed signs of becoming the year of customers and customer acquisition. Some of the biggest deals involved large content networks such as MySpace, About.com and IGN, but it’s those in the customer acquisition space that numbered more. The customer acquisition purchase trend began in earnest with Experian buying LowerMyBills and continued with the multi-billion dollar combined purchases of comparison shopping engines Shopping.com, Shopzilla.com, and just last month PriceGrabber.com. Last year also saw the purchases of ClassesUSA, Vente, Inc., LeadClick Media, iLead Media, eLoan, NewCars.com, and many more in the lead generation space.

Expect 2006 to pick up where 2005 left off with respect to lead generation companies being acquired or even going public. The two that I mention most often are NexTag and Quinstreet, but there are quite a few others positioned as well as positioning themselves for significant exits. Along with this consolidation, though, will come many dropping off and shifting to other areas. One check on Google for the terms “phoenix degrees,” “phoenix online,” and “online masters degrees” shows why. The online lead generation space is beyond crowded, extremely fragmented, and overlapping. More disconcerting is the fact that currently too many players exist to create a useful user experience, and that has always been the sign that change will happen regardless of whether companies want it to or not.

The lead generation market resembles the co-registration market in 2001 and 2002, and interestingly enough, many of the players that were active in co-registration are now making their living in lead generation. The reason lead generation is crowded is the, to-date, low to no barriers to enter. The fundamental pieces have always been access to traffic and monetization, i.e. lead buyers. Google has opened up access to traffic to almost anyone with a credit card, and enough affiliate options exist to get a reasonably competitive price per lead, many of these affiliate companies even allowing posting.

It was this historic ease of access that led to the overcrowding we see today. Affiliate companies have a disincentive to accept fewer affiliates, so it’s left up to the direct lead buyers and the traffic sources. The direct lead buyer who for a long time had typically not had enough quality vendors to work with have found themselves with too many. In addition, the direct lead buyers have found themselves facing increasing opacity with respect to where they get the leads. While there exists only four main sources – search, display, email, and co-registration, buyers have started to feel less distinction than they would like from Vendor X and Vendor Y.

The cleanup of the space is again left to the traffic sources, as they ultimately suffer by providing a decreasing user experience. It is in this vain that Google announced last year their affiliate policy that prevents more than one company promoting the same display URL from being seen on the same search query. And, it was lead generation in particular that led to Google’s recent landing page relevancy factor in determining bid prices. While not nearly an end-all solution, they represent a first step in attempting to create a meaningful barrier. Without easy access to traffic, fewer companies can compete online. Companies will be forced to focus on those areas under their control, such as effective PPC campaigns and landing page optimization or will have to gain in-roads on the relationship front. Each of which requires significant expertise and thus investment that it will weed out many in the space today.

Lead generation is far more fragmented than the search market, and as a result will support more than a handful of companies, but it cannot successfully support fifty companies in each vertical, which is the case today. The education space supports quite a few seven-figure monthly companies including Quinstreet, Vantage Media, ClassesUSA, Adteractive, Advertising.com, Cole & Weber/Red Cell, Platform Advertising, and eLearners, let alone the even greater number doing more than $200k per month. Those in the upper tier get their traffic from search, media buys, and/or affiliates. When one company doesn’t own seven out of the ten to twelve ad spots, then we’ll know that progress has been made. If the company that owns the six has done so without bullying the advertiser then they deserve to be where they are, but that doesn’t mean they will be immune from the relevancy changes. It only means they have helped mature the market by becoming their own barrier to entry. More barriers means better lead generation in 2006.

AOOOOOOL

By now, almost everybody outside the Internet world has heard of Google. Similarly, thanks to its first mover status and ubiquitous blanketing of American mailboxes and retail outlets with CD-ROMs, you’ll be hard pressed to find someone that hasn’t heard of AOL.  For those that somehow managed to avoid mention of either company over the past 15 years, the ante just got raised as the two have dominated industry and general media coverage for the recently announced $1 billion investment by Google in exchange for 5% of AOL and among other things an extended search pact. Consider this week’s Trends Report a, “We sort through all the stories so you don’t have to.” And there are a lot of them. We’re just happy we didn’t publish the story last week when it looked like MSN was sure to win the AOL business.

A lot has changed in two and a half weeks. Looking over the news from the beginning of the month, you would have seen headlines such as “Microsoft May Have Edge in AOL deal and “Report: Microsoft and AOL Deal Close.” These past few days, the headlines read “Google Outfoxes Microsoft Again” and “Google Checkmates Microsoft on the Web.” With the deal signed, this certainly seems the case, although we see that a few saw the Google / AOL partnership not as a triumph but as a sign of potential weakness. For example, rather than praising Google, the Wall Street Journal said “Google Goes on Defensive with AOL Stake Buy.” Only time will tell there though.

At the most fundamental level, any deal with AOL comes down to money. Google has a vested interest in AOL as they add more than $300 million to their top line. That is more than enough money to help Microsoft jump start their own fledgling search business built off its first generation advertiser platform, Ad Center. For AOL, the deal means more than just the $300 million it earns in search. The deal secures its lifeline as the company looks to Internet advertising revenues to replace its well-documented declining subscriber revenue. Yahoo was mentioned in the early talks, but did not choose to participate in the final round of talks.

An AOL deal with MSN would have made sense on levels other than helping Microsoft with search. MSN and AOL share much in common – from the ad units to their strategy. Each company wants to compete with Yahoo and ultimately with Google. An alliance could have put both on the map and given their respective internal sales teams a chance to sell more of what they already sell. Immediately, they could have become a sizable display ad and search entity. That combination though would have come with some significant operational challenges for both companies.

Working with Google will still require solid execution on AOL’s part, but it provides a baseline if none of that execution occurs – the status quo and an extra billion dollars. True, AOL will most likely get some favored nation status within Google’s own search results and buying opportunities on its AdSense network. But, making that work will rest on AOL. Google on the other hand gets access to AOL’s vast content, which includes video and other sought after media formats. There is little doubt that Google will successfully execute on their end to leverage what AOL offers. And, while a technological laggard, the AOL brand brings a maturity that brand advertisers trust, something Google desperately wants.

Coverage of Google’s investment into AOL wouldn’t be complete without mention of investor Carl Icahn, who owns 3% of AOL. He questions whether the deal with Google provides the best choice for realizing the value of the “AOL asset.” In his letter to the board of directors he says that he is “not opposed to the Board using its business judgment to enter into a transaction with Google or another suitor so long as the transaction does not destroy or impede Time Warner's flexibility to unlock shareholder value in the near and long term.”  Mr. Icahn mentions other suitors in this letter but does not show a preference for any particular company. He focuses on finding the best choice, and there is a real case to be made that Google represents the best short term choice but not long term choice. Again, the onus for realizing the value of the investment really falls upon AOL not Google. The one who spends the money generally will find a way to get their money’s worth. That is not always true of the one who gets the money.

In the end, or we should say in the beginning, The AOOOOOL story started three and a half years ago when Google beat out Overture to supply the “You’ve got mail” site with its paid search listings. I guess it shouldn’t come as a surprise that it chose to step up yet again. At least Google has finally helped solve one lingering question – what they planned on doing with their $4 billion secondary offering “defensive” war chest. Their $1 billion investment earned them not just 5% of AOL but an estimated 7% of the search market. Who wouldn’t want 7% of the search market for $1 billion? IAC paid almost $2 billion for less than four percent. While not quite that easy, even viewing the deal as Google paying $200 million per year for $300 million in revenue and perhaps $45 million in search profit isn’t that bad of a deal. In the end, the deal is Google’s to lose. They have the money, and they have the confidence to confront those who saw their willingness to buy a stake of AOL as a sign of weakness. And, when AOL gets spun off from Time Warner and goes public, they will yet again look like smart ones. And did we mention AIM?

All That's Fit to Google

In what feels like ages ago, yet in actuality occurred only two months ago, NASA and Google publicly announced their intent to work together. Having already conquered cyberspace, a milestone seemingly capped by Google’s successful hiring of the “father of the internet” Vinton Cerf – it might seem only natural that they would put their minds to outer space.  Google’s ability to organize data matches well with an entity that produces worlds of it. Not that anyone doubts it isn’t a good fit, but the announcement did lead to more than a few wondering whether Google wasn’t starting to stretch itself too thin…or worse, get its hands into too many things. Then came a story this month that Google might put their computing power to work at better understanding inner space, teaming up with geneticists and other scientists to catalogue and characterize all genomic development. More announcements like this and the company will reach, if it hasn’t already, a tipping point. It has increased the scope of its activities without increasing the transparency, and this could quickly lead to the company facing an uphill battle for future growth as opposed to their experiences, to date, of having the wind at their backs.

From a PR perspective maybe not, but from a product perspective, Google has been right on. A quick glance at this month alone shows off their achievements.

• November 14, 2005 – Google Analytics launched. The free software based off their popular Urchin product had so many requests that the company has had to hold off on new signups, having gone from 0 to 234,725 in less than ten days.
• November 15, 2005 – Google Base goes live. What had been a rumor was officially open for use. Like the typical model for search, Google Base relies on mass amounts of user information, but unlike their marquee search product, Google Base solicits the input of content. It is widely believed to be the foundation for a potential classifieds killer to challenge the dominance of Bay Area neighbor Craigslist.
• November 17, 2005 – Google shares hit $400 for the first time. After hitting $300 and being questioned for potential overvaluation, the stock took one month to match the targets set by analysts for their six to twelve month’s guidance. Will it really take another six months to hit $450 or $500? That’s barely 20% growth as opposed to the 30% it took to hit $400.
• November 18, 2005 – Google allows advertisers to bid directly on a site they visit. In a move that potentially signals a more advertiser needs driven Google, the company matched functionality of text link ad network competitors, Industry Brains and Kanoodle, by making it possible for publishers and advertisers to connect directly. Like their competitors, for certain sites, advertisers can now bid for placement solely for that site rather than bidding on the entire network.
• November 21, 2005 – Google allows separate bidding on search and content. Three days after the announcement that advertisers could buy on specific sites they were visiting, Google did a very un-Google like move by continuing the level of control and happiness they give advertisers. As most are familiar, advertising with Google involves their search traffic (Google search results page and select partners – AOL, AskJeeves, etc.) and distribution on their version of an ad network i.e. contextual ads on web sites. Until this announcement, advertisers that wanted to advertise on content had to advertise on search, and it involved only once price, which Google automagically adjusted using their SmartPricing algorithm based on a particular site’s performance. Now, not only can advertisers run on search and content independently of one another, they can also set different bids. This gives Google parity with Yahoo, which has offered independent channels and separate bidding since launching their contextual content ad product.
• November 23, 2005 – Google tests click to call ads. Greg Yardley broke this story that showed how the company was facilitating the connecting of users to advertisers not just by clicks to a web site but through the phone. They seemed to have beat eBay to the punch who paid $4 billion for Skype, presumably to assist in such activities.

For much of its history, Google has been the anti-Microsoft – democratic and not the least bit idealistic. As their own web grows, the distance between the two companies gets closer, and not just with respect to their market caps. As New York Times op-ed writer Adam Cohen states, both companies give little to no control over how their personal information is collected, stored, and shared, and that the level of data doesn’t seem to be changing. Google has reached a point where “trust us” no longer covers it. The company has proven itself to be, as John Heilemann and John Batelle say “coming close to a ‘worm turning’ moment - a moment when the world realizes that the company is *too powerful* and its ambitions are *too great. “  Google, though, does have the small luxury of being able to learn from Microsoft’s and others’ mistakes, ones that did not hurt sales but did hurt their image and public support.

I hold Google in high regard. Like many though, reality has started to temper that feeling of reverence. Those feelings that helped push the company high up on its pedestal are being replaced by frustration and concern. Like Microsoft, Google might come to a point where they are no longer really liked, just respected, watched, and feared. As Wired magazine writes, everybody is afraid of Google. What this next chapter will bring is how Google handles this role reversal. If this month is any indication, they will continue to push ahead with their great products, and while their areas of focus might lead to some questions about focus, that grandeur of cause will enable them to keep getting the top talent, having something for them to do, and keep them from being seen as merely an ad company. Google truly is a company that we would have a hard time living without. As long as they stay there, Slate’s chronicle of a death foretold might be avoided. This is a story of product and PR no longer showing alignment. They are growing pains that almost all of the most dominant companies have faced, Google just quicker than others.

Creating the next Valueclick

Could a company that generates per year what a similar company does per month, one whose market cap equals that bigger company’s quarterly revenues, be considered the “next” iteration of it? That appears to be the question that CGI Holdings Corp., d/b/a Think Partnership might just be answering. At a run rate now surpassing $20 million per year and a current market cap of $90 million, Think Partnership still has a long way to go before they challenge the company they most closely emulate, Valueclick, but daunting a task as that might seem, especially for one that did not have the benefit of an IPO during the early internet heyday, the little company that could might just pull it off. This week, we’ll take a closer look at Think Partnership, a company that we wrote about back in March when they first appeared on the industry radar with their acquisition of web marketing company, Primary Ads.

Reading through their history, CGI Holding Corp doesn’t seem like a company that would be where it is today. They say this about themselves in a filing this year, “We have lost money historically. We had net losses for the years ended December 31, 2002 and 2001. Our future operations may not be profitable. If we are not profitable in the future, the value of our common stock may fall and we could have difficulty obtaining funds to continue our operations. Our balance sheet is weak. We lack the capital to compete aggressively. Our growth is capital constrained.” Granted, those statements are in the risk factors section, but they don’t give the immediate impression of a company that will challenge or be similar to Valueclick. But, those statements, while true, are also perhaps overly modest and cautionary. Think Partnership’s story is one of growth, leveraging a good market and knack for acquisitions.

CGI Holdings is not a new company. It was incorporated in 1987, but it didn’t really become active in the space until 1997 but more so in 2001 when it purchased Internet stalwart but outdated Worldmall.com. That was renamed Websourced in 2002 and became a division of CGI Holdings, focusing on search engine marketing. Websourced was best known by one of its subdivisions, KeywordRanking.com, run by Patrrick Martin, who founded Worldmall.com. In 2003, Think Partnership, under its Websourced division launched affiliate dating site Cherish.com. The two, along with the upturn in the Internet advertising economy helped the parent company to achieve strong revenue growth in 2004, this after becoming profitable in Q2 2003.

The real fun began in 2004. That June they made their first of many acquisitions to follow, buying Engine Studio, creators of a product to help small businesses get listed on the search engines. Engine Studio’s assets presumably helped beef up the competency of Websourced and the value perception of Think at a time when Google was getting ready to go public. And, thanks to the strong revenue growth coming from their search business, their only division at that time, CGI decided not to push ahead with its reverse stock split. They did continue buying, announcing the acquisition of WebCapades in August. Then, in November, they signed a letter of intent to merge with privately held MarketSmart, which ran three companies. That merger led to Think’s dramatic rise in 2004 revenues to $20 million, up from $7 million in 2003.

Just before the close of the year, Think outlined their future strategy, raising $15 million in a private placement offering to help continue their aggressive acquisition strategy. Shortly thereafter, also in December, the company declared its intent to merge with another, Proceed Interactive, at the very end of 2004. That deal ultimately fell through but the buying spree marched forward. In February of 2005, Think purchased two other companies – Personals Plus, which extended their dating business, and Ozona Online, a small web shop that does design, hosting, and custom builds. The price was $2 million and $300,000 respectively. Also in February, in a win for the group, its stock moved from being an over the counter to the American Stock Exchange, trading under THK.

Things got really interesting in March when they announced their desire to purchase affiliate marketing software company Kowabunga - a scaled down version of Valueclick’s Commission Junction. They followed that up in April with a merger with Vintacom and Real Estate School Online in deals worth almost $5 million each. Also in April, Think announced its desire to purchase Primary Ads for $10 million. That deal was followed up by its decision to purchase Babytobee.com. It was the Primary Ads deal that had most of us taking notice of Think, as their, now well documented but still under the radar, spat with Direct Technologies lasted several months this year. Think, though, marches strong, increasing their revenues and profits and now having a suite of skill sets from search engine marketing, to an affiliate platform, their own advertising campaigns, internal inventory on which to run them, and a company that can help promote theirs and other offers to third parties. No doubt, we will see more acquisition announcements from them in the future. Theirs is a trend not necessarily started by Valueclick, but they have thus far executed on an aggregation strategy that has taken a relative tiny player and turned them into a future force to be reckoned with. Others will no doubt follow, as this is just the beginning of the mass roll-up, and they a leading example.

The Ownership of Traffic

The first half of A Crash Course on the Digital Marketing Vendor Landscape, the basis to last week’s two part Digital Marketing 101, focused on the different types of internet advertising and the companies that operate in them. The second half of that presentation focused on something entirely different and something that  was not covered in last week’s introduction to digital marketing, and that is the numerous mergers and acquisitions. We have covered mergers and acquisitions, and the often corresponding consolidation many times, including most recently in Digital Thoughts - Following the Money, An Investment Recap - Part 1  and Part 2. Additionally, Cliff Kurtzman, with whom I gave the crash course presentation during Ad:Tech, does a phenomenal job of recounting the numerous deals here. This week’s Trends Reports though looks at the underlying reason behind many of those deals – the desire to own traffic, in particular the network / publisher consolidation.

Even the famed Intermix/MySpace.com acquisition had the net result of giving Rupert Murdoch’s News Corp. traffic. That certainly applies with the New York Time’s purchase of About.com, WebMD acquiring TheHeart.org, Yahoo buying Flickr, AOL purchasing Weblogs, eBay scooping up Skype, and the list goes on. In fact, of the tens of billions spent this year on mergers and acquisitions, half, if not more helped one company purchase the user base of another. As Cliff has pointed out, while $580 million might seem like a lot for a social networking site, a company could spend a lot more over a longer period of time and not build up an active user base of more than 20 million people who together produce a site with the most ad impressions.

The size of the MySpace deal and many of the others that involved the acquisition of a user base is distracting. It’s easy to focus on the hundreds of millions of dollars changing hands and not the underlying trend. Some in our space have taken notice and are the ones secretly leading the strategic consolidation trend, i.e. purchasing profitable companies that currently contribute to their bottom line. These deals tend to be less than $10 million and are all aimed at owning traffic. Thanks to 2004 and 2005, which treated most of the networks well, many have a nice war chest and can now consider corporate development activities. And, while not the reason for becoming a network, their business model has given them an advantage with respect to potential acquisitions. They connect publishers with ads. This means they not only know a lot of publishers but also know how much money that publisher can generate.

So far, two reasons seem to drive the networks that have started to acquire. The first has done so simply to lock up distribution and defer margin compression. When they started, most new ventures online focused on building traffic not monetizing it. Entrepreneurs made web sites, created email lists, and even distributed ad ware. Today, the gap no longer revolves around traffic but monetization. The barriers for creating a new network have decreased while the sophistication of the entrants has increased. In the current environment, we see those who once had, or still do have, the traffic turning into the aggregator, the network. Google is a prime example. Access to traffic is only getting tougher, i.e. expensive and margins thinner.

The second reason for owning traffic relates to margin compression insulation, it deals with reduction in potential volatility. Several companies that had a good ‘04 and ‘05 want to leverage the past success and overall promising Internet advertising market to have an initial public offering. And, most of these companies would define a successful offering by achieving a high and sustainable stock price. Two or three key publishers / affiliates moving could affect that price.  So, as insurance against such fluctuations, they have bought, through cash and stock, these traffic anchors.

In many ways the high level consolidation not only feels like, but also qualifies as, a bubble. Similar to the current offline, real estate bubble the right market conditions have led to inflated pricing. In both Bubble 1.0 and today’s Bubble 2.0 one of the main objectives in investing was to own traffic. The biggest difference between this bubble and the one that already burst is that many of these deals actually make sense. They might be overpaying for a Malibu beach home, but at least they’re not paying for swamp land. And this certainly holds true for the networks buying up their publishers. Bubble fever has driven up the cost of these publishers, but the logic for doing so not only makes sense, but also should prove a key factor in their longevity. So, while the answer to, if we are in a bubble is yes, at least we know the floor is more stable. The clever networks have joined in to help solidify theirs.

Trends Report: The Future of Direct Navigation

If you read this week’s Digital Thoughts, which of course you did, you would have read about a small conference that very few in our industry attended. For those of us that did attend, such exclusivity won’t last long as this space should soon become a significant player in the world of online advertising. Its ascension is by no means guaranteed. This is a segment that has grown to its current size by deliberately staying below the radar of mainstream internet activity, one that in order to reach the next level must learn to embrace becoming a more visible aspect to online advertising. It’s a market that today takes only five minutes of time and fewer than ten dollars. It’s a space that exemplifies the saying, “It’s all in the name,” and it’s a space that quietly accounts for upwards of 15% of all paid search revenues. This space is direct navigation, and our goal today is to help paint a picture of the role it can play in the future while exposing some of the challenging models that could threaten its existence.

What makes the direct navigation space so exciting is that it deals with the heart of advertising. Some people looking for car insurance will search for Geico, but those who have yet to identify a brand with a subject will look for car insurance, or in this case type in carinsurance.com to a browser. Similarly, someone looking for golf courses might decide to type in golfcourses.com instead of going to a search engine and typing the same.  The downside to this, and where direct navigation has in the past set itself up for failure, lies in the low hanging fruit, searches that cannibalize on other people’s brands. It’s this that many associate with direct navigation, and it’s why those not familiar with direct navigation probably have heard of it by its less flattering and quite accurate other name, typo-squatting.

Calling direct navigation typo-squatting is akin to calling all email, spam. People will unfortunately abuse just any segment, and the direct navigation is no different. With domains though, people have mistakenly assumed that if it is registered but has no content that the person is typo squatting. For a “real world” analogy I think of Baltimore, Maryland where I lived for three and a half years. For two of those years, I passed a piece of land on the water front that sat undeveloped. During the housing boom, that person partnered with a builder to create lots and homes and sell them, making them both a lot of money. Another example is Lake Las Vegas, now an impressive resort community but for many years nothing. It wouldn’t have made sense for him to do so before the demand was there. This is exactly how internet real estate works. Some owners have already built, but many have simply been collecting. They understand the property’s inherent value but have been waiting for the right time to develop.

One company, for example, has started doing this. They have proven the value of the internet real estate that makes up some of the direct navigation space. This company partners up with the owner of a name, creates a pseudo content site using affiliate offers (as opposed to search listings) and then use their connections to sell the name to a major brand. They have done this with quite a few names, their method of internet flipping yielding payouts in the seven figure range. Unfortunately, that strategy works for the sellers but not for the industry of direct navigation. The industry benefits not by selling the names to a specific brand but by creating greater user desire to search from the browser. This industry will see the greatest returns by not selling what could be the next Times Square but by creating it and then generating revenues off of the billboard space. That is the future of direct navigation.

More companies like the one mentioned above will start to exist, and rather than creating a page for sale, they will create a property for rent. They will bridge the gap between Madison Avenue and a 5th Avenue that has no Saks on it. The direct navigation industry holds incredible promise for marketers as it provides not just the most targeted users but a chance to communicate a message that paid search, in its few lines of text, simply can’t. A few direct navigation pioneers are proving that this model can exist, and hopefully a few more will step up and make it happen before the opportunists accidentally create the next Louisiana Purchase and allow another entity to profit off this industry’s potential.

Trends Report - Affiliates and Search

In only a few years, search has gone from the new kid on the block to the de facto method for driving traffic. While most likely not intentional, the increased popularity of search has been accompanied by an ever increasing learning curve to use search effectively. No longer is profitability guaranteed. This has helped make the case for leveraging the affiliate channel with respect to gaining access to search traffic. Affiliates bare the media risk; they pay the engines the necessary CPC’s while only getting paid when an action happens. The complexity of search and the risk-carrying nature of the affiliates have led to this being a contentious topic as the two parties have similar objectives but different comfort thresholds. In other words, what is good for the affiliate isn’t necessarily good for the advertiser, and clashes do and will happen.

Affiliates come in all types, from hundred person companies that possess sophisticated technology to the often, stereotyped, basement dweller working from home. Regardless of their size, engaging affiliates to promote your offer means putting your brand in someone else’s hands. Today’s article covers the wide range of issues related to allowing affiliates to run paid search campaigns whose traffic ends up on your offer(s). We cover the topic from an advertiser-focused point of view although the information is designed to engage publishers as well. Sophisticated marketers likely know much of what we cover but will hopefully find it a good overview that can be shared with newer members of the team and those less familiar with the intricacies and nuisances of Internet advertising.

If you have an affiliate program, chances are your offers are being run through search whether you know it or not. Publishers, as indicated earlier, because they bare the media risk, won’t often act with your brand in mind. They tend to act with their profitability in mind. Finding a happy medium takes effort, and can only be achieved by understanding the medium, i.e. search. That understanding we can start here, but ultimately, there will still be more questions than answers, and it will be up to you to determine which of these questions matters and to create the internal processes for answering them.  By the end of this article, you should have a solid grasp of the pros and cons of allowing affiliates to leverage search traffic to run your offers as well as being able to embrace search as a means for affiliates to generate traffic, feeling like a seasoned marketer even if you aren’t.

Most affiliates will turn to Google first to test an offer’s viability from a profitability standpoint. If you have been following the Google vs. Geico case as well as seen the signup page for Google’s AdSense program, you’ll know that the engine has a liberal policy towards what ads can run with which keywords as well as offering the ability to generate traffic in as little as 15 minutes. The ads that affiliates place appear, depending on the keyword volume, either on top of the search results and/or along the right hand side of the page. Google used to have a policy that required affiliates to identify themselves to the end user by placing an “aff” in the text. They no longer require such identification, instead allowing only one unique display URL per paid result. That means the ad from the affiliate will appear the same as the ad from the product or service owner. This differs from Yahoo where the person placing the ad must own the site that the user gets directed to; Google simply restricts results to the best bidder (price * conversion rate) so that a non-owner of the site can still bid for a keyword.

Remember, at the core, search is merely a channel for affiliates to drive sales. As an advertiser, this means that you must still be comfortable establishing an affiliate program (or working with a company that can such as Commission Junction, LinkShare, or AzoogleAds’ Mport). You will also need to know what your action is and the cost per acquisition you can pay. One thing to note is that the traditional price / volume discount actually works in reverse. The more traffic an affiliate or network can drive the more money they will expect you to pay to them. The discount in this situation is on your margin. And, while counterintuitive at first, it does make sense as the owner of the service, you, generally gives a margin break for those who consume a lot of the product or service.

When it comes to running your ads via affiliates and search, three big decisions arise. The first is whether to work directly with affiliates, indirectly via affiliate networks or both. The second is whether to allow affiliates to bid on your company’s trademarks. The third is how to deal with the natural conflict that will occur from those within the company doing search feeling threatened by the affiliates. Regarding the first, with whom to work, that generally depends on your level of experience and the sophistication of your internal (tracking) systems. As a general rule, the more relationships you have and the more you create a market dynamic within your affiliates, the more you will make. Many companies though do not have experience dealing with multiple relationships; these companies should start by dealing with an affiliate network that has no difficulty managing hundreds of active relationships. With more experience, I recommend investing in internal technology and working with the larger affiliates directly as it will allow for closer coordination, which ultimately will be needed as you scale the business.

With respect to trademarks, this is a less straightforward decision. For a live example of the issue, head to Google and type in almost any brand, for example “Ameriquest” or “AIU Online” or “University of Phoenix Online.” The uninitiated will have a hard time telling the advertiser’s actual site from the affiliates. Even more confusing to those unfamiliar with Internet advertising and lead generation is the fact that almost all of the affiliates in the latter query examples have created their own pages, each trying to find the right combination of elements to yield the best conversion. The best conversions and often the highest volume come from terms based on your marks. Whether you give free reign or partial reign to affiliates will depend on your comfort level and need for strict control. One reason to consider allowing them to bid on your behalf comes from the fact that if you prohibit it, they might bid on your marks on behalf of your competitor.

Lastly as far as major issues are concerned, is the likely conflict between an internal search team and the external team, your affiliates. Unless a brand advertiser, those internally should be held to similar backend accountability as the affiliates. Your goal should be to obtain the greatest number of conversions possible, and an internal team alone cannot accomplish this. If internal politics are an issue, it is possible to help the internal team by providing them a higher CPA (which is usually the case) or exclusive access to certain keywords. The gut reaction of many companies is to create prohibitive measures to limit affiliate activity such as capping the max bid on certain keywords or prohibiting them from occupying a position higher than the company. Policies such as this only limit maximum growth. A policy of openness and communication with affiliates will go a lot further.

Unfortunately, as is more often the case than I’d like, we can only paint with a broad brush in these articles rather than diving in deep to a specific piece of the puzzle. There are some worthwhile topics and examples of affiliate search yet to cover. These include the registration of domains by affiliates that contain your brand (see the “University of Phoenix Online” query results for an example of the issue), along with a discussion of the various types of pages created by affiliates – from their simply directing traffic to your site to biased comparison pages. Topics such as how to police and monitor affiliate activity and judge quality must also be saved for another time. Ultimately though, affiliates can be your best ally or a big headache. The best bet is to embrace affiliates and search, cultivate some key relationships and watch them not only grow your business but aid you in designing best practices and keeping a fair and effective marketplace.