an innovator’s dilemma with pay-per-click search models

November 30th, 2009  

…what happens to revenues when search gets better?

Last spring, I wrote a post about the conflict of interest with regard to algorithmic search results and paid search listings. This is a follow-up post, with a different spin on the same idea: that there is a problematic conflict of interest in the paid search business model, and that this schism may well emerge more saliently over the coming years.

My thesis here is that there is an “innovators dilemma” for a search engine that makes money on pay-per-click advertising, to improve the quality of its algorithmic results. Doing so, would in theory, more effectively answer a users’ query, and thus make it less likely for users to click on advertisements. Because the pay-per-click model only earns revenue when users click on ads (rather than algorithmically generated “organic” results), lowering the advertisement click would ultimately mean less revenue for the search engine.

image

 

Here’s an example case to consider – a query for: “Student Loan”

In theory, a search engine dedicated to organizing the world’s information, should very much be able to provide valuable results for this term. So, suppose a hotshot whiz-bang engineer comes up with an awesome way to spider and store up-to-the minute results on lenders, rates, reviews, etc. laid out in a clean, organized manner, and all based on what is most relevant to the searching party. What would be the response from the “business” side of the house that pays that engineer’s salary?

Here are some accumulated statistics from Google’s AdWords tools for “Student Loan” and 50 recommended related terms:

CPC Weighted Average $ 14.31
U.S Monthly Search Volume 4,484,113
Pct. Ad Clicks (estimate!) 6%
Total Monthly Revenue $ 6,415,170

So…suppose this awesome new search innovation was so good that more queries were now satisfied by algorithmically generated data, and the percentage of clicks on ads falls in half to 3%: this search innovation just cost over $3 M in monthly losses. Take this example to its logical end, and the theoretically perfect search engine’s ad-click rate will be 0, as the algorithm will always answer my query, and 0 x any $CPC will always be 0.

There are two obvious rebuttals here, which deserve more serious consideration that this,

1) Increase Price: boost the CPC that advertisers are willing to pay.

This seems possible, but unlikely. Because that price is determined by a second price auction bid stack, presumably destination sites are bidding based on the value of the arriving traffic, which is exogenous to the search engine.

2) Increase Volume: If more total people search, then total number of clicks may be the same, even if a smaller percentage of people click on ads. Perhaps the search engine can grab more market share because of its (newly improved!) ability to answer queries such as “student loan.” Or perhaps the entire search market will continue to grow. But, while this rationale may have been sensible over the past ten years, you can only replace margin with volume for so long, as you either reach market saturation(market won’t grow) or market dominance (you own the market, and there’s no more share to grab from competitors).

There’s more to say on this subject…in the meantime, I am hopeful, though pessimistic, that the technology press will start to think more critically about search business models — as they like to say in mutual fund prospectuses: “past performance is not a good indicator of future success.”

 

reflections on starting a mini-meme

October 29th, 2009  

 minimeme

I really don’t like the Yankees, mostly because of their team salary is 227% of the league mean which I think gives them an outrageous advantage over other teams. So I’m pulling hard for the Phillies in the Series. And Monday morning, I posted the following Tweet: “Go Phillies. #CheeringForTheYankeesIsLike hoping investment bankers get really huge bonuses – at least 8 figures.” Kinda proud of my clever hashtag, I then posted this: “…Hoping someone w/ more Twitter clout than I can help popularize #CheeringForTheYankeesIsLike…”…which was RT’ed by college buddy Lizzie O’Leary…who called to task some heavy hitters…and off it went.

Over the next day or so, lots and lots of people posted their own tribute to Yankee ludicrousness, including John Berman, Dave Winer, Jake Tapper, Jake Tapper, and Jake Tapper. Not quite a full-fledged meme worthy of being a trending topic. But humor me a mini-meme, yes?

Some takeaways from the experience:

Some of my favorite #CheeringForTheYankeesIsLike include a hashtag convert, making fun of the Red Sox, references to Rocky (of course), Hoosiers, dunking on 4th graders (yes, from me. but it’s funny), and asking for more Soylent Green.

p.s. Apologies to the BTM team for being distracted for most of the day.

 

user is always right, but…really?

September 11th, 2009  

On a fairly regular basis, feedback at futureme dot org gets silly requests that make me chuckle. Or cry. Or both. Here are some of the recent more memorable ones:

Oct. 6, 2009: We hate people with cancer, apparently (FM requires 30 day sending date minimum…) Jay says: “you’ll never beat cancer with an attitude like that”

Saw this on the Today Show this morning and decided to write myself a letter to see how I was doing next week and got a response that said you’re not a reminder service jaand it must be a month away. Well, you know what, when you have cancer, a month may not come for you. What a crappy service. You should be ashamed.

Sep. 18, 2009: He’s afraid about getting fired b/c he forgot his meds:

I was not taking my anti-depressants and think I sent a future me e-mail to my boss by mistake.

Please help me.

If he receives it I will lose my job.
Please help.

Aug. 28, 2009: Sent her Facebook password to the future (and huh?)

well i contacted you because i’m an avid futureme.org fan. recently i was just about to go on a “facebook” fasting and made random passwords and sent it to myself in the future. problem was, i wasn’t even logged in at that time. now as far as i can remember it should have been sent to me a week ago. help please you know how IMPORTANT of a caprice facebook is. i really have to get my password. my user name in my futureme.org account is [******] and i wasn’t logged on to it. i actually sent my random password to **********@yahoo.com, my official email. it’s just that i used my other email, [*********]@yahoo.com and i cant even remember the random info i entered while making this 2nd email. PLEASE DO HELP ME OUT HEEEEEEREEEEEEEEEEEEE

Apr. 4, 2009: He girlfriend’s FutureMe letters wants:

You are my last hope. We have lived with my girlfriend about one year in peace, but serious problems have more recently begun. It is very guilty to me and tries to disappear from my life not to hurt. We are very love each other, but I do not understand as myself to conduct.

More recently she has written 2 letters on your site. (her e-mail **********@mail.ru). the Second should be delivered on June, 30th.

If is though any possibility - send me please text of this letters on *********@gmail.com. Becouse of i wanted to know what i should do to keep peace beetween us and wish to know not to lose she. Help to rescue love.

Yours faithfully, *****

Appologise my English - i am russian speaker.

 
« Previous Entries