SIMS/Haas School of Business, UC Berkeley The State of Search-based Online Advertising Michael Cho Andrew Iskandar Sanjay Kidambi Steve Shepherd Cuong Do Tuan Vuong November 3, 2005 Vs.

SIMS/Haas School of Business, UC Berkeley Agenda Setting the Stage –Basic concept –History –Major players Economics at work –Network Effects –Complements –Lock-In Where are we headed?

SIMS/Haas School of Business, UC Berkeley Search-based Online Advertising is a simple process at its core Bidding process occurs beforehand –Advertisers bid to be displayed by keywords of their choice in auction-like process User types a keyword into search engine Advertisements displayed next to search results –The higher the advertisers bid, the higher the placement on the page

SIMS/Haas School of Business, UC Berkeley In 10 short years, advertising has been changed forever InfoSeek began to target banner-ads Yahoo and Proctor & Gamble introduced “pay for clicks” model Open Text experimented unsuccessfully with targeting text-based ads to search queries GoTo.com (later changed to Overture) and AdWords (Google) introduced labeled text-ads correlated to keywords Yahoo! buys Overture Growth of smaller, specialized firms in tangential business like search engine optimization (SEO) Google IPO MSN introduces its own search engine Timeline

SIMS/Haas School of Business, UC Berkeley Search advertising shows huge market potential Online advertising: fastest growing sector – Universal McCann: increase of nearly 53% (from $4.3Bn in 2000 to $7.1Bn in 2004) – PWC/IAB: $9.6Bn in 2004 – Search-based advertising: 40% Spending will predictably increase in the coming years −From $11.5Bn in 2005 to $17.6Bn in 2008 −Search-based advertising: $7Bn – nearly 85% increase −Forrester: $11.5Bn on search engine marketing in 2010 Forrester Research, July 2005

SIMS/Haas School of Business, UC Berkeley Google is currently the clear market leader in search

SIMS/Haas School of Business, UC Berkeley Overall, Yahoo! is the most visited site on the web Yahoo: most popular website –Sponsored Search –Local Sponsor Search –Search Submit Express –“Cost-per-click” and monthly payment after an initial fee

SIMS/Haas School of Business, UC Berkeley Best of the rest… Microsoft: the last in ranking of the three –MSN AdCenter –MSN Paid Search Solution Cooperation between MSN and AOL/TimeWarner –AOL/TimeWarner: dominance in media –MSN: dominance in desktop application Main competitor to Google and Yahoo on online advertising?

SIMS/Haas School of Business, UC Berkeley Agenda Setting the Stage –Basic concept –History –Major players Economics at work –Network Effects –Complements –Lock-In capabilities Where are we headed?

SIMS/Haas School of Business, UC Berkeley Network effect: Yahoo and Google’s scale will be tough to overcome The Virtuous Cycle Technology investment Better user experience Attracts new users More advertising dollars

SIMS/Haas School of Business, UC Berkeley Google and Yahoo! have created an ‘ecosystem’ of complementary products The Search “Ecosystem” groups SEARCH IM news shopping toolbar desktop search images maps Dell distribution Sun distribution search engine optimizers mobile photo sharing Blogging tools travel social networking games Fantasy sports personals Hotjobs sports finance Firefox partnership music calendar

SIMS/Haas School of Business, UC Berkeley Achilles’ heal to business model: low switching costs for consumer Many tactics aim to overcome this challenge: “Personalize” search results by tracking consumer behavior and preferences (Y!’s MySearch) Establish desktop presence outside of browser as a constant reminder (Y! music engine, Google desktop search) Utilize community in social networks improve search results (Yahoo’s MyWeb 2.0) Create complementary web products so search box is always in view ( , maps, etc.)

SIMS/Haas School of Business, UC Berkeley Agenda Setting the Stage –Basic concept –History –Major players Economics at work –Network Effects –Complements –Lock-In Where are we headed?

SIMS/Haas School of Business, UC Berkeley Matching a specific ad to a specific sale is the holy grail of advertising 2005 Pay per click 1998 Pay per impression 2008 Pay per call 20?? Pay per sale