Ingenio and Pay-Per-Call: First Impressions

I spent an hour with Ingenio executive vice president Paul Manca this morning, talking through the pay-per-call opportunity and the company's business.  I'm not an expert in pay-per-call and Paul's a persuasive fellow, so I welcome counterpoint.  In any case, here are my key takeaways and impressions:

• Ingenio's "pay per call" product is distinct from Google's new "click-to-call" product: With Ingenio, the web user sees a unique 800-number generated on the fly and then calls that number.  The advertiser pays only for calls to the 800 number, and only if they last more than ten seconds or so (to eliminate poor leads).  With Google's "click-to-call," meanwhile, the web user must enter his or her phone number online, and then Google calls both the user and advertiser to establish the call.

• Ingenio has offered a click-to-call product like Google's for several years.  It has experienced a low conversion rate because users do not like entering their phone numbers (inconvenience and fear that number will be sold, misused, or given to advertiser, etc.) and because they do not want to wait for the phone to ring.  The conversion rates for the Ingenio pay-per-call product are much higher.  As yet, Google is not testing an 800-number pay-per-call.  (Greg Yardley provides an excellent walk-through of the Google service here, with screen shots).

• Ingenio is distributing pay-per-call links through AOL search, Interchange, Miva, Marchex and others and expects to add more soon (traffic begets partners begets traffic begets, etc.--the same old chicken/egg).  Several blogs have apparently reported that Yahoo!'s pay-per-call test partner is Ingenio.  Paul didn't dismiss this as bogus. 

• The distribution deals are structured as revenue shares: every time a call is placed, Ingenio and the partner split the revenue.  The revenue splits are richer for Ingenio than for Yahoo! and Google in the average sponsored search partnership, but Ingenio still keeps a minority of the gross (I assume approximately 40% ).  The splits vary depending on whether the content partner or Ingenio signs up the advertiser; Ingenio keeps more if they bring the advertiser to the table.

• The average price-per-call across the Ingenio network is now $10-$11 per call.  In some categories, prices-per-call are as much as $60.

• Call fraud is probably negligible.  Ingenio can block autodialers, so fraudsters have to actually hire people to call and chat.  Not impossible, but inefficient.  Also, because prices are determined by a bidding system, the advertiser maintains control over ROI.

• Ingenio will book $35-$40 million of (net) revenue this year, 90%-plus of which is from a pre-existing advice business, which includes the former keen.com (people available for phone consultation for a dollar or two a minute).

• Assuming the remaining 10% of revenue encompasses Ingenio's pay-per-call business, I estimate that Pay-per-call revenue is currently tiny: approximately $2-$4 million.  Given that Ingenio has been incorporated into AOL search since April, this revenue seems surprisingly small (and may indicate that the feature is not actually that popular with searchers, perhaps for the reasons described below).  Because the company's voice infrastructure already exists, the incremental margin contribution for the PPCall business is very high.  Overall, the company's operating margin is about 20%.

• The company has invested $60-$100 million in R&D developing the voice infrastructure and believes its system is robust enough to handle $1 billion in revenue.  Most other pay-per-call vendors are operating with much smaller budgets.  Ingenio believes this is a major barrier to entry.

First Thoughts:

Pay-per-call, as currently implemented, is a small business in part because it's not a perfect solution.  Most web searchers would probably like some additional information about a vendor before chatting with them on the phone, and Ingenio deliberately does NOT enable this (by, say, also linking to the advertiser's web site; see this search on AOL as an example, and compare the top link--Ingenio's--with the next few).  The best experience for the searcher would be to be presented with all options--link to web site, click-to-call, 800-number, and direct number--and only the use of the 800 number will result in a revenue event for Ingenio.  Unless Ingenio doesn't mind the "leakage" that results from the user going direct--or can figure out a way to get paid for a direct call from the advertiser's web site--it will offer searchers an imperfect experience.

Yes, Google will enter this business, and, no, it won't kill Ingenio.  The stronger Google gets, the more it will be in everyone else's interest to support non-Google partners.  Yahoo!, AOL, and MSN wouldn't be caught dead using a Google Pay Per Call product, so Ingenio has three massive potential partners there--at least until one or more develop their own solutions.

Ingenio would be a prime acquisition candidate for Yahoo!, Microsoft, or Google (AOL probably can't afford it, at least under current ownership).  The Google guys would presumably consider it an insult to stoop to buying a capability like this, so that probably leaves Microsoft and Yahoo!. 

If Ingenio isn't acquired, it will probably go public in late 2006 or early 2007, provided revenue ramps as expected (which I actually don't think is a slam dunk; the business is still way too small to declare victory, and, in my opinion, the leakage issue is potentially a big one).  The company has already generated significant buzz on Wall Street and appears to have potential underwriters and M&A advisors in a tizzy.  This, too, will act as a barrier to entry.

Comments

[Roni]

Extract>> The stronger Google gets, the more it will be in everyone else's interest to support non-Google partners.

isn't it human nature, that once a company success people search behind other solutions ;-)

http://netrsc.blogspot.com

[SearchAnalyst]

Henry:

I've been interested in pay per call for a while now and found your blog while doing research in this area (welcome back, BTW). It seems a natural fit for local advertisers -- a group currently underserved by click advertising, and a huge potential market, which is why it's interesting to any analyst. You were able to surface a lot of numbers that can't be found anywhere else, and I'm hoping to use them to see whether there really is a "there" there.

While you seem surprised with the tiny $2MM figure, I have a different take. Let me walk you through my thinking, I'd love your comments. You say the current average price is $10-11. Let's make it $10.50, but clearly that's not the average call price since the program's start. It grew there from a lower number. From Ingenio's site, I see the minimum price is $2.00. Let's assume they started there. You say they've been live since April, or roughly 240 days. Pop open Excel and type in 4/1/2005 and drag it down to 11/29/2005 (the date of the interview). Place a $2 next to the April 1st date and $10.50 next to the last. Do a trend fill between these two figures (edit/fill/series...), and assume a growth curve. The average of this column is $5.11. This is a more likely reflection of the average price since the April launch.

You guess that Ingenio is taking ~40% of the revenue. I'm not sure whether the $2MM figure is gross or net, but you make it sound like net. If true, gross since April is $5,000,000. Divided by the average price of $5.11 gives you nearly 1 million calls. That's not too shabby, but here's the kicker. If we assume a similar growth curve for revenue to the one Excel figured out for the average price, 50% of this revenue (either $1MM or $2.5MM depending on whether you were talking about gross or net) was earned in the last 45 days. That's fairly encouraging, given that the call prices are likely to be immature, and the ad coverage is currently quite low (I had trouble getting pay per call ads to return when testing out searches on AOL, except for obvious stuff like "mortgages". Any idea how many advertisers they have? Coverage rates?).

Anyway, I can't see the growth for this product being anything but exponential during the early days (in my experience, all new revenue curves are S-shaped, but the first part of the S is exponential). This means a big chunk of any quoted revenue happened relatively recently. Even a million bucks a month is small, but the trajectory points to an interesting business by the end of next year. An overlay of cost-per-click growth curves (avg click cost, coverage, total revenue) would be very interesting.

[Henry Blodget]

This is great work. I agree with the observation about coverage (low), as well as the fact that this may be the result of too few advertisers knowing about the product (I don't know how many advertisers they have.)

My point was really that it is too early to draw any hard conclusions about whether pay-per-call is a shoot-the-lights-out product that might suddenly add another major wave of search growth, or whether it will fizzle like many other promising ideas have.

One possible flaw in the model, it seems to me, is that users will be reluctant to call unless they feel as though they have a good sense of the vendor. Ingenio is addressing this by allowing advertisers to include detailed information in the landing page, while still listing only the (revenue-generating) 800-number, and this may take care of the problem.

In any case, it's one of those big ideas that could turbocharge the industry, so it's worth watching closely.

[Roby Jones]

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[Steve D]

Leakage issue is relevant only when a business with a website buys pay-per-call. However, there is a great number of local businesses which don't have a website and rely exclusively on walk-in sales and yellow pages/local newspaper ads. It seems pay-per-call service is most useful to them.

Yellow pages is a very high margin business and judging by the thickness of yellow pages books, quite many buy ads - the ads display mostly phone numbers and relevant description. And it seems local businesses keep buying ads in yellow pages - it's been a practice for many years - and this shows that there is ROI for them. Combine yellow pages with fastness of internet search, feedback/review system, and maps/driving directions, and it seems the resulting service will be way more superior to plain yellow pages book. Embed the above functionality right into Skype client (as a separate tab) and it's right away introduced to all those millions of savvy users - users who already have usb phones/headsets and who are comfortable to use internet calling.

It seems obvious that growth in pay-per-click will come at the expense of yellow pages and that's a multi-billion dollar business. The functionality for consumers can and will be made way superior to paper books and this will drive consumer adoption. The do-it-yourself ability to control ROI for advertisers by means of auction instead of dealing with arbitrary pricing and advance payments to phone companies will drive advertiser adoption.