So, How's adCenter?

As the WSJ describes, Microsoft's adCenter debuts this week, when it is opened to all advertisers instead of just the 6,000 in the pilot program.  adCenter is critical to MSN's future and critical to the industry's future, as it will determine whether the search industry will continue to be a duopoly or will move to a more normal structure dominated by a "big three." 

Advertisers want the service to succeed, so they will have options other than Google.  Microsoft needs the service to succeed, or any remaining chance it has to gain ground in the search business will be lost.  And whether or not the service succeeds is a critical question for Google, Yahoo, and both companies' shareholders. 

If it is true that Google generates 50% more revenue per query than Yahoo! (and more than 50% more than Microsoft), and if it is true that a major reason for this is Google's ad-selection algorithms, then a successful adCenter could have a meaningful impact on not only industry revenue share but Google and Yahoo's growth rates. 

Revenue to the search engines equates to spending by advertisers, so every dollar spent on Yahoo and Microsoft is a dollar that won't be spent on Google.  Microsoft generates less than 1/5th the search revenue of Google (probably much less).  Still, if adCenter can boost Microsoft's efficiency by, say, 100%, a circa-$1 billion business could become a circa $2 billion business, which would mean that Google's $7 billion business would grow $1 billion less than it might have otherwise.  Bottom line, even if Microsoft keeps sweeping out the cellar in the search wars, it can still play spoiler to the big dogs.

So, the key question is, how's adCenter?  The word one user I spoke with two weeks ago used was "chaos."  Anyone else have any impressions/experiences?

UPDATE:

IO Reader Victor aggressively challenges my logic above that search spending is a zero-sum game (see his comment).  His argument is that, as long as the ROI is there, advertisers will buy as much search as they can, so Microsoft can grow it's own revenue without affecting Google's growth trajectory.  I am not sure I agree that advertisers view search as a "cost of revenue" expense rather than a marketing expense, but I do think Victor has a point (to a point). 

If the ROI on Microsoft is much better than on Google (which is certainly possible in the early days of a successful adCenter adoption), I think you will see dollars flow to Microsoft at the expense of Google and Yahoo--i.e., the argument I made above.  As long as the ROI on Microsoft is the same or worse than on Google, and as long as the demand for good quality search inventory still exceeds the supply, Microsoft's growth should not come at Google's expense.

Comments

[King Troll]

Another Story! Man you're on role bro. oh and FIRST!

[TallTroll]

>> if it is true that a major reason for this is Google's ad-selection algorithms

*snigger* That's one way if looking at it. The other, rather more cynical way, is that AdSense spammers have worked out how to game the selection algo so higher paying ads appear.

Regardless of how badly AdCenter sucks, they'll be able to shift inventory by doing unto Google what Google does unto to everyone else : get the arbitrage boys in.

They'll take the cheap MS traffic and push it out through a high paying Google / Yahoo feed. As "real" advertisisers move into AdCenter, CPCs will rise, and the arb boys will back off, go for the longer, cheaper terms, and scale back their spend. This will have the effect of plateauing the AdCenter CPCs for a while though, don't expect their revenues to shoot up in line with their market share

[Victor]

"A dollar spent on MSN is a dollar not spent on Google". That's horribly fallacious reasoning Henry. Many firms that use Google account for their budget as *cost of sales*, not as marketing (listen to Eric Schmidt on the first earnings call google gave). This is a crucial insight. Many firms would spend a lot more on Google if they could, because they know what their rate of return is, and believe me, it's positive. The problem is that they're hampered by enough places to put their ads, so they have large budgets sitting there unused. Google knows this too, which is why they're scrambling to create new properties (google video, google finance, google maps, gmail etc etc) where they can plaster ads that are well targetted. If MSN can create the same return on investment, then people will put money there too - as much as they possibly can while their ROI is positive. You really need to rethink that argument because you're missing a fundamental point about the online advertising game.

[Bruce Hamm]

From WSJ
Microsoft's pitch yesterday and today features speeches by Messrs. Gates and Ballmer, a rare double billing that shows just how much is riding on the initiative's success. The company has rented out Safeco Field, the ballpark where the Seattle Mariners play, for the finale tonight. So far, adCenter is getting high marks from advertisers who have tested it, partly because Microsoft has taken pains to court them and solicit their feedback

[Jeremy Johnson]

Couldn't they think of better brand name than AdCenter, being that it sound so much like asSense?

[Victor]

Hi Henry, thanks for picking up my comment. I want to share an anecdote with you that gave me a great insight into the advertising business. I have a friend who runs a business in Australia to help prepare students for the standard medical entrance test they do over there. He gives lectures to these students on how to prepare for the test. He uses Google to get leads and pays on average 50cents per click. Through various tracking mechanisms he estimates that he gets conversions from about 3% of clicks. That is, he's paying Google about $17 per conversion. For each conversion he is paid about $600. His other costs (such as hiring lecture theaters, and travel costs) come to about $50 per student. As you can see, he's making a huge return on his investment.

I was fascinated speaking with him about the business. He told me that if he could, he'd spend a lot more on google, and would be willing to pay as much as $300 per qualified referral. The only problem is that Google isn't putting his ads in enough places. He only spends about $2000 on Google per month, but he would pay much much more if Google was showing his ads more often.

My friend also advertises on Yahoo and told me that he gets far fewers conversions (Google has a huge market share in Australia), so the budget he has in his Yahoo account mostly goes unused. He told me that if Yahoo could get him the clicks, he wouldn't hesitate to pay for them.

It was only when I was speaking to my friend that Eric's comment about cost of sales started making sense to me. The fact that there's a small business in Australia that can exist and be hugely profitable entirely because of the Web (and Google in particular) gave me pause. In my opinion there are thousands, if not tens of thousands of companies that are running profitably like this, and they're not going to scale back their spending. They're looking to scale UP their spending, and will do so wherever they can find qualified leads.

It was this discussion with my friend in Australia that first made me bullish on GOOG. (Full disclosure, I'm net long GOOG). I strongly believe that there is a whole economy of businesses that are using Google as a cost of sales, and they're not going to scale back on that because it would directly affect their bottom line. If anything, many of these businesses are struggling to find ways to get there ads shown more often.

[Victor]

I should point out that your point about higher on MSN is right on the money. My friend gets higher ROI on Yahoo in Australia, but he gets almost no clicks, so even though the percentage return is slightly better, the absolute return is far worse. With Google taking share from Yahoo and MSN (and this is a secular trend), I think the question of percentage ROI wins on MSN will be mostly moot. Follow the eyeballs to the money.

[Neal Lachman]

Victor,

I agree with your comments. I also enjoyed reading the whole cost of revenue/sales philosophy of your friend. Nice.

[TallTroll]

Victor,

Nice post, but you are missing one point, I think. Neither Google nor Yahoo, nor MSN for that matter can really control the amount of visitors available. People arrive at those sites looking for information. It's in the SEs interest to serve the ads that make the most money for THEM, so only those visitors actually looking for info on Australian medical entrance exams should really be shown those ads.

I'm guessing that that just isn't that big a market. Some additional traffic could be provided by diverting from closely related topics, but the conversions would suffer, and the revenue loss to the SE would be worse. I'm afraid your friend is going to have to wait for the user market to increase, SEs are gatkeepers, NOT traffic sources per se

[Wayne]

Well, if we can't capitalize expenses, let's try to treat advertising as COGS :)

Seriously, this whole "advertising is COGS" argument has been used by ad firms (e.g., google) ever since advertising was invented over four years ago (irony intended). It's not a new argument (shocking that some of you seem to think it is), and it's not true, but boy it's fun to think it might be -- just turn the knob, and my sales increase !!1!!1

To victor, can you give us the url for your friend's business? It's nice to hear these "anonymized" examples, but unless I know more about how he's tracking conversions (it's harder than it seems), for all I know you are just talking your google shares.

For the business you describe, it sounds like a simple direct mail campaign to australian medical school graduates with his web site on it would have a cheaper conversion rate.

thanks to everyone for their contributions!
wayne

[Roman Geyzer]

I can see both sides to the zero-sum advertising debate. Companies investing in brand-building typically spend a fixed sum and even pay-per-click campaigns typically have some kind of expenditure ceilings to prevent costs from getting out of control. With that in mind, advertisers ultimately care about conversion ratios and the winner of that battle will be the search engine that can deliver the most relevant ads to visitors. When ad campaigns work and a proper conversion ratio is in play, companies are happy to see linear growth in advertising because it is truly behaving as a cost-of-goods-sold.

So while adCenter means Microsoft may have caught up to Google in terms of "how" they sell advertising, the real question is whether Microsoft's search engine can deliver ads as relevantly as Google.

There is also the business of scale. A myriad of small businesses spend considerable dollars with Google every month. Even if adCenter is the best thing since sliced bread, there is the overhead of having yet another advertiser to manage. Unless Microsoft delivers enough traffic to make a difference to your business, you simply may not bother dealing with the extra overhead.