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Battle of the search bots

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With its $1.63 billion bid to purchase Overture Services Inc. last month, Yahoo! Inc. made no secret of its desire to be at the top of the search marketing industry.

"Together, the two companies will be able to provide the most compelling and diversified suite of integrated marketing solutions around the globe," said Terry Semel, CEO of Sunnyvale, Calif.-based Yahoo!

The deal, which is expected to be completed in the fourth quarter, pits Yahoo! against rival Google Inc., Mountain View, Calif. It also underscores what analysts expect will be a fierce battle for supremacy in the search category. Microsoft Corp., for example, is said to be developing a competitive paid search product.

"MSN is definitely putting a lot of money into it," said Gary Stein, advertising analyst at Jupiter Research, a division of Jupitermedia Corp.

The search market also includes smaller paid search players such as Ask Jeeves Inc., LookSmart Ltd. and Primedia Inc.’s Sprinks.com.

While online advertising has declined two years in a row, search advertising will grow 50% this year to $1.6 billion, predicted Jupiter Research, which sees no signs of a slowdown in the category. In fact, robust growth in paid search will lead a recovery in online advertising, according to Jupiter. This year, online advertising is expected to grow 10% to $6.3 billion.

"The main reason search is so hot is it’s very easy to get into for advertisers, with very little upfront investment and risk. You only pay if someone clicks,"Stein said. "Mostly what they get back in terms of response is better than what they’ve seen in other forms of advertising. That’s where this big boost is coming from."

According to comScore, Google leads the pack with a 33% worldwide share of the search market; Yahoo! runs second with a 24% share. Microsoft’s MSN and AOL control 19% and 12%, respectively.

Economics encourage search

Marketers finding success with search advertising use words such as "efficient," "targeted" and "measurable." No wonder—they can reach prospects who are already, by definition, looking for something and often ready to buy. Moreover, they can avoid the time-consuming and expensive process of creating banner ads.

Keywords are the essence of 5-year-old Overture’s original business model. Called "pay-for-placement," the tactic involves selling keyword search placement to the highest bidder. Overture, like Google, now also offers robust algorithmic search, a technology that involves automated calculations in order to access Web pages and instantly return search results.

Google started with algorithmic search but in 2000 introduced its own pay-for-placement advertising system called AdWords. The program got a major overhaul in 2002, including adding a cost-per-click pricing model.

Increased competition and pressure from advertisers have pushed both Google and Overture to work on more sophisticated tools to make it as easy as possible for advertisers to manage campaigns.

"When you get reports from these guys, you get this enormous Excel spreadsheet," Stein said. "Brand managers don’t want a data dump. They want a concise summary of how well their campaigns are doing."

In January, Overture acquired Keylime Software, a developer of analysis tools, and it recently released a formal upgrade of its analytical suite. Google said an update of its tools is in the works.

A key battleground for both Google and Yahoo! will be so-called contextual, or content-targeted, advertising. The concept is to serve specifically targeted, relevant ads automatically on a variety of content pages across the Web.

Overture calls its contextual product "content match," and is currently testing it with partners MSN, Yahoo!, Advertising.com and Away.com.

Despite being enthusiastic about the new service, Overture’s Meisel said he wants to proceed with caution."Content-targeted advertising has very substantial challenges that we’re determined to get right for advertisers," he said. Those challenges include fine-tuning to produce contextual ads that are relevant and appropriate.

Google’s contextual ad product, AdSense, debuted in March. Participants include HowStuffWorks, Knight Ridder Digital Properties, VNU and, most recently, Reed Business Information.

"Healthy competition has accelerated innovation," said Stein. He added that the biggest ramification of consolidation among search providers may be to help search companies court the largest advertisers.

"Right now, search is a real direct response vehicle," said Stein. "There’s plenty of money in direct response, but there’s always a push to get brand advertising. It’s a good chunk of money and credibility [for the medium]."

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