Internet Search Engine Advertising Shows Major Gains

Term-Targeting Becoming a Killer App for Online Marketing

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NEW YORK (AdAge.com) -- Last week Microsoft ended its licensing deal with Internet search provider LookSmart, signaling its intent to carve out its own piece of the lucrative search-related advertising sector. Two days later, punctuating Microsoft's move, Yahoo! cited paid-search revenue as a major reason its third-quarter earnings doubled.

Term or 'key word' search advertising allows marketers to instantly and precisely target individuals who express a certain personal interest in their seaches.

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The two events were the latest evidence demonstrating how paid-search is rapidly emerging as a central muscle of the Internet advertising business.

Revenue up 50%
The category, currently dominated by Google and Overture Services, has grown nearly 50% to $1.6 billion this year, according to Jupiter Research, outpacing all other forms of online advertising. Overture bullishly estimates the market will hit $8 billion by 2008. Simply put, marketers are flocking to the tool.

Paid-search advertising refers to the process of linking the display of online ads to the individual searches executed by users at major search engine sites such as Google. If the individual performs a search for, say, "Hummer," their results include actual Web sites of Hummer-related content like Hummer.com, as well as a series of "sponsored links" from vehicle dealers such as newscars.com and carsmart.com to wackyplanet.com, a retail site selling Hummer t-shirts, hats and gifts. The sponsors pay each time their their ad is served up to a user who enters a relevant search term.

Customer mining device
In large measure, paid-search has quietly converted search engines into a new sort of customer mining device, systematically matching hundreds of millions of specific consumer searches each day against advertising campaigns precisely aimed at certain search terms.

According to comScore Networks, U.S. consumers are conducting more than 4 billion search-engine searches each month.

Most appealing to marketers is the amazing precision with which search-related ad responses can be documented and analyzed. "Basically, everyone's in this mode right now of getting to a granular level on their metrics," said Tim Armstrong, vice president of advertising sales at Google. He said that increasing numbers of marketers are investing profits tracked to search back into more search advertising programs.

Heavy automotive use
The accountability of search advertising has already turned it into a mainstay of the hyper-competitive auto category, where rival brands compete to buy up key words for, say, every imaginable configuration of SUV-related phrases on the major search engine sites, including automotive sites like Edmunds.com. Targeting similar consumer psychographics, they frantically bid for inventory that will get them in front of the consumer at the key moment in the auto-purchase process.

At Ford Direct, Ford Motor Co.'s online arm, search makes up 20% to 25% of the overall media budget and will exceed 25% in 2004. Ford Direct President Steve St. Andre said: "Our goal is to drive online transactions. We want key words to convert into leads and then sales. Search allows you to rethink the entire advertising model and immediately see which keyword buys are successful and which aren't." Managing the process carries a risk, however: "The open bidding process [on key words] can cause costs to run up," he added.

40% return
Auto site Edmunds.com favors search for its precise targeting and ability to generate high-quality, qualified traffic. "We know what works and what doesn't. We're generating a 30% to 40% return on what we buy," said Seth Berkowitz, vice presidnet of business development.

Other sectors have also started to ramp up their search ad spending. United Airlines' UAL Loyalty Services began using it in March: "For us, every dollar spent must come back to the bottom line. ... It's purely about ticket sales," said Pam Stein, Internet marketing manager. Ms. Stein said she'd like to see search account for 25% to 50% of the online marketing budget. The one downside she mentions is the bidding: "Orbitz and Travelocity are driving up costs."

Focusing on key words
Amanda Gooding, Hewlett-Packard Co.'s consumer marketing manager, HPShopping.com, agreed: "We've typically stayed away from bidding on competitors' key words. We're focused on key words that make our conversion as strong as possible."

This issue of the way that search words are typically bought is, in the eyes of many, the biggest threat to the continued success of the tool. Jeffrey Housenbold is vice president of business development and Internet marketing for eBay, one of the biggest users of search marketing. He warns: "If you peel back the numbers, most of the growth is coming from rising costs, not rising number of queries. As more people are adopting it, the demand for key words is increasing, so price is increasing. ... At a certain point you've got diminished marginal returns."

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