Paid search's appeal escalates

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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, underscoring Microsoft's reasoning, Yahoo! reported doubled third-quarter earnings, citing, in large part, the growth in the search ad market that is currently dominated by Google and Overture Services.

Paid search 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.

Most appealing to the marketer converts is the transparency in terms of the return on investment. "Basically, everyone's in this mode right now of getting to a granular level on their metrics," said Tim Armstrong, VP-advertising sales at Google, who maintains that increasing numbers of marketers are plowing profits tracked to search back into search.

mainstay

The accountability of search has already turned it into a mainstay of the hyper-competitive auto category where rival brands buy up key words on each other's sites. Targeting similar consumer psychographics, they 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.

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, VP-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."

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 VP-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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