Remember all those seemingly radical business ideas that arose during the Internet bubble of the late 1990s? Young executives at startups pushed concepts such as first-mover advantage, click-through advertising, along with the entire notion that online could successfully compete with offline programs for marketing dollars.
Most of those executives are long gone, but years later, Overture Services is proving that some of those maxims may have had some truth in them after all.
Overture, which started five years ago as GoTo.com, is the clear leader in paid search advertising, where companies bid anywhere from 10 cents to more than $50 per click for the right to appear on the sponsored results list each time a consumer uses a search engine.
Thanks to deals with major portals such as Yahoo! and MSN, the publicly traded Overture reported revenues of $667.7 million last year, up 132 percent over 2001.
But more important, as the industry is projected to grow from $1.4 billion in 2002 to $5 billion-$7 billion by 2007, the company is in prime position for what could be an explosion in online search advertising.
"There's such a pent-up demand for this kind of marketing that we haven't really begun to see a leveling off in either cost-per-click pricing, the number of searches, or in the number of advertisers getting involved in this business," says Harrison Magun, of Denver, Colorado-based GO TOAST, one of a host of companies that have sprung up to help companies manage their online search advertising campaigns.
Overture's rise to the top of what may be the hottest trend in advertising caught many by surprise. When the company launched five years ago, online banner ads were still in vogue, and the conventional wisdom was that consumers would probably resent the inclusion of paid sponsors when using a search engine.
"When they started up as Goto.com, people rolled their eyes at them, but boy they had a vision of what was going to be important to advertisers. Look at them now," says John Lustina, CEO of the Chicago search agency Intrapromote. "It turned out they knew much more about the future than any of us did."
Paid search is a fairly simple concept. When a consumer types a keyword or combination of keyword phrases into the search engine at sites such as Yahoo!, Google, or LookSmart, they get two lists of results.
The first is what's known at the "natural" search list, where the engine spiders through the Internet and based on a fairly complex and ever-changing algorithmic formula -- returns with a list of what it considers the most relevant websites for that keyword or keyword combination.
The second grouping of results is the "sponsored" list. The concept, which Overture pioneered, has companies bidding against each other for the right to appear at, or near, the top of a paid search list. Companies pay Overture the bid price only when a consumer clicks on that listing and is delivered to the company's website. If the search is done at a third-party portal, Overture then shares that paid clickthrough fee with that portal.
"It's a win-win-win model," explains Matthew Berk, senior analyst with Jupiter Research. "The consumer wins because they get what's relevant, the portal wins because they get revenue, and the advertiser wins because they get the consumers' attention."
Overture claims it is finally delivering on the Internet's promise of building a direct and measurable connection between a business and its clients. "I think a number of dot coms faded out because they really couldn't deliver the ROI (Return On Investment) that companies are increasingly demanding," says Todd Daum, vice president of marketing for the Pasadena, CA-based Overture. "If you really look at our model, pay-per-click, it's the most targeted, measurable form of advertising out there. It's incredibly efficient because you're only paying when a customer clicks on the listing."
Despite its early success, paid searches have had some difficulty gaining the attention of the traditional advertising community, in part because they are such a different type of campaign. For one thing, there's little or no creative -- the listings that appear as a result of any paid search consist of a few lines of text following a top-line "call to action."
"Being able to track from exact search term to conversion really makes advertising clients much more confident in what they're doing," says John Lustina of Intrapromote, whose clients include Honda and several of the Bacardi liquor brands. "You can look at it at a really microscopic level, term by term, and you can pick and choose exactly what you know is going to make you X number of dollars for every dollar you spend. It becomes really easy to get a budget increased or to acquire money diverted from somewhere else."
Todd Daum points out that there's another, often overlooked advantage of Overture's service. "One of the interesting benefits an advertiser gets are the hundreds of thousands or even millions of impressions that people get during a search but don't click on," he says. "Those impressions, which re-enforce the company's message, come up every time a search is done, so the company ends up getting a lot of free exposure as well."
A recent study by NPD Group seems to back up this claim, finding that first, second, and third positions in a paid search listing had much higher levels of unaided consumer awareness than banners also appearing on that webpage.
But U.S. Bancorp Piper Jaffray's senior analyst Safa Rashtchy stresses it may be wise for Overture not to play this branding benefit up too much, noting that, "The problem is it almost competes with the main purpose." He adds that if major brands start taking this brand-building ability to heart, and begin bidding on keywords that are only marginally linked to a consumer's search, then click-through relevancy levels will come down, and both consumer's and advertiser's satisfaction could decrease.
Overture's success has triggered a flood of competitors, most notably, the AdWords program at Google, which swiped AOL's paid search program away from Overture last year.
But Overture has thus far been able to stay on top and indeed has been aggressively growing through acquisition, including the recent purchases of the AltaVista search engine and the web-analytics company Keylime Software.
"Even their competitors will acknowledge that Overture is a very well-run company with very smart people," says Rashtchy. "The core technology they developed was really quite simple -- anyone else could do it too. But Overture took it and really worked hard at the business concept. They became very good. Now it will be very hard to catch them."
Despite its impressive track record, Overture's stock price -- currently trading in the mid-teens, down more than 50 percent from its recent May 2002 high of $35.59 -- indicates there are still a lot of doubters out there, at least in the investment community.
One key worry is that the ever-increasing competition may eat into Overture's profit margins. But Rashtchy says a bigger concern is that the major search portals -- most notably Yahoo! and MSN, which account for a large chunk of Overture's revenue -- may eventually decide to bring their paid search program in-house. Overture's stock recently dropped ten percent on reports that Yahoo! was buying European pay-per-click company, eSpotting -- a rumor that proved unfounded.
Rashtchy for one, doesn't believe that the portals will opt to go it alone. "We think that Yahoo! has studied this issue rigorously, and realized that the scale advantage of Overture is just too great," he says.
The other major issue going forward is what will really happen as the price of keywords continues to rise. Todd Daum notes that the cost of the average bid has risen 50 percent over the last year, but even with that increase, it's still fairly economical at 35 cents per keyword.
Magun says, "Tomorrow, Google can change the way they prioritize listings within their algorithmic engine. Overture doesn't change, so the advantage of paid search advertising is that you know what you're buying."
Magun predicts that a likely scenario is that even more money will be diverted from other marketing programs into Overture and other paid search programs. "It's already beginning to happen," he says. "The paid search industry just increased 40 percent, and this is occurring during one of the decade's worst eras for advertising. When companies cut their market budgets, they're actually putting more money into their search engine marketing. They can always go back to their CEO and guarantee that they're meeting the internal target rate for investment "