NEW YORK -(Dow Jones)- Internet search engines are riding a monster wave of online-advertising dollars. But last week it became clear one company - Google Inc. (GOOG) - is catching it more expertly than others.
Blockbuster third-quarter financial results from Google showed the search leader is growing much faster than its top rivals Yahoo Inc. (YHOO). Google's revenue rose 96% to $1.6 billion, while Yahoo's advertising revenue rose 46% to $1.2 billion. Microsoft Corp.'s (MSFT) MSN unit, which posted $564 million in revenue, had 20% advertising growth.
One reason for the disparity is Google's growing share of search traffic, a force that creates more and more Web pages on which it can display ads. But the key reason turns out to be Google's superior ability to milk revenue from its pages. The Internet wunderkind, it seems, has applied its creative energies as much to making money as to its official mission of organizing and making accessible the world's information. And its success is pushing Yahoo and MSN, which is now entering the ad-selling game, to get creative about "monetization," too.
"Google's revenue per thousand searches is probably 50% greater than Yahoo's, and maybe more," says Mark S. Mahaney, Citigroup's Internet analyst. While Yahoo and MSN can catch up, he says: "Google has built up a pretty significant lead, and I don't see anything that changes that leadership position in the next 12 to 24 months."
Search engines make money by placing small text ads on search-results pages that are also generated by search terms. Advertisers bid on these keywords in online auctions and pay bid prices when users click on ads. The method has taken off because the ads tend to target prospective customers well. As such, the ads are also being affixed to other types of Web pages, based on assessments of page content.
But Google and Yahoo have different methods for deciding which ads get the coveted top spots on search (or other) pages, and this accounts in large measure for their disparate financial results. Yahoo runs a straight auction that gives the highest spot to the highest bidder. Google, however, considers both the price an advertiser is willing to pay and the rate at which users click on an ad, increasing the chances the ads it features are relevant to users and ensuring the highest yielding ads get the most advantageous placement.
Yahoo has said it's working on its paid-search algorithm, but Chief Executive Terry Semel declined to say how Yahoo's auction or ad-ranking method might change, speaking in an interview following its earnings call. A company spokeswoman said Yahoo is "evaluating whether we should be more expansive about our use of click-through rate."
Meanwhile, MSN last month began rolling out its own ad service using an ad-ranking method that, like Google's, accounts for click-through rates, which will over time take the place of Yahoo's service. Microsoft is also using demographic data to target ads, such as users' age, sex and locations, presumably further improving relevancy to consumers and lifting click-through rates.
During Microsoft's quarterly earnings call late Thursday, it said MSN's search revenue fell from the previous quarter (compared to sequential rises at Google and Yahoo) because of lower-than-expected monetization. Microsoft said it intends to address that problem through adCenter.
Yahoo and MSN may be working to narrow the gap, but Google isn't standing still either. In fact, Google recently rolled out a number of new, monetization-enhancing features it says helped boost results during the third quarter. The efforts, the company says, are focused on improving ad quality, ensuring a good user experience and providing value to advertisers - and the money just follows.
"We don't think of this as monetization, but as delivering useful ads," says Salar Kamangar, vice president of product management at Google.
"We can still think of a lot of ways to improve the quality of ads," he adds, though declines to discuss them. "There's a lot of opportunity for us."
In July, Google launched "quality-based bidding," which sets minimum bids for keywords based on a fluctuating quality score that weighs factors like click-through rate, relevance of an ad's text and historical performance of the keyword. Higher quality scores mean lower minimum bids, encouraging advertisers to use high-value keywords and create good ads. Over the past two months, Google also started showing a third ad at the top of results pages for some highly commercial terms, such as "mortgages" or "cheap hotels."
And the company took steps to improve monetization of its network of publishers, which are sites that display its keyword ads placed based on an analysis of page content. In April, Google rolled out what it calls Smart Pricing, which adjusts keyword prices based on a prediction of whether an ad will generate a sale or other business outcome, discounting words that don't convert as well and, thus, pushing better-performing ads higher. Google says this improves the relevancy of the ads it shows and boosts advertiser return on investment.
And it launched a feature in June that lets advertisers control which partner sites they place both keyword and graphical ads on, and to pay for those ads based on site-user viewing numbers, rather than per click. The feature - which allows, say, a movie studio to pitch an action film on online-gaming sites - has gone over well with large advertisers, Google says. It can also bring more money for targeted sites and Google.
The changes Google has made don't please all advertisers. "Google is thinking about this as what's best for Google," says Kevin Ryan of Kinetic Results LLC, a search marketing agency. He says a lot of advertisers are complaining about the increasing expense and difficulty of managing sets of keyword used in refined searches (like "Doubletree hotel Philadelphia") that don't generate large volumes of searches, but are cheap to buy and produce good customer leads.
Bryan Weiner, president of search marketing firm 360i LLC, says Google's additions "have been good for advertisers willing to invest the time in managing search media," but adds that the increasing complexity is making it more difficult for advertisers that don't have sophisticated technology and personnel. The complexity is compounded by the fact that "you have now three main engines, all with different algorithms for ranking results - and it's an auction to begin with," he says.
The complexity may have just begun, considering Google is promising more, MSN is just arriving and Yahoo is scrambling to catch up.
Semel said on Yahoo's earnings call that the company is developing a "product suite" to improve monetization that will provide "real upside for Yahoo in the near future," something Wall Street is waiting for with bated breath.
The suite includes technology to improve how ads are matched to user queries, for instance by matching a search for "Elmo party supplies" to ads for both Elmo and Sesame Street favors. Yahoo will also in the next few months be testing ways to optimize advertisers' ability to get customer leads and better returns from their advertising spending, a spokeswoman said. Yahoo is also developing a self-serve portal, similar to Google Adsense, that's designed to bring more small publishers into its ad network.
-By Riva Richmond, Dow Jones Newswires; 201-938-5670; riva.richmond@dowjones.com
