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Looking Back At Battelle’s ‘Search’

November 24, 2012

A few thoughts on John Battelle’s The Search.

Arbitrage is what launched GoTo. Founder Bill Gross initially sold keywords at a penny a click knowing that the bid prices would eventually rise to eight to ten cents (he never imaged that keywords would eventually go for as high as $100 on Google). He thought it would take about two years for the arbitrage play to pay off.  It didn’t hurt that GoTo got really good at acquiring cheap traffic. They bought traffic for 4-5 cents per click which allowed the company to quickly turn a profit as advertisers bid up the price of keywords up into the 8-10 cent range. Overture was able to generate tens of millions in revenue in the first couple of years. Not too shabby.

– Overture’s decision to shut down their destination site (GoTo.com) because of fears that their customers (Yahoo, Microsoft) would see their destination search site was a terrible idea. Keep reading.

– Gross saw the issue of quality search as paramount to success in the search business; however, this is universally credited to Google. Portals during the time saw quality, algorithmic search as counterproductive to the interest of their business. They didn’t want people to find what they were looking for then leave the sight. Big mistake. Gross saw accountability as the key to the Internet commerce. Gross came up with the idea but Google got the credit. Execution always trumps ‘ideas.’

– Google AdWords were initially sold on a CPM basis. True, Overture sued Google for patent infringement (and won) after the AdWords platform converted to CPC. Overture may have won the battle but Google won the War.

– I’ve been putting a lot into ad networks lately and it occurred to me this morning that with the success of AdWords (advertisers bidding on keywords) and then the addition of AdSense (publishers allowing advertisers to place text ads on their sites) was an absolute master stroke by Google. They leveraged their advertisers to create a massive network almost overnight i.e. some of those advertisers where probably also “publishers.” Now advertisers could buy advertising and simultaneously sell ad inventory and millions of long tail websites could start making money from contextual advertising. $$$

Gross’ addition of “friction” into the market i.e. having advertisers bid in a NASDAQ-like auction partially solved the issue of spam (porn sites burying keywords in their sites to drive traffic). This “bid engine” gave advertisers what they wanted: targeted traffic (people how are actually interested in your products and services) versus undifferentiated aka “bad traffic.” This put a wrench in AOLs ad model. No longer did it make sense to sell your soul to AOL and pay $20M to drive undifferentiated traffic to your site. The bid engine resulted in sales not just traffic.

Overture realized too late they needed to be a destination search engine after their stock took a hit and Wall St. began to value Google’s business more favorably. With that in mind the company acquired AllTheWeb and AltaVista as a hedge should their sale to Yahoo not go through (MSFT was also a suitor). Yahoo bought overture for $1.7B – pennies on the dollar considering that Google now generates about $1B in revenue every ten days.

Goto debuted at $15 a share on NASDAQ and closed at $22 back in ’99. Ahh, the good ‘ol days. Here’s the press release.

~ Zorilla City

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