“A little too frothy”

A blogger at yapaZOO points to a transcript of the February 7 earnings call of online diamond merchant Blue Nile, which provides some fascinating insights, from a big advertiser’s perspective, into the current dynamics of the paid search market. Blue Nile CEO Mark Vadon says that in December “we saw extremely aggressive increases in the cost of online advertising. Our cost per click on Google, for example, rose by over 50% from a year earlier.” Echoing a recent announcement by florist FTD, Vadon says that Blue Nile will begin shifting marketing dollars away from search advertising: “Our marketing efforts during the fourth quarter were skewed toward search engine advertising. Given our experience over the past few years with paid search, this seemed like a prudent decision entering the quarter. However, with increased costs for paid search in Q4, we were unable to drive as much profitable traffic as we would have expected. Given these results, we will be looking to broaden our marketing efforts beyond search in the future.”

Vadon goes into detail about some of the trends that are influencing paid search – and making it relatively less attractive to advertisers. At one point, he describes how Microsoft apparently tried to use Google advertising as a way to transfer Google users to MSN:

A couple of weeks back, we saw MSN Shopping appear on Google. And that’s in our category; it’s also in a number of other categories. MSN Shopping began bidding to take customers from Google over to MSN Shopping. And for those of you who understand the cost per click on a Google, which is very targeted, versus a shopping channel, those economics are not going to make sense. So we see things like that, and we just feel like there’s something going on here; it’s a little too frothy.

He goes on to talk about the rate at which ad-clickers are turned into actual customers, which is of course a crucial variable to advertisers:

Over time from search, we see slight declines, and it’s not tremendous but slight declines in the conversion rate. I think, to some extent, that has to do with the search engines placing more ads. So, when you went to a search term a year ago versus going to it today, you are going to see more paid search placements today than you did a year ago. And as there’s more people there competing for the same traffic, if one consumer is shopping, so if you’re shopping for a plasma TV, you are probably going to go to many merchants, or at least a handful of merchants, before you make your purchase. And so you will be clicking on multiple ones of those, but only buying one plasma screen. And the more paid placements there are, probably the more click-throughs you’re going to have. So what that results in for merchants is downward pressure on the value of those customers. So just as bidding is going up, you’re seeing downward pressure in conversion. Again, this points to our desire in the channel to be less aggressive with our bidding.

If you’re in the paid search business, there’s good news and bad news here. The good news is that there appears to be a lot of irrational bidding going on for ads. In the short run, frothiness is great for the ad sellers. The bad news is that frothiness naturally corrects itself. Blue Nile’s move to be more conservative in bidding for ads is a sign that the correction is beginning. The irrational bidders may continue to hold sway over the rational ones for a while, but rationality will win out in the end. The ad bubble will pop.

4 thoughts on ““A little too frothy”

  1. IPcentral Weblog

    The Search Engine Biz

    For those who like to wallow in the details of the search engine world, the Internet Stock Blog has a Blue Nile corporate earnings conference call transcript that discusses the economics of this ad biz. Rough Type and yapaZoo have…

  2. Srinivasan

    Good Post. Maybe, the Adsense / Adwords model or the whole ‘contextual’ model is nearing saturation. other models are emerging – some based on MDHP and some like adbrite etc. Many predict that this year may finally see the end of CPC ?? Time will tell.

  3. gemdiamondguy

    One thing I would add that helps explain some of the “froth” is that many new companies are finally getting serious about the web. With millions of sites clamouring for visibility, pay per click is about the ONLY way many sites, especially new ones, can gain prominent placement and visibility. Hence, if you are an advertiser new to the party and determined to be seen on high demand keyword searches like certified diamonds

    , you will likely succumb to irrational bidding.

    It’s certainly not surprising that Blue Nile would begin to pull back from the ppc frenzy, especially considering how well optimized they are for natural search and the ubiquitous presence they have developed through other forms of online advertising.

  4. aaron wall

    My business model is not that good and I am in a hyper-saturated market. I make money from AdWords and AdSense both. There is still much room to play in many industries.

    Most advertisers are not bidding intelligently and are focused on only a few terms – often with irrelevant ad copy as well.

    The notion of the correction beginning is that there are always corrections beginning. Like in the stock market where some things go up one day while others are dropping at the same time. The whole market does not move in one direction at the same time, and a couple early adopters getting shocked by actual competition where they were once getting free money from a lack of competition tells very little about the market. You can’t even be certain that their vertical as a whole is getting competitive until you look into their account to see what words they were bidding on, what they were bidding, where they were directing the traffic to and what their ad copy looks like.

Comments are closed.