The perfect tollbooth
January 09, 2006
A couple of days ago, I asked, "Is the ad bubble leaking?" I pointed to some anecdotal evidence that on-line advertisers were beginning to rebel against high per-click ad prices. A study released today, by Fathom Online, also points to some recent softness in ad pricing.
But there's another side to the story. Writing in response to my post, Paul Needham noted that as advertisers improve their sites, increasing the efficiency with which they convert searchers into buyers, the value of every visitor will go up, and the advertisers will thus be able to bid more for keywords - boosting the revenue of Google and other search engines.
Today, in an insightful article titled "Search Engines as Leeches on the Web," Jakob Nielsen explores the economics of this phenomenon further. Using a simple example, he shows how companies that depend on paid search ads are stuck in a vicious cycle: Whenever they enhance the effectiveness of their sites, they'll tend to compete away the economic gains by bidding up keyword prices. "In the long run," Nielsen writes, "every time companies increase the value of their online businesses, they end up handing over all that added value to the search engines. Any gain is temporary; once competing sites improve their profit-per-visitor enough to increase their search bids, they'll drive up everybody's cost of traffic."
That in a nutshell is one of the beauties of Google's business model. And it certainly explains why the company recently made its Google Analytics site-optimization service free - the benefits will tend to flow not into the sites' coffers but into its own. Sweet!
But it's also troubling: It points to a new kind of economic asymmetry arising on the web - something that I'm not sure we've ever quite seen before. It's not clear, for instance, that increased competition among search engines would remedy the imbalance (as competition usually would) - after all, the search engines aren't setting the prices; the advertisers themselves are. Nielsen writes: "I worry that search engines are sucking out too much of the Web's value, acting as leeches on companies that create the very source materials the search engines index." He also predicts that "liberation from search engines will be one of the biggest strategic issues for websites in the coming years."
That sounds right, but I have to say, after reading Nielsen's piece, I'd rather be the leach than the leachee.
UPDATE: Jason Calacanis calls Nielsen's article "the stupidest thing I've read in a long time," noting that search engines drive lots of visitors to sites and that Google's AdSense can provide sites with important revenues. I think Calacanis and Nielsen are both right; they're just looking at different things. Nielsen is looking at sites as advertisers, while Calacanis is looking at sites as content providers. Obviously, many sites are both, which certainly complicates the picture.
My Blog offers a viewpoint that the search engines can be viewed as commission agents who charge your business per sale.
Posted by: Nitin at January 10, 2006 03:31 AM
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