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The buzz in paid search

By Bambi Francisco, MarketWatch
Last Update: 2:28 PM ET Mar 1, 2005
SAN FRANCISCO (MarketWatch) - As Wall Street looks at volume of searches and other metrics to determine the growth rate of the keyword-marketing business, one veteran search observer says his metric is simple: people.

Danny Sullivan, editor of Searchenginewatch.com and host of the 6th annual Search Engine Strategies conference in Manhattan this week, says the gathering has attracted 1,300 sign-ups. That's up from 1,100 last year. It's also up from 325 people who attended the conference back in November 1999.

"My numbers are human beings," Sullivan said. "It keeps getting bigger and bigger."

Sullivan said that the new attendees consist of executives who work in-house and not at advertising agencies. The broad interest in search-engine marketing is one reason why Sullivan believes the concern over paid-search pricing is overblown.

"The market is completely undervalued," he said. "That's why we have 1,300 people paying $1,500 for four days."

The paid-search advertising market has been under a microscope ever since Yahoo (YHOO) and Google (GOOG) reported outstanding numbers, while eBay (EBAY), commerce and other companies paying for keyword terms have seen their costs go up.

The question has been raised: Was it a seasonal issue, or the typical holiday-marketing push, that sent pay-for-performance advertising prices higher?

Sullivan believes that people are just using "seasonality" as an excuse.

"It's an excuse we're reaching for," said Sullivan, who said that it's difficult to gauge seasonality when the leading search providers do not break out what percentage of their sales come from contextual advertisements. Both Yahoo and Google provide their advertising listings on editorial pages as well as their search-results page. He believes Google generates a lot of advertising sales by placing its clients' advertisements on editorial pages.

Additionally, at least based on the interest in the conference he's hosting, it does appear the demand for paid-search advertising is sustainable. And, some observers believe there is a greater level of participation that's creating noise in the paid-search marketplace.

"We are definitely seeing keyword terms with significant price inflation," said Ellen Siminoff, founder of Efficient Frontier, a search-engine marketing company that manages $100 million worth of keyword purchases. "Those managing a handful of words are relatively unsophisticated. These are the ones seeing price inflation."

Who's providing the new source of keyword demand?

It does appear that venture-backed startups are becoming, in part, a new source of paid-search advertising demand. See Net sense.

Many startups are buying up keyword terms and trying to carve out niche search engine sites through which they can qualify the traffic and sell it at higher rates to advertisers.

These vertical sites have a shot but it'll be difficult down the road to compete against the majors, Google and Yahoo, said Sullivan. "When you get into this dangerous area of competing with the majors, you'll get licensed out, bought out or burned out," he said.

Voices in Silicon Valley agree that startups trying to tap into paid-search business may be eventually squeezed out.

"Similar to the late 1990s when buying and reselling domain names was all the rage, these days several companies and individual entrepreneurs are out there buying search keywords and then trying to resell them to the higher bidder," said Bill Burnham, a venture capitalist, and former Internet analyst at CS First Boston.

See interview with Burnham

"The big risk they face is that either the advertisers or the search engines will try to cut out the middleman through either a new technology or simply banning the practice," said Burnham.

"If aggregators continue to buy search keywords in bulk and resell the traffic/lead for 2X via an arbitrage model it will assert pressure on the search providers [Yahoo and Google] to go more downstream to acquire the marketers directly at some point if they want to continue to grow their top line revenue," said D.C. Cullinane, CEO and co-founder of thinkingVoice, a startup focused on a pay-for-call business model.