Will Google move to true pay for performance ?

What happens if Google adopts and impliments Bill Gross's idea

From Economist 10/01

Online advertising | Pay per sale | Economist.com

Sep 29th 2005 | SAN FRANCISCO
From The Economist print edition

The holy grail of advertising is within reach

“HALF the money I spend on advertising is wasted,” John Wanamaker, the owner of America's first big department store, allegedly said in the 1870s. “The trouble is, I don't know which half.” It has been the advertising industry's favourite witticism ever since. But it may expire soon, at least in the online world.

This week, Microsoft unveiled a new system for placing advertising hyperlinks on its MSN internet search site that could help it to close the gap with Google and Yahoo!, the two most popular search engines and the leaders in so-called “paid-search” or “pay-per-click” advertising. (MSN currently uses Yahoo!'s advertising technology.) The basic idea behind pay-per-click is that advertisers bid in an online auction for the right to have their link displayed next to the results for specific search terms—“used cars”, for instance, or “digital cameras”—and then pay only when a web surfer actually clicks on that link (hence “pay-per-click”). Since the consumer has already expressed intent—first by typing in the search terms, then by choosing the advertiser's link—he is more likely to make a purchase. From the advertiser's point of view, this reduces some of the waste that bothered Mr Wanamaker.

Pay-per-click advertising is the fastest-growing part of the advertising industry. In the first half of this year, it rose by 27% to $2.3 billion in America, the Interactive Advertising Bureau, a trade group in New York, said this week. That is 40% of all online advertising (though only 3% of total advertising) in America. Piper Jaffray, an investment bank, thinks that the pay-per-click market will grow to almost $20 billion within five years.

But pay-per-click is far from perfect. There is “click fraud”—bogus clicks generated by software-powered websites set up just for this purpose. And even humans who search and click often stop short of buying. Hence the next step: pay-per-call advertising. Most people first heard the term last month, when eBay, the world's largest online auction site, bought Skype, which makes software that lets people make free computer-to-computer phone calls. Meg Whitman, eBay's boss, explained that one rationale for the deal was to “monetise” Skype's internet telephony by placing little Skype “buttons” on web pages instead of sponsored text links. A web surfer might click on such a button and talk live to the advertiser's salesperson, at which point eBay would charge the advertiser.

A San Francisco company called Ingenio pioneered this approach in 1999 and already makes a decent living by placing toll-free numbers for local businesses on the results pages of search engines. This April, AOL, one of the big four internet portals, signed up as Ingenio's largest partner. The other three—Google, Yahoo! and MSN—will also launch pay-per-call programmes sooner or later, says Greg Sterling at The Kelsey Group, a market research firm, because small businesses and service providers like lawyers or plumbers find it much easier to close deals on the phone (many do not even have their own web sites). And faking calls is harder than faking clicks. Mr Sterling reckons that pay-per-call will be worth between $1.4 billion and $4 billion by 2009, on top of pay-per-click revenues.

But even the pay-per-call model may turn out to be only an intermediate step towards the ultimate in advertising efficiency, which would be a pay-per-sale approach. This is what Bill Gross has recently started offering at SNAP, a search engine that he founded. United Airlines, for instance, places text links on SNAP's search pages, but it pays (about $10) not when somebody clicks or calls, but only when somebody actually buys a ticket. Eventually, argues Mr Gross, 100% of advertising will follow such a pay-per-sale approach—although he won't guess how soon—because this is “the holy grail of advertising.”

A bold claim, but credible, since it was also Mr Gross who invented the pay-per-click model in 1997 by launching the company that would become Overture, now part of Yahoo!, and whose business model Google imitated with spectacular success. His first innovation, says Mr Gross, merely liberated advertisers from the old “cost-per-thousand” model, in which they targeted audiences and then blindly threw money in their general direction. In this round, he says, he will liberate advertisers from all wasted spending, by tying their costs directly to real sales. Mr Wanamaker would be amazed.