Hybrid Auctions Are Taking Over

As author Robert C. Gallagher observes, “Change is inevitable – except from a vending machine.” And so it comes as no surprise that paid search engines are changing too. The biggest change is one of the most fundamental, affecting which paid ads are shown first in the results. The tried-and-true high bidder auctions, pioneered by Overture (later acquired by Yahoo), are being phased out in favor of hybrid auctions, introduced by Google.

High-bidder auctions are just what they sound like – the search marketer who bids the highest per-click amount for each search keyword gets the top spot in the paid search rankings. But high-bidder auctions are starting to seem so 20th century.

The new thing is hybrid auctions, which set the paid search rankings based on a combination of the bid, the clickthrough rate and sometimes other factors. For example, if one search marketer bids $2 per click to show an ad with a 1 percent clickthrough rate, another bidder could outrank the first with a lower bid – perhaps by bidding $1 for an ad with a 3 percent clickthrough rate. In a high-bidder auction, the $2 bidder would always rank higher than the $1 bidder.

Google has been using hybrid auctions for years, but until recently, all other paid search engines were the high-bidder type. That’s all changing now. Earlier this year, MSN Search introduced new paid search technology that uses a hybrid auction. Yahoo has announced plans to follow suit late this year or early next year. Given Google’s longstanding use of hybrid auctions, the changes at MSN and Yahoo will transform the paid search industry, and nearly a whopping 97 percent of all paid search queries will use hybrid auctions.

Hybrid auctions usually provide more relevant results to searchers, because the most-clicked ads tend to rise to the top of the rankings. And hybrid auctions make the search engines more money, because the combination of clickthrough rate and bid price maximizes the total fees paid by search marketers.

More Complex Planning

If you’re a search marketer accustomed to planning paid search campaigns for high-bidder auctions, hybrid ones bring you some new challenges. With a high-bidder auction, you can see what your competitors are bidding at all times, and can take an educated guess as to what bid could get you ranked No. 1, for example.

Hybrid auctions, however, demand pure guesswork; not only don’t you know your competitors’ clickthrough rate, but you don’t even know your own, so you can’t predict where your ad will land no matter what the bid. Without that information, you can neither project the number of clicks your campaign will get, nor the amount you’ll pay in total, which hamstrings your ability to plan your paid search campaigns.

Google and MSN could help predict the number of clicks you’ll get with your bid, but they don’t, instead merely projecting the number of clicks to expect with an average bid. If your bid is higher (or lower) than average, you’re out of luck.

In contrast, Yahoo has publicly stated that they will provide predictive information based on your bid when they convert to a hybrid system, so we may be able to use Yahoo to help plan campaigns.

Simpler Operations

While hybrid auctions can pose new campaign planning issues, they also make operating your paid search campaigns far easier than high-bidder systems do.

To understand how much is changing, we need to remind ourselves of the work required to manage high-bidder campaigns. The very predictability of high-bidder auctions that aids campaign planning also makes operations tougher than with hybrid approaches. Because changing your bid in a high-bidder auction directly changes the search rankings, search marketers can use bidding tricks against their competitors to manipulate those rankings.

These high-bidder tricks include bid jamming (intentionally bidding 1 cent below a competitor’s bid to force them to spend as much as possible); gap surfing (bidding 1 cent more than a competitor to steal a higher spot); and friendly URL (bidding just under a specific opponent to avoid a bidding war).

Search marketers managing campaigns in high-bidder auctions must be aware of these techniques and must use them for highly competitive keywords. These techniques require constant monitoring and tinkering, raising operational costs for high-bidder campaigns.

In contrast, none of these tactics are needed for hybrid auctions, because the rankings can’t be changed simply with a new bid. And because clickthrough rates can’t be adjusted at will the way a bid can be, hybrid auctions are far less volatile than high-bidder auctions. The combination of fewer bidding tactics and less volatility means that search marketers can spend less time monitoring every ranking fluctuation.

A New Fraud

But all is not rosy. Search marketers are familiar with click fraud, but hybrid auctions have spawned a new kind of fraud, called impression fraud.

Impression fraud is almost the opposite of click fraud. With click fraud, competitors or unscrupulous search partners use low-paid workers or automated bots to click on paid search ads, draining the victim’s search marketing budget. Impression fraud occurs when competitors enter search terms to display your ads and then don’t click on them.

Confused? Stay with me now, because this is a bit tricky. Because hybrid auctions consider clickthrough rate in their rankings, anything that lowers your clickthrough rate helps your competitors. So, when they cause your ad to be shown and then don’t click on it, your clickthrough rate declines, which lowers your rankings (or forces you to bid higher to retain your ranking). It may scare you that some folks have nothing better to do with their time than to dream up such schemes, but it’s apparently the case.

While some observers estimate click fraud to affect as much as 20 percent of all paid search clicks, no one knows how rampant impression fraud may be. Because impression fraud cannot enrich anyone, it is likely less prevalent than click fraud, but its rise demonstrates how every change in search technology has unintended effects.

Despite the specter of impression fraud, the shift to hybrid auctions is generally a boon to search marketers, by making campaigns less work to monitor and operate, even if they are more difficult to plan for. The less time you spend in short-term bidding tactics, the more effort you can devote to improving your clickthrough and conversion rates and finding new keywords your competitors have not yet discovered. It’s better to focus on being more effective than more efficient, and hybrid auctions help you do that.

MIKE MORAN is an IBM Distinguished Engineer and the Manager of ibm.com Web Experience. Mike is also the co-author of the book Search Engine Marketing, Inc. and can be reached through his website (MikeMoran.com).

Santa in September

Kathy Eickenberg, who runs PurpleBearsShopnEarn.com, knows exactly what she is going to do this holiday season to ramp up her Christmas sales. One is start early; another is she has started a newsletter. She’s hopeful her Christmas ideas will help her move the teddy bears, arts and crafts, toys, children’s clothes and other collectibles and party supplies she carries on her site.

“I do try to read up on things and pay attention to various sources to find out what are considered the ‘hot’ products for the holidays and will definitely spend more time on the electronics, jewelry and toys sites since I assume they’re natural shopper favorites,” she says. She adds that she probably stands in the shadow of the “really successful” affiliates, but she’s proud and determined to learn as she goes. “I’m not really sure what to expect this year,” she says. “Sales have been improving, so we’ll see. Virtually all of my toy sales are around the holidays. It will be interesting to see how many toy sales will remain with Amazon or be done through Toys R Us, since they’re now separate.”

She also knows that any affiliate – with one site or one hundred – who sells gifts, clothes, electronics, books, toys and other retail goods is tested in the fourth quarter of the year when holiday sales could mean as much as 90 percent of an affiliate’s income for that year. Mostly, affiliates like Eickenberg are catching on to the techniques they need to rank higher in searches and keep the visitor interested – whether through content, coupons or presentation. What they want is to start as early as they can – for some, July is when they gear up – and to have the merchant weigh in, too.

There is do doubt holiday sales are big business – especially online. In 2005, holiday shoppers in the U.S. spent $30.1 billion online (that’s excluding travel) during the period of roughly mid-November to Dec. 25, according to a study by Goldman Sachs & Co., Nielsen//NetRatings and Harris Interactive. That spending is actually up 30 percent over the previous year. A separate report by comScore Networks put the Nov. 1 through Dec. 25 spending number at $19.6 billion (excluding travel, auctions and large business gifts) – a lower amount but still 25 percent more than its previous year’s total.

The Goldman Sachs & Co., Harris Interactive , Nielsen//NetRatings, study stated shoppers spent the most money on clothes, at $5.3 billion, followed by computer hardware and other peripherals at $4.8 billion. The ubiquitous iPod and consumer electronics in general made for a very fastgrowing category at 109 percent year-overyear, according to the study. This, they say, was due to demand for the iPod but also the lower prices in 2005 on laptops, printers and plasma televisions. The study also said shoppers bought $3 billion in books and $2.3 billion in toys and video games. And purchases didn’t necessarily stop the day after Christmas. Nielsen//NetRatings says while the number of unique visitors to websites in the week leading up to Dec. 25 totaled 60.2 million, the week after Dec. 25 to Jan. 1, 2006 totaled 61.2 million, as recipients proceeded to promptly spend their holiday gift cards.

AFFILIATES EMBRACE THE SEASON

Joel Bevil also knows the holiday season is an important period, but unlike Eickenberg, isn’t quite sure how to approach it. His BeachCombersCove.biz, DreamJewelry.biz, RoadTripVacations.net, and VarsitySportsStore.com will be experiencing their first Christmas this year. He says he plans to look into how to best market his sites in the next few months but that right now he’s actually just finished some back-to-school sales that did rather well for him. He says he primarily goes to ABestWeb.com forums on the Internet two or three times per week to seek out advice and to gather helpful hints.

Marilyn Olsen with American- Luxury.com has recently started a blog to help her sales. She also runs World- Luxury.com and French-Luxury.com, where she sells higher-end apparel, furniture, baby clothes and accessories, interior decorating ideas, gardening essentials and dog and cat gifts. “The fourth quarter is more a difference of magnitude rather than a change in what I offer to my clients,” she says. “Very special, handmade items, both decorating and gifts, sell as soon as they become available, which is usually in October.” For her the holiday season means working long hours to update the Web pages, which she does individually. “Since I carry everything at an individual item level, both image and text, this represents extra hours to add SKUs, and because of the faster sellthrough, I spend much more time checking for broken links or out-of-stock conditions,” she says.

Olsen says the blog adds a personal touch, which her buyers appreciate. She says the blog acts as a kind of newsletter to alert clients to “developing trends and to provide information about specialized luxury products to help them make informed buying decisions that meet their lifestyle needs.” She’d rather do it that way than to send email, which she says is too obtrusive. She does allow clients to set up an RSS feed to get only the information they want.

Marilynn Ferguson of GoodBulbs.com knows seasonal cycles. (Can you think of anything more seasonal than flower bulbs?) “I’m going to be promoting GoodBulbs with some brick-and-mortar advertising,” she says, “and some online ads, working to get the branding up … things like that. During the bulb-selling season, I’m going to fire up several ad campaigns. I’m quite excited about advertising on the merchant side, because I can go for branding and such and can afford to take a longer view when it comes to the ROI. Plus, a merchant site is a natural destination site.” She says that although she’s all for gearing up about two months before a high-selling season, “on the affiliate side, September is early enough for me,” she says. “Any earlier, and the ‘newly updated’ SE rank bonus dies before the season starts.” She adds that even with marketing pushes that some retailers start offering before Halloween, she doesn’t believe the selling season in actual sales numbers has changed in “20 years.”

What she calls the “actual” buying season for Christmas products should be anticipated by “SEOing” those items a couple of months in advance so that they get ranked at the right time. This is a different approach than any “regular” items you may have on your site, she adds. “Just tweaking the pages to show up in the SEs will do,” Ferguson says. “And if it’s a summertime item, they can pretty much forget it for Christmas; the ‘holiday’ for most summer items is Memorial Day – if there’s any holiday for them at all. There are some July 4 items, but other than that, summer stuff seems to not be connected to a particular day.”

As much as Ferguson is aware of the product life of her goods throughout the year, people like Bevil and Eickenberg want – and may need – more guidance from an affiliate manager. Fortunately, there are some who know they need to help make the sale, too. John Walter, affiliate coordinator at outdoor apparel and gear sites DogFunk.com, BackCountry.com, Tramdock.com and Explore64.com, knows that teaching affiliates a little SEO isn’t going to cut it. He says his sites do 50 percent of their sales in the fourth quarter and that he actively goes to the forum sites and advises affiliates to start their holiday work early – like August.

“We have a clear-the-warehouse sale then to get ready for the holiday season.” He says the 120-day cookie on his sites helps, as does the bi-weekly banners through Commission Junction so that affiliates don’t have to change that link. This year, they are gathering all the programs under one “mega-program” in CJ – so that will “diminish tracking errors across sites,” he says. “That’s less painful for affiliates.”

MAKE IT SIMPLE

Gary Marcoccia, co-founder of network AvantLink.com, says they go the extra yard for affiliates who need massive site updating for the holidays. They offer an automated data feed management tool that comes in handy when pages and pages of your site may need the necessary customizing to get them ready. Marcoccia says he noticed a fundamental difference in the kinds of online traffic some time ago.

“We recognized there were people either surfing or shopping,” he says. “We found out that we get a 10 times greater conversion rate from those shopping online. Those people are in buying mode. That said, we help affiliates make the sale by offering spiderable content. This way you don’t have to pay too much attention to it. It can take two to four hours per week customizing content manually.” This automation can be completed a few weeks before the beginning of the season so that spiders are sure to find it.

“We are focused on a shorter tail,” Marcoccia says, “not the thousands of affiliates who are just throwing up banners.” He says that while their affiliate selection process is very rigid, their platform can allow an affiliate to promote a feed so specifically that it is essentially syndicating affiliate creative. Even so, Marcoccia actively goes to forum boards and campaigns for early preparedness. He says affiliates have to go to their merchant sites in September to make sure the merchant inventory is still in stock and the price hasn’t changed. He says the best success is to devote one page to one item. But if summertime comes and the link stays up, then you have to go back to the static page, he says. And no one wants to manually check hundreds or even thousands of items.

For many, instinct and manual techniques are all they have at their disposal, especially if you’ve maxed out your SEO budget. To this end, the National Retail Federation’s Shop.org recently released a best practices and holiday trends study for holiday retailing 2006. The study’s highest-ranked advice is to start early. About a third of consumers plan to start their online shopping earlier than they did in 2005, so that means marketing campaigns will have to start earlier, too.

Secondly, the study found that the other two-thirds of online shoppers are waiting to shop later and later – 20 percent wait until 13 days before Christmas to start the bulk of their online shopping (compared to the 9 percent who leap in on the day after Thanksgiving). To facilitate the late shoppers, more than half of all online retailers were still offering free shipping during the last six days before Christmas. The study also commented that savvy online shoppers were expecting big online sales and promotions as early as Nov. 26.

With the ease of shopping online now a nonissue, customer satisfaction just keeps rising. Shop.org’s study cites an 11 percent jump in “very satisfied” online shoppers from the previous year. While 29 percent of online merchants began markdowns even before Thanksgiving, an equal 29 percent offered no markdowns all season and both groups came out ahead – 87 percent of merchants saw the same or improved profit margins.

SHOP + SEARCH = SALES

The Shop.org study also reiterated a basic truism: Search is still king. Even though some retailers were wary of spending so much money on paid search, the majority are still allocating budget moneys to it and even increasing their efforts in paid search this season. Affiliates also put search high on their list of effective seasonal strategies. Some will use search this year for the first time.

Ferguson at GoodBulbs.com would love to see the timing even up over at some merchants. They may want to help for the holidays, but she says sometimes the promotions are ill-timed. “It would be nice to start seeing the offers and new links and banners in September and October,” she says, “when there’s still time to do something with them, but not so darned soon that putting them up would give a reasonable person the idea that the ad was left over from last year.” She adds that some merchants email her the week before Christmas shipping ends (or even closer to the deadline) with some deal, “as if I’m going to be able to do a thing with it then.”

Her standard operations are to “fire up the PPC campaigns and tweak the SEO for my affiliate sites. Affiliate-wise, I aim for products that aren’t limited to Christmas interest, so rather than a ‘now or never’ type of cycle, the holidays just cause increased interest all around. A lot more buyers come out at the holidays, so sales rise accordingly. So, for me, it’s just a matter of making sure my pages are getting seen at that time.”

This year, Eickenberg says she will put “more emphasis on the gift cards that are available. I have only started to experiment with some pay per click and am still very much learning about it. I may devote some effort into that this coming holiday season. Probably everybody else will be, too, so not sure how effective that will be.”

Marcoccia at AvantLink loves to say that removing all the manual labor for the affiliate helps them execute “best practices.” It isn’t all just feeds; he says he lets affiliates know what feeds will be holiday-related and communicates that to them. In his network, though, the learning curve is a bit steeper. “With us,” he says, “if you’re not a little bit savvy, you are going to be challenged.”

Olsen of American-Luxury.com lauds the whole retail industry for embracing the online world. They may still be learning how to do things but clearly are in for the long haul. “I applaud online merchants who realize that truly unique items for which inventory could not be supported in brick-and-mortar [stores] can be offered successfully online to an audience that may be a small niche but is willing to pay full retail early,” she says. “This not only can give them important information on trends, but is also profitable.”

Domain Reign

Domains are the undeveloped land on which e-commerce properties are built and like real estate, it’s about location, location, location.

Gary Kremen is driving along I-5 in San Diego. He’s talking on his cell phone and sounds like he’s just had a pot of coffee he talks fast and furiously. Kremen is not from Southern California, but he seems to relish his newfound role as alien resident, an East Coast boy playing the part of the laid-back, easygoing renegade entrepreneur.

“I’m even more of a disgrace here than the Heaven’s Gate cult was,” proclaims Kremen, who is living in a mansion in the tony enclave of Rancho Santa Fe, a neighborhood known for its wealthy residents, in a six-bedroom, Spanish-style spread that he received as a result of a court ruling.

He may be a disgrace, but divine grace smiled on him when the court gave Kremen the beautiful property, a luxurious villa once occupied by Stephen Michael Cohen, a con man who forged documents in order to take away Kremen’s money-making cyber-property – that of the domain Sex.com. Cohen now owes Kremen $65 million and is out of the country and on the lam. But Kremen is still hopeful he’ll recover some of what he’s owed. Even if he doesn’t, he’ll be OK – in addition to the real estate, he had another windfall earlier this year, when the Sex.com domain sold for a cool $13 million.

Kremen’s experience was a harrowing ordeal; he paid investigators to track Cohen’s whereabouts and he endured long-fought battles in court. But Kremen’s experience is also an object lesson in how trading in the domain-name space can prove lucrative. The stakes are high, and counting on fortunes to be made isn’t a sure bet. It takes a tough constitution to weather the ups and downs of playing the domain-name game.

Luck

Kremen says that when he originally registered names (in the mid-90s), he snapped up Jobs.com, Housing.com and Autos.com. He also bought a site you may have heard of – Match.com. He paid $2,500 for Match.com; when he left Match.com, his payday was in the tens of thousands. (He was asked to leave because he refused to sell Match.com to Cendant for $7 million; after he left, the sale went through and Cendant later sold the name for $50 million.)

Fresh out of business school, Kremen thought the domain game was fun. On a lark, he bought Sex.com. Then he largely forgot about the site and focused on other pursuits.

But Cohen noticed the domain, and forged documents to take advantage of the cyber real estate. Kremen got lucky and found out that Cohen had fleeced his way into Sex.com. Kremen wrested back control of the site in 2001; Cohen had bilked so many others that Kremen had other litigants to back him up.

Even before selling Sex.com for millions, Kremen made a mint; it’s been reported that ad revenue for Sex.com was bringing in $8 million a year, a nexus of adult-entertainment websites offering products and services. His story shows that marketing geniuses can clean up if they know what they’re doing in the domain space, even if they don’t own domains with as flashy a name as Sex.com.

Easy Street

Plenty of other domainers are laughing all the way to the bank. Mike Bahlitzanakis sold Cellphones.com for $4.2 million in cash, a domain he paid $90 for in 1996. And others are profiting from the fact that today’s technology makes it easy to set up a revenue stream. According to Ron Jackson, publisher of DNJournal.com, “It’s such an easy process. In two minutes, I can set up a thousand domain names. I know quite a few guys making over a million dollars a year from advertising on their domains. It’s like a 24-hour money-printing machine.”

And it seems like easy money. With operations like GoDaddy offering a domain name – and a potential chance at untold riches – for less than seven bucks, the allure is rather appealing. It’s like playing the lottery; in this case, pick the right name, wait the right amount of time, play your cards right, utilize the name wisely or sell to the highest bidder and boom, you’re a winner.

Ad Dollars

Domainers, as they call themselves, are living as if it’s the dot-com heyday all over again. In the ’90s it was all about buying a name and then selling it to some sucker for a mint. Some domainers still approach it that way. But now, many prospectors are buying names in order to cash in on the riches that are freely flowing into online advertising.

Various winners view the idea of using their domain names wisely in different ways. Take Dan Warner, the COO of Fabulous.com and Dark Blue Sea Limited in Australia. His companies own thousands of websites and manage another 500,000 for other people. According to Warner, 4 million websites are owned by only a few hundred professional domain owners: “These domains attract $750 million in search advertising spend each year, and are actively traded as real estate.”

People are snagging scads of domains, like DigitalCameras.com, for example, and loading them with pay-per-click advertisements using services from Google and Yahoo. If you happen to visit one of these sites, you might see a review or two but you’re certain to be overloaded with text ads for products or services related to the domain name.

News of a New Boom

Pay-per-click advertising is prompting increases in the number of domain-name sales and the dollar value of deals. The space is red hot, and recent news underlines this fact. GoDaddy, with a $250 million market cap, has been reported to be going public. eNom merged with eHow and was bought by Demand, run by a former MySpace exec.

Cambridge, Mass.-based Sedo managed the sale of $17 million worth of domains in the first 10 months of 2005, up from $8 million in the same period in 2004 and $3.1 million three years ago. Domain sellers pay Sedo a 10 percent commission. Afternic Inc., of Orlando, Fla., brokered the sale of $5 million of domains last year. In 2004, the firm managed the sale of $2.2 million of domains, and in 2003 it did less than $1 million. Its standard commission is also 10 percent.

The domain-name market is also attracting new investors. It used to be for Internet entrepreneurs only, but now public companies and venture capitalists want a piece of the action. Domain aggregator Internet REIT is raising $250 million to buy domains, because Web addresses can be long-term investments that provide a steady stream of revenue.

Sedo managed the sale of Website.com for $750,000 this year, and according to Matt Bentley, CEO of Sedo, the business is shifting: “The fact that it is moving from individuals to larger corporations ” represents a legitimization of the domain-name industry.” For years, many in the industry had a bad rep for “cyber squatting,” registering names associated with famous brands in hopes of selling them to a big company at a hefty price, which fueled trademark legal feuds. But now that there are legitimate domainers and not just squatters, that is changing.

Personalities

Rick Schwartz is another prominent name in the business. He owns thousands of names (some are in the “adult” category and some are not). It has been reported that he wears a $65,000 Rolex on his left wrist and lives in a waterfront house in Boca Raton. Other people have invested in smart names – Candy.com, CellPhones.com, AthletesFoot.com – and can bring in hundreds of dollars a day, while the owner does little work to bring home the bacon.

Schwartz, for instance, directs his traffic to one of the many small companies that serve as go-betweens with Google and Yahoo, the two behemoths that have revolutionized online advertising and marketing. The middlemen aggregators do the major work, creating the sites, buying keywords and tapping into one or the other of the search engines’ advertising networks to add the best-paying links. Some other big domainers cut out the middlemen completely and work directly with the search giants themselves.

A Domain by Any Other Name

So what’s in a name? “Domains are the undeveloped land on which e-commerce properties are built, and like real estate, it’s about location, location, location,” says Dark Blue Sea’s Warner. “They can be bought, sold or leased and there is a limited amount of valuable property.”

While many Web-address purchases are motivated by investors looking to earn money from ads, some aren’t. Last summer, the owner of Dog.com bought Fish.com for $1 million. The buyer plans to grow an online pet supply store.

Pets United CEO Alex Tabibi wanted to expand his firm’s list of pet-related domains, which include Horse.com and Bird.com. He says the new site will sell fish food, fish tanks and accessories.

Pets United LLC, parent of Dog.com, acquired Fish.com from Dan Farmer, a tech exec. Afternic Inc. brokered the deal. Farmer, CTO and founder of computer security firm Elemental Security Inc., bought Fish.com in the early ’90s and used it for a personal website. He had multiple offers for the domain over the years. “I glibly decided that if anyone offered me a million dollars that I’d sell,” he told the Wall Street Journal. He said he used the after-tax proceeds to pay off the mortgage on his condo and “gave a bunch to charity.”

Large Portfolios

Several firms have quickly amassed huge portfolios of thousands of domains. A single site may get relatively little traffic, but aggregators aim to earn enough ad income across their network of sites to cover the expense of buying existing domains and registering new ones.

Houston-based Internet REIT, launched last year, has quickly acquired tens of thousands of domains, including MutualFunds.com. The company’s lead investor is Jacobson Family Investments Inc., an investment vehicle for a wealthy New York family.

Internet REIT’s president and cofounder Marc Ostrofsky purchased Business.com in 1995 for $150,000, and sold it four years later for $7.5 million. He also had the smarts to snap up Bachelor.com and Consulting.com. Internet REIT takes its name from real estate investment trust, a legal term for a company that buys, sells and operates properties. CEO Bob Martin compares it to owning and developing real estate: “Rather than having a speculative approach to what a domain name could be worth, you can now generate cash flow from these assets and value them like securities.”

Internet REIT wants to buy domains from hobbyists and retain them, rather than resell them. It uses “Google AdSense for domains,” a variation on Google’s popular search-ad network. Owners of large numbers of domains, those that generate more than 750,000 page views a month, get ads for their sites. The companies and Google share the revenue.

Other big domain buyers are looking to make money with pay-per-click ads without ruling out the possibility of selling their domains to other businesses. BuyDomains Holdings has 500,000 domains, like JobFinder.com and TravelChoices.com. Highland Capital Partners Inc., a venture capital firm in Lexington, Mass., bought a stake in the closely held company, which has advertising- oriented domains in 90 “verticals,” including travel, music and finance.

Marchex wants its portfolio of 200,000 domains to become destination sites filled with relevant content, but the sites mostly sport ads right now. The company paid $164 million to get domains such as Debts.com and Camcorders.com. Ad revenue from Marchex’s direct navigation sites totaled $7.7 million in the third quarter, up from $6.4 million in the second quarter.

The Future

The enormous growth means new businesses. A handful of companies now sell “domain parking” services. You can pay a parking service to create a page filled with pay-per-click ads so you draw revenue, which is distributed among the domain owner, the parking company and the advertising broker, like Google or Kanoodle.

The surge in online ads is also contributing to a big increase in the number of registered Web addresses. VeriSign estimates that about 10 percent of all .com and .net domains being registered are created to host pay-per-click advertising. The risks? Consumers could hate being deluged by ads and advertisers could shy away if the backlash gets too great.

DIANE ANDERSON is a senior editor at Yoga Journal. She previously worked for Brandweek, the Industry Standard, HotWired and Wired News. She lives in San Francisco.

Mistakes Lead to Success

Learn from your missteps and the path to affiliate success will be paved with opportunity.

Lurk around any affiliate marketing forum for more than a few minutes, and you will surely encounter a post that reads much like this: “Affiliate marketing sucks! I’m not making ANY money and I’ve tried EVERYTHING – Google AdWords, AdSense and affiliate programs. NOTHING works. My sites have loads of content and I even started a blog. I get a ton of traffic, but for every dime I spend on PPC, I’m lucky if I make a penny. More often than not I earn squat.

I followed the advice of those so-called affiliate marketing ‘gurus’ and coaches, but at this point I don’t believe ANYONE is really making money as an affiliate. Those success stories are a total scam. ~Disgruntled FORMER Affiliate”

Affiliate marketing success stories are a “total scam”? No one is making money? Our disgruntled former affiliate must have missed the keynote address at Affiliate Summit 2006 West last January by Anne Holland of Marketing Sherpa, and failed to get the information from any one of about 100 blog entries.

Here’s a brief recap. Ms. Holland said affiliate marketing bounties and commissions will reach $6.5 billion in 2006 – and that figure didn’t include projected earnings from contextual ad networks such as Google AdSense.

Although it may be hard to believe that thousands of affiliates will share $6.5 billion dollars in earnings when your ROI is in the red – believe it. The affiliate commissions’ pie gets bigger every year and anyone who is willing to learn what it takes to be a professional affiliate can take a slice.

If you really want a piece of that pie, review your site and ask yourself the following questions. Determine whether your site needs improvement. Success could be as simple as making one or two of the changes recommended below.

Do you lack knowledge or experience in your niche market?

Just because your auntie had a double hip replacement 10 years ago does not qualify you to give advice on that topic, unless you are an orthopedic surgeon.

Anyone searching for “hip replacement surgery” on Google wants and deserves information published by medical professionals. If your credibility isn’t immediately shot by that double-hip-replacement-4-you.com domain address, it will be as soon as your visitor attempts to confirm your identity and credentials on your “About Us” page.

People buy from people they like and trust. Build credibility with your visitors by working with topics about which you are knowledgeable, or about which you are willing to gain expertise.

Does your site’s appearance or lack of order turn people away?

Does that olive-on-pink color scheme really appeal to the Prada crowd? If visitors can look beyond the amateur “look and feel,” will they find what they want easily from amongst the 50 banner ads on your home page?

You have approximately three seconds to engage your visitor. Greet them with a pleasing appearance. Also make sure that your site’s theme and objective are congruent and immediately apparent. Navigation should be categorical and consistent throughout your site.

If you find it difficult to make an objective assessment, ask for a brutally honest review of your site from an experienced webmaster, preferably a super-affiliate.

Do you rely on a single source of income?

Affiliate programs can and do change their terms of agreement. I’ve seen commission rates cut in half and some affiliate programs shut down with no advance warning. “Google AdSensers” should also beware. Many experienced surfers now click Back buttons rather than support sites whose only purpose is to promote Google’s advertisers.

Hedge your bets. Successful affiliates build comparison or review sites that help visitors make informed choices about a variety of products offered by different merchants.

Do you sell rather than endorse products?

“ABC Widget is the BEST-ever widget in the whole history of widgets! No other widget even comes close. Buy ABC Widget NOW!!!!!”

You wouldn’t buy in to that kind of hype and neither will your visitors. Give your visitors credit for knowing that no product or service is ever perfect. Be honest. Endorse your merchants’ products with informative and balanced product reviews.

Do you waste time promoting two-tier programs to other affiliates?

For every $1,000 dollars I earn promoting a merchant’s products as an affiliate, I may earn a buck through the efforts of webmasters I referred to the program.

Invest your time and effort relative to your earnings. Promote those products and services that make you money and let other affiliates find their own programs.

Are you burning up rent or grocery money on pay-per-click campaigns?

The fastest way to the PPC poorhouse is to use generic ad copy that sends all traffic to your home page.

Prequalify visitors by mentioning a specific product or type of product in your ad title, then send them to a landing page that promotes that product. Test your campaigns by sending 250 to 1,000 clicks to the page. Determine your conversion rate then, set your maximum cost per click. Control advertising expenditures by setting daily budget, keyword targeting and negative keywords options.

Are you wasting good traffic?

Do you want to quintuple your earnings and your conversion rate? Then build a list.

Create an auto-responder series and encourage visitors to sign up for a free downloadable report or weekly tips. Invite subscribers to revisit your site by following up with topical information, new product and discount offers.

Invest an hour or two each week to communicate with your current subscribers. It is cheaper, more valuable and more fun than building new PPC campaigns to attract more nameless traffic.

Does your site fail to stack up against the competition?

What sets super-affiliates – the 5 percent of affiliates who sell 95 percent of a program’s products – apart from their peers?

Low-earning affiliates use the same old merchant copy or private-label rights articles to save time and energy; super-affiliates write their own articles, reviews and endorsements. Super-affiliates provide contact information and answer visitors’ questions. They create forums to build community and improve visitor retention rates. Super-affiliates survey their visitors and then give them what they want.

Give your visitors more than they expect and they’ll return the favor.

Do your visitors know you? Although your site may be hugely informative, it may lack repeat visitors because it fails to entertain or provoke curiosity.

The remedy is simple: Brand yourself. Stand apart from the vast majority of sites on the Web, which are completely boring and anonymous. Inject your humorous, witty or even curmudgeonly personality.

Are you working from a plan? Are you patient and persistent?

As the old saying goes, “Fail to plan, plan to fail.” Plan your site from the ground up before registering a domain or opening your HTML editor. Act on and stick with your plan.

Also, when you give up on a project too soon, you guarantee failure. So, put any unrealistic expectations of overnight riches aside, accept that there is work to do and stay with your project for the long haul.

Use the points above to determine whether your site hits or misses the mark. Implement the recommended solutions if required.

Don’t be afraid to make mistakes. It’s a safe bet that you will make some along the way. It’s not likely that any one mistake will kill your affiliate business. Simply correct the error and go on. The worst mistake a new affiliate can make is not to learn from their mistakes. The best thing that you can do, however, is to learn from the mistakes of others.

All mistakes are just opportunities in disguise.

ROSALIND GARDNER is a super-affiliate who’s been in the business since 1998. She’s also the author of The Super Affiliate Handbook: How I Made $436,797 in One Year Selling Other People’s Stuff Online. Her bestselling book is available on Amazon and SuperAffiliateHandbook.com.

Comparison Shopping Engines Drive Sales

Rev your sales by driving comparison shoppers your way.

Could comparison shopping be the gas fueling tomorrow’s affiliate sales? In 2005, three of the top comparison-shopping engines pulled in a whopping combined $351 million, thanks to merchant commissions. Yet insiders at the top shopping- comparison sites say the best days are still ahead.

“Comparison shopping really is vertical search and its day is just starting to dawn,” Mike Aufricht, chief marketing officer of mega-shopping-engine Shopping.com, says.

Already the number of comparison shoppers online is growing faster than the number of new Internet users. comScore reports that the Internet audience grew 5 percent over 2005. The number of comparison shoppers, meanwhile, grew nearly twice that much, according to comScore.

What started as a way to directly compare prices and features for technology at various online retailers is now expanding to all kinds of products and services sold by retailers online and off. Some comparison engines categories are already top of mind, such as travel, books and soft goods like apparel. Others are just gaining a foothold, such as education, financial services, automotive, healthcare and real estate.

The result? Thirty-seven percent of those who went online or used an Internet application in January 2006 used a shopping comparison site, according to Nielsen// NetRatings. That’s a whopping 57 million consumers in January alone. In the financial category, 15 percent of financial consumers based in the United Kingdom used a price-comparison engine in January before picking their purchase – up from 6 percent in 2003, according to Forrester Research. And here’s the kicker for affiliates: Forrester also found consumers who use comparison sites spend 25 to 30 percent more online than those who don’t.

Affiliates, Start Your Engines

So what new revenues are affiliates bringing in by adding comparison-shopping engine functionality? A whole lot, if you ask affiliate David Felts.

In 2002, Felts had one website with static affiliate links organized in directory format. Three months into running it he received his first affiliate check: $22. He now runs 40-plus niche price-comparison sites pulling from a database of over 1 million products from more than 50 stores. His main site, iShopHQ.com, receives an average of 400 visitors a day. In December 2005, gross revenue from his network exceeded $9,500.

Providing the ability for his customers to view in-stock products from multiple vendors in an aggregated, yet simple, format “definitely gives me an edge over single- vendor affiliates, and helps drive sales,” he says. Vendor data feeds are automatically

downloaded and unzipped; data import jobs pull the new feeds into the database, and more jobs reconcile the inventory and rebuild the search index. The whole process kicks off every day at 2 a.m., giving up-to-date inventory daily. He hosts all the sites from his own server at his house using a business-class broadband connection. “As a Web application developer by trade, I was able to do all the programming myself,” Felts says, “and my search engine marketing background enabled me to leverage PPC and SEO to complement my affiliate marketing efforts.”

With search results filtered by price, price range, feature set, brand or whatever users want, price-comparison engines are indeed changing the process of comparison shopping, both on and off the Web.

“Rather than flipping through catalogs, writing down sale items from newspaper ads or scouring the Yellow Pages and calling local retailers,” says NexTag vice president of product shopping Mark Bradley, “[shoppers] can now conduct product – and

many services – in a few seconds with a few mouse clicks.”

While comScore’s mid-2005 study of consumer electronics comparison shoppers found 75 percent were merely window shopping, 25

percent did buy within the next 90 days. Only 10 percent bought online, though. That’s a figure top comparison engines are working hard to increase. Some have added buy-now incentives. Some have built-in peer pressure in the form of real-time blogs and peer-to-peer reviews. Some offer special deals only found online.

“Consumers are just beginning to understand the power of the Internet when it comes to shopping: comparison,” Farhad Mohit, founder of the Shopzilla.com comparison engine, says. “In the offline shopping world, there hasn’t been a service like this that lets you have all the choices for all the stores.”

While the Sabre system in travel allows people to tap in to all the flights and seats that are available, there is no Sabre for shopping. “In a very real way, we are building the Sabre in our industry,” Mohit says of today’s top comparison engines. “All of us are attempting to do this.”

But for affiliates, paying to be included in comparison-shopping sites is not very thorough searches for just about any seen as a benefit, according to industry observers. That’s primarily because most merchants are already sending feeds to the big comparison engines and since most of those charge a cost per click, rather than a percent of the sales price, click costs also quickly add up. For instance, Shopzilla collects the equivalent of 10 to 15 percent commission in click costs for every product sold. Affiliates would profit only if their commissions were substantially higher.

A few enterprising publishers are launching their own comparison engines, simply adding search technology within their existing catalog of affiliated merchant products. Take Pepperjam.com, which since 1999 has amassed a loyal following of a reported 6.5 million unique visitors monthly to shop its QVC-advertised collection of grandmother’s-recipe pepper jams and a growing assortment of affiliated merchant products. With more than $100 million in affiliate sales through LinkShare, Commission Junction and Performics in 2005, this 25-employee super-affiliate in March launched the Pepperjam Comparison Shopping Blog, its house-made search and customer review forum.

“Over the past six years, as we’ve grown as a company, we’ve received calls from a merchant or affiliate manager saying, ‘How can we work more closely with Pepperjam to get more sales for us?’ Now it’s going to be easy,” says Kristopher Jones, Pepperjam’s co-founder and CEO. Featured search placement goes to merchants who increase their commission or open a Pepperjam online merchant account and bid their product to the top. “With 6.5 million visitors already coming to our site,” Jones says, “now, in order to get the premier real estate on Pepperjam, [merchants] are going to have to give us more.”

While Pepperjam has more than 1 million products in its catalog, the largest product selections are found on the existing biggies of comparison sites, which include up to 100 million products each. So, the secret for most affiliates to profiting on this trend is to get in as an affiliate of a comparison-shopping engine already offering categories their site visitors need. Shopping.com, PriceGrabber.com, NexTag.com, Shopzilla.com and many other engines have affiliate programs, either through co-branding, custom banners or text links.

“Consumers are just starting to realize that general search is very difficult for doing shopping,” Shopping.com’s Aufricht says. “Consumers talk about the chaos that’s created by using general search engines to do their shopping. They talk a lot about having to click from a search engine to a website, back to the search engine, taking notes along the way, opening multiple browser windows simultaneously. That’s very unwieldy and very time-consuming. Shopping comparison engines allow you to do all of this very quickly from one website. It’s a value proposition that’s very appealing to consumers.”

Not the NASCAR Crowd

The purchase prices for three of the top engines that were sold in 2005 seem toconfirm industry

watchers’ expectations for growth. Shopping.com went to eBay for $634 million, Shopzilla.com was sold to media conglomerate E.W. Scripps for $525 million and PriceGrabber was acquired by Experian for $485 million, plus expenses.

Companies buying these shopping engines are justifying the hefty price tags with the promise of a potentially lucrative and loyal shopping following. NexTag’s Bradley says the demographics for electronics is typically higher income/higher education, while there is a more broadbased appeal for apparel and sporting goods – those run the full gamut when it comes to education and income.

With the addition of such categories as education and healthcare, across-theboard comparison shoppers are “a very general audience now,” Bradley says. “We touch a lot of people simply shopping for anything online.” Meanwhile at Shopzilla, “women are our target demographic; 70 percent of women use Shopzilla.com,” Mohit says.

Though you may think of comparison shoppers as cheapskates, they’re not. At Shopping.com, Nielsen//NetRatings reports 42 percent of its shoppers have household incomes of more than $75,000 and 48 percent hold at least a bachelor’s degree. Shopping.com also reports 80- plus percent of its shoppers prefer to shop for brands they trust, with less than 10 percent considering lowest price to be the primary driver behind their buying decision. According to comScore Media Metrix, that translates to five times the revenue per lead of other leading portals and search engines.

PriceGrabber brings in all ages, from 18 to 54, with high incomes (users report an average yearly income of $71,000) and college educations (77 percent). The average order is $450. NexTag, meanwhile, seeks to “close that gap between the savers and the non-savers,” Bradley says. “Since comparison shopping is morphing from lowest pricing and grabbing to social shopping, we’re adding in content, recommended merchants, special deals and coupons that you can’t get anywhere else.”

For now, online comparison shopping is anyone’s race. “You put all those numbers together,” says comScore chairman Gian Fulgoni, “and what that says to me is: It’s having a pretty major impact on the way consumers spend their dollars.”

Fine-tuning Your Engine

As far as placing your comparison engine on your site, “every site’s different,” Bradley says about comparison search engine box placement. “Above the fold is the best, but it really depends on their navigation and how they have their advertising laid out currently. You can do very effective testing over a month’s period.”

Must-haves are things like images, product reviews and search technology that allow users to not only search by general search terms, like shirts, but also search for specifics like a camera make and model, and corresponding product reviews. At the least, says Peter Koning, a British Columbia-based M.B.A. and founder of Affiliate-Software- Review.com, “affiliates need to get to that next stage if they want to survive, as more technology is used in the shopping experience,” he says.

“It comes down to basic business principles: If you understand your audience and are listening to them and answering their

questions, then you need to go a little further and give them a little help so they can self-serve and educate themselves. Try to separate yourself from your bias as an affiliate, where you only get paid for a sale, with the real challenge of establishing your credibility so they are willing to trust you. At minimum, put up a one-page comparing products on your site. Show them you’re not biased and you’ll really provide value,” Koning says.

You’ll also want a defined marketing message. In January, Forrester researcher Benjamin Ensor found that price comparison sites aren’t top of mind even for previous users. “The more we can educate consumers when they first come to us through a search engine, the more likely they are to return,” Shopping.com’s Aufricht says. The message is simple, he says: “We need to generate awareness that comparison shopping exists and the advantages of consumer search engine sites. The biggest advantage is to be able to search across millions of products across thousands of merchants. As a result, you’re going to find the right product, at the best price, and probably most important, do it with the least amount of effort.”

For the 10 percent or more searching exclusively for price, University of Indiana Professor and new-economy researcher Michael Baye in 2005 uncovered some stats that make good promotional verbiage for site visitors: “Consumers save 18 to 20 percent, on average, by comparison shopping for products online versus visiting the nearest brick-and-mortar retail outlet.”

Here’s Shopzilla’s marketing strategy: “We have a higher conversion rate because we prepare our shoppers in advance to make a purchase once they click on a listing,” Mohit says. “By having all the information up front, they’re not going to click on a listing that doesn’t make sense to them.”

NextTag’s marketing advice comes from Bradley: “Reviews for merchants that don’t have brand-name recognition are very important. If a customer comes in and hasn’t heard of that merchant, reviews from satisfied clients definitely help them make a sale.”

The Finish Line

And there’s plenty more for comparison shopping down the line: Yahoo Shopping, with 100 million products in its database but no engine affiliate program as of yet, will be the first to bring out a comparison- shopping service for mobile phones. “So you’re at point of sale and simply type in the product model number and have access to comparison information,” says Rob Solomon, vice president of Yahoo! Shopping Group. “That is a game changer from a consumer perspective, because it gives a lot more power to consumers on price. In the future, they will be able to scan in a bar code or take a picture of the product. It’s just a phone call, and it isn’t an incremental cost at all (depending on your phone plan). You could also use a pay-per-call technique in the future; I can imagine a universe where that happens fairly soon. It’s nascent, but it’s coming and it’s very interesting.”

Whether turning to an existing comparison engine or launching your own, experts say you’ll do well to get in now. “The general question is whether online shopping is going to continue at its torrid pace, but it’s tough to see it slowing down anytime soon,” says comScore’s Fulgoni. Even better news: “On top of that, when users go to broadband, their spending rates just rocket, plus the broadband user is spending 35 percent more time online,” he says. “This just plays into the hands of anybody that’s offering a value-added service online. Comparison engines have got to be one of the beneficiaries.”

JENNIFER D. MEACHAM is a freelance writer who has worked for The Seattle Times, The Columbian, Vancouver Business Journal and Emerging Business magazine. She lives in Portland, Ore.

Vinny Lingham: Playing the Angles

Vinny Lingham’s career as a marketer started early. In kindergarten, he made money buying Thundercat stickers and selling the popular ones. In his early teens, he switched to cricket cards and then Magic The Gathering cards. In college, he partially financed his undergraduate studies by playing pool and managing and booking bands.

So it’s not difficult to see why the entrepreneurial aspect of online marketing appealed to him. In 2001, he caught the bug while he ran the search marketing department for a company that marketed on behalf of online casino clients, which had a large paid search budget.

Two years later he left to start his own company. Lingham is the founder and chief strategy officer of incuBeta, an online marketing company based in Cape Town, South Africa. incuBeta owns the super-affiliate Clicks2Customers.com, a paid search marketing company, incorporated in the United States, which specializes in directing targeted traffic to its clients’ sites and is one of Commission Junction’s top five performers.

With more than 50 full-time employees, incuBeta is on track to generate eight-figure commissions this year, as well as over $100 million in sales for its merchant partners. The company was a recent winner of Business Day’s Most Promising Emerging Enterprise in 2005.

Lingham started the company in 2003 with two friends and his then-fiancee, Charlene Troskie, who is now his wife and focuses on new development within the company’s campaign team.

It’s not easy working with your spouse – especially when you’ve been married just over one year, recently bought a house and make an international business trip every month. But Lingham feels that the toughest part of being employed at the same company is trying to keep shop talk from seeping into their home life.

Still, the line between his business and personal life is blurry. The self-described workaholic says he is online 24 hours per day and works 60 to 70 hours per week. He is often toiling at home into the night to keep up with clients on the west coast. Lingham estimates that 25 percent of incuBeta’s clients are in the United States, where he travels every two or three months.

Despite all the traveling, Lingham does not feel that his company’s location in South Africa is a disadvantage.

“Cape Town is considered the ‘Silicon Valley of South Africa.’ And we’re pretty close in time to London,” he says, which is where 60 to 70 percent of incuBeta’s clients are based. The only real issue is having to hop on a plane to get the interaction with clients he feels is so important. “The power of face-to-face is indefinable. But we’re a global company, so we’d have to travel wherever we were.”

Only one thing about traveling so much really bothers him. “I hate airports – taking my shoes off, waiting in queues and taking my laptop out of its case.” He’s also learned not to combine leisure travel with business trips, ever since work forced him to cancel the holiday portion of a trip last year. He did, however, manage to get away for his honeymoon, where he was “forced not to work for 10 days. I only signed on twice in all that time ” it drove me a little crazy.”

When Lingham does have spare time, he likes to spend it watching movies, including “Tsotsi,” which not only won this year’s Academy Award for Best Foreign Language Film, but was co-produced by Moviworld, a company that received investment from TEIM Ventures, the same private equity firm that provided incuBeta with crucial development capital.

Lingham is also a big reader – he’s read all of Dan Brown’s books and loves them. He’s also a big Tom Clancy fan. And his favorite book, Rich Dad, Poor Dad by Robert T. Kiyosaki and Sharon L. Lechter, reinforced his existing viewpoint that there is a huge difference in the mindset of the haves and have-nots.

Originally from East London, a city on the east coast of South Africa where his parents still live, Lingham is happy only when he’s learning. In addition to his more-than full-time job, he is also studying for his Master of Science degree, which will likely conclude with a thesis on incuBeta. He’s also interested in getting an M.B.A., but only in the U.S. His ideal school would be somewhere in the Silicon Valley, where he’s interested in spending a few years to grow the business.

Lingham was recently invited to join the Society of Industry Leaders, which provides knowledge and information to Vista Research, a Standard & Poor’s company. He also belongs to Mensa, defined on its website as “the international society that provides a forum for intellectual exchange among members.” But Lingham thinks the formula for selection is flawed. “I know my IQ but I don’t put a lot of faith in it. It’s your mental age divided by your chronological age,” he says, claiming that means the older you get, the lower your score becomes.

He considers Virgin founder Richard Branson a role model. “We’re similar in many ways, but I’m not as crazy as he is. He has a fantastic brand. Some of his companies have worked and some haven’t. But he does it because he enjoys it – for kicks. It’s a passion. It’s not about the money.” Other mentors include a former manager who inspired Lingham to study at Harvard one day, and Bono of the Irish rock group U2, “because of the work he’s done in Africa and for Africa.”

Lingham is a fourth-generation South African, whose ancestors hail from India. He does not consider himself religious, but says, “I was born Hindu, but I tend to focus more on the spiritual aspects of the religion (Karma, etc.), as opposed to the religion itself.” As for politics, he thinks he has “far too much candor to be a politician, but maybe I’ll become president of South Africa one day. Who knows?”

Proud to Be a South African

Lingham says there’s a lot of erroneous information circulating about his country in terms of drought, poverty and AIDS. “The Rand Water Board has one of the top three water supplies in the world,” he says, referring to the 100-year-old water utility that services South Africa. “Our economy is growing at 6 percent a year and all the urban and semi-urban areas, which house 70 percent of the population, can be considered ‘firstworld’ by many standards. The AIDS contraction rate is actually at a decline in South Africa, according to the latest statistics,” he says. And while the CIA World Factbook lists the poverty rate as 50 percent, Lingham says that is incorrect because “it doesn’t take into account PPP (purchasing power parity) or currency differentials.” Lingham says, “The poverty rate has dropped to around 20 percent, which is exceptionally low for a developing country, but is still obviously not ideal.”

Lingham also feels his country’s low life expectancy rate of 43 years is misleading. “The average is skewed by the number of AIDS babies that are born that die at a young age,” he explains. “It’s not an ideal number, but I guess that’s one of the things that the government is working on. Countries in Africa need relief from first-world debt in order to focus on issues like healthcare and poverty. Bono deserves his Time Person of the Year award for the work he has done in order to drive this forward.”

Lingham loves the weather, the people and the sports of his country. “I will probably spend a few years living abroad before finally settling down and having kids, but South Africa is my home and I truly enjoy living here – it’s a beautiful place.”

Lingham’s passion for his country is matched only by his passion for his business as a performance marketer. He even has a blog – VinnyLingham.com – where he discusses industry issues and events that he deems important to the online marketing community.

The Company He Keeps

In the beginning, Lingham and his associates needed a name for their new company. “We were looking for a word that embodied a start-up company looking for opportunistic ways to grow Internet businesses,” he says. Unfortunately, their first choice wasn’t available. “Someone suggested the name incubator, but obviously, the .com was taken. But incuBeta wasn’t – and seeing as technology is almost always in beta, it stuck.”

Clicks2Customers.com’s traffic comes from search engines – primarily Google and Yahoo. The company works with three affiliate networks: Commission Junction, TradeDoubler and LinkShare. Lingham’s company has had a relationship with CJ since its inception three years ago and was honored with the network’s Award for Innovation in 2004. Lingham’s site works with merchants with defined metrics (leads, sales, etc.) to generate traffic.

But don’t call him an affiliate.

“The term ‘affiliate,’ as it relates to online, was coined back in the day when Amazon and Barnes & Noble were paying commissions for clickthroughs on banners that resulted in sales for their sites. That was almost a decade ago,” Lingham says. “We’re performance marketers.”

Lingham wants incuBeta to become “the biggest performance marketing company – not just an affiliate.”

Given his fervor for the industry, that seems like a real possibility. “Nine times out of 10, we beat in-house and agency bids because our margins are better,” he says.

Lingham says he feels incuBeta is almost guaranteed to succeed, since the company has built-in motivation – it uses its own money to make clients’ projects work. The company is also growing and expanding. It’s opening an office in the United Kingdom this month, which will join the small setup in Woodland Hills, Calif., the Cape Town headquarters and the office in Johannesburg, which is considered the financial capital of South Africa.

Still, finances were once a huge challenge.

“When we started out, cash-flow management was the worst green-eyed monster,” Lingham says.

The difficulties stemmed from paying Google up front for search engine marketing costs, then waiting 60 days for a check.

“You can’t pay your debts with future profits,” he says.

The second-biggest issue was growth – the number of people working at incuBeta increased so rapidly that it became hard to create a functional business culture. But it was Lingham’s previous career ups and downs that made it all possible. “incuBeta wouldn’t have been started unless I had the experience I had. I believe if something doesn’t work, try something else. Failure is only a bad thing if you don’t learn from it.” Another challenge for incuBeta is being able to react to new developments in the search marketing field.

Flexible and Focused

“This industry is new and young, and when the rules of the games change every month, you have to be flexible,” he says.

“I think our biggest success has been in the paid search marketplace. Our focus is on the end user and delivering high-quality and targeted advertising. Whenever the search engines, especially Google, make a move to release new features or functionality, like quality scores or the affiliate policy, which relate to the user experience and relevancy, it always improves our performance because we both understand that user relevancy is the key driver in the search marketplace, and our business focuses on such,” Lingham says.

One thing that isn’t a problem at incuBeta is the dress code. Since only one of the company’s clients is based in South Africa, the office is pretty casual. “Cape Town is a beach town,” says Lingham. “Some employees are surfers and come to work after their morning run. Jeans are considered formal,” he jokes. Despite the laid-back environment, incuBeta is serious about business. Lingham has faith that his company can achieve great things and believes it is well on it way.

His definition of success includes helping South Africa lower its high unemployment rate (estimated to be 25.2 percent by the CIA World Factbook) by adding jobs to the local economy. He would also like to be a philanthropist, “investing in social community projects and education projects, and finding a cure for AIDS.” incuBeta is still a bit too new to be able to give much back to the community, but Lingham says they do participate in “charitable donations. It’s something we want to do more of going forward.”

Lingham says the Internet has made that a real possibility.

“Marketing has always been a relationship thing with no accountability. Performance marketing is different. The beauty is information for results – you can see what you’re getting for your money. If you can find things that satisfy advertisers, you can be successful. You can do it yourself. It’s the cradle of innovation on the Internet.”

Affiliate Market Maturing

The affiliate space is getting more sophisticated and complex, according to the findings of the AffStat 2006 Report, an annual study examining the state of the affiliate marketing industry.

Released earlier this year by Shawn Collins Consulting, the survey polled nearly 200 affiliate managers from a cross section of the industry on their overall statistics, as well as a number of issues about their affiliate marketing channels, such as staffing, recruiting and management.

Of those surveyed, 77 percent were pay-per-sale, 19 percent pay-per-lead and 4 percent bounty affiliate programs, which is almost exactly in line with the report’s 2005 breakout of how companies paid out commissions.

Over the last year, however, the size of pay-per-sale programs seems to have shifted. The latest report shows an increase in the number of affiliates in the midrange, with 23 percent of this year’s respondents reporting 5,001 to 10,000 affiliates compared to 13 percent a year ago, yet 18 percent said they had too many affiliates to manage effectively.

The trend toward smaller programs is also on the rise. A year ago, 16 percent of respondents had between 2,001 and 5,000 affiliates. The latest figure jumped 7 percent for 2006. Last year, however, 26 percent of respondents had 5,000 or more affiliates and rose just 3 percent for 2006.

Part of moving to small programs is that merchants are giving more scrutiny to the affiliate approval process. And while 17 percent still approve affiliates manually, that is down from 23 percent for the previous year.

Another interesting finding from the survey: Nearly two-thirds of in-house affiliate managers earn $40,000 to $80,000 a year. In the pay-per-sale programs, 71 percent had dedicated affiliate managers; 24 percent had fewer than 500 affiliates; 22 percent had 501 to 2,000 affiliates; 23 percent had between 2,001 and 5,000 affiliates; 15 percent had 5,001 to 10,000; and 14 percent had more than 10,000 affiliates.

Commission Junction continued to lead the pack when it came to which affiliate networks, solution providers or software solutions were being used to track affiliate programs. CJ had 31 percent of the total survey respondents, up from 26 percent in 2005. Some of that gain is likely from Be Free, which is owned by Commission Junction. Be Free dropped 2 percent to comprise 6 percent of this year’s total for respondents.

The use of homegrown tracking solutions rose to 22 percent from 17 percent in 2005. LinkShare moved up 2 percent from last year, to account for 11 percent in 2006. Performics also gained some ground; up to 3 percent from 2 percent in 2005, while ShareASale.com inched up 1 percent to reach 6 percent overall for 2006.

Still, some lost ground. My Affiliate Program//KowaBunga dropped to 8 percent from 13 percent for 2005. Direct Track dipped to 8 percent from 9 percent in 2005, while the response for “other” dipped to 5 percent from 9 percent in 2005.

There was virtually no change in attitude from 2005 to 2006 in responses to the question, “Do you permit your affiliates to bid on your trademark name in pay-per-click search engines?” Fifty-nine percent responded no; 29 percent said yes; 7 percent said yes, but with restrictions; and 5 percent did not know.

As for blogging, of those surveyed, 21 percent had a blog, compared to 15 percent last year.

And the biggest challenge for affiliate marketing for 2006, according to the report, continues to be recruiting new affiliates. This year 31 percent cited it as the largest challenge, compared with 24 percent in 2005.

The entire report can be found at http://www.affstat.com/products.shtml.

Data Double Duty

Website publishers are up in arms about the potential threat posed by employees at companies, who have access to their crucial data that could be used to compete with them.

Insiders have nicknamed the situation “Triple Jangro,” after the catchy title of a blog post on Revenews.com by David Lewis, CEO of 77Blue. The title refers to ex-BeFree/Commission Junction product manager Scott Jangro, who left the affiliate network several months ago to become a full-time affiliate.

The crux of the recent situation revolves around the threat of perceived or potential conflict of interest. Observers claim many employees of search engine companies and affiliate networks are infringing on the data privacy rights of their clients by using data from affiliates and merchants to enhance their own affiliate sites, or to go to networks and buy traffic based on inside information these employees receive from clients.

While many say they have suspected this practice for years, news of the situation came to a head at the LinkShare Partnership Summit 2006 in January. A few former Commission Junction employees attended the event as affiliates and revealed that three CJ staffers resigned after the company recently put a policy in place prohibiting employees from also being publishers.

“In the early days of affiliate marketing and affiliate networks – especially CJ – there were a lot of entrants into the space who came to us being program managers or some were publishers and gravitated toward this space,” Jeff Pullen, COO of ValueClick, says. “Over the years they have operated websites of their own on weekends and evenings and in the past we have not discouraged that. It was a good way for people to know the business. We always had a code of conduct and we are aware of the proprietary nature of the information we handle. Because we consider ourselves a leader in networking quality, we wanted to eliminate any potential appearance of a conflict of interest.”

To that end, an email was sent to everyone at ValueClick and its subsidiaries, clarifying that publicly-held ValueClick would no longer allow any employees to be publishers and violators of that policy would be subject to disciplinary action, up to and including termination/dismissal, according to Pullen. He says the change was spelled out and included in an updated restatement of another policy related to the issue of confidentiality.

“It really is easier, from an operational stand point, rather than to have to try and implement policies to monitor the issue, to just eliminate the practice altogether and not be concerned,” says Pullen, who noted that the new policy was not prompted by any wrongdoing nor was there any evidence of any improprieties.

Still, the new policy resulted in the departure of three employees – Chad Darling, an account representative for many of search affiliates; Andy Powell, who didn’t work with publishers but was part of the search management team; and Don Batsford, a CJ employee, who joined the company when it acquired BeFree.

“The people that left took a look at two different business opportunities. These are entrepreneurially focused publishers that chose to pursue that route. We hope they continue to do well. But they can not do both things.”

It’s unclear if these ex-CJ employees were running affiliate sites or doing arbitrage. Commission Junction officials declined to provide any details.

Regardless, the situation has angered many affiliates, who claim network staffers are supposed to be helping affiliate partners, not helping themselves. Despite their outrage, many affiliates, network representatives and industry watchers say the overall issue is so politically charged, they declined to have statements attributed to them and spoke only on the condition of anonymity.

The issue also sparked a lot of heated discussion on the affiliate forums and generated plenty of fodder for bloggers, many of whom admitted to posting comments on a variety of industry blogs under pseudonyms.

“The networks have been very quiet on this issue and are reluctant to make any public comments. This lack of communication is causing an increasing concern of potential wrongdoing at the networks. When the networks have to talk to their lawyers before commenting, nobody feels comfortable,” says Adam Viener, president of IM Wave, a Virginia-based search affiliate. Darling was Viener’s account manager.

Here is a typical post. “Let me get this straight, top affiliates shared their secrets with account managers at a network only to find out those account managers were their competition and using those hard-earned secrets – I’d be fuming. So much for a trusted third party.”

One angry – and anonymous – affiliate tried to put a positive spin on things. “If they quit their day jobs at the network, they were obviously making more money as an affiliate and that certainly bodes well for the state of affiliate marketing as a very lucrative career.”

Cause for Concern

Viener says he alerted Commission junction to the potentially problematic issue.

“I had a conversation with Todd Crawford [Commission Junction’s vice president of sales] about this issue at Affiliate Summit [2006], after talking with some top search affiliates who were concerned that CJ employees were looking at HTTP referrer data to determine exactly which keywords they were bidding on were converting to sales. They seemed to have some internal evidence that showed that when they identified new keyword niches with no competition, that almost immediately after there was a conversion on those terms, new affiliates popped up advertising on those terms,” Viener says.

Both Crawford and other CJ executives insist that calls to that specific database are tracked and protected. In some case only two to three people at the network have access to that sensitive information.

“To be an effective account manager we certainly have access to operational data. We have to do that job in a good and helpful way and that means seeing a variety of data,” Pullen says. “There is no scrutiny that we can’t withstand, and we encourage and hope others can say the same.”

One CJ super affiliate, who asked not be identified, says that on more than one occasion, within days of launching a new campaign, he would also see competition. “No one knows we are running the keywords, so in theory, no one should pick it up. That led to some speculation how it got started and I went away thinking that I should speak to the network about my concerns regarding who has information about keywords and referring URLs. I’m concerned about who has access to keyword data as well as what is converting and what is not converting.”

Vinny Lingham, founder of IncuBeta, poses a possible scenario:

“CJ has about 2,000 merchants, and it takes a lot of time and effort to evaluate, negotiate, research and run test campaigns. Say that one in every 10 campaigns we test out becomes a full-blown campaign, which is both scalable and profitable. We don’t focus on small campaigns, so typically we’re looking for merchants who can do a lot of volume and has great conversion rates.

“An average test campaign costs us anywhere from $5,000 to $25,000 before we even see a daily profit. Can you imagine our frustration when we take a program on CJ with a network earnings of 2 or 3 and turn it into a 5 overnight, only see other affiliates jumping onto the bandwagon – almost as if they had inside information.

“If I worked at CJ or any other network and I knew who the top affiliates were, I would just wait for them to test out all the merchants for conversion rates, etc, and then run only the successful campaigns – why bother running test campaigns myself? Even worse, imagine after all our testing, the network employee gains access to the keywords we’re bidding on and the conversion rates?”

Steve Denton, recently appointed president of LinkShare, says that as employers you can have policies in place but that “ultimately you’re not going to control what people don’t do at work.”

As for LinkShare, the company encourages its employees, especially those in customer-facing jobs, to set up to affiliate accounts as part of their training, according to Denton. “We see it as a value-add. It allows our employees to know what is going on in the space from the point of view of the affiliates as well as the merchants,” he says.

However, LinkShare has a variety of controls in place to ensure the security, confidentiality and privacy of the data related to merchants and affiliates. All LinkShare employees are required to sign a confidentiality agreement and a non-compete agreement.

“Those agreements are reflective of the fact that we deal with a lot of sensitive data and they make all employees contractually aware of what they can do with any of that data,” Denton says.

LinkShare also controls the access to data by limiting certain pieces of information only to specific jobs titles as well as by workers’ roles and responsibilities, he says.

In addition, through the company’s Athena registration and affiliate validation system, LinkShare monitors which employees have affiliate accounts and what they are earnings via their social security number, Denton says.

Like CJ, affiliate network Performics has a policy in place prohibiting employees from being affiliates.

Still, observers suggest it’s not about having a policy, but more about enforcement and direct communication to affiliates about who has access to what specific data.

Lack of Communication

Some chided Commission Junction for not addressing the “Triple Jangro” issue directly with affiliates, most of whom found out about the situation only by reading online reports with sketchy details, inflamed blog comments from other publishers or after being informed via email that their own account representative had left Commission Junction. Many complained there was no official comment from CJ on the details or any attempt to reassure or placate affiliates.

“CJ did a poor job of communicating this problem to the affiliate community,” Viener says. “By not disclosing what was happening, even if there is no evidence of wrongdoing, it makes me feel uneasy. That’s wrong. I don’t feel like I have the facts; I’m not comforted because there has been no communication from the company. I need to hear what happened. There needs to be more communication,” says Viener.

“The networks should take a hard look at these e-affiliates and communicate with the top affiliates they had contact with about what programs they are running, what sites they have, and give top affiliates a chance to determine if their business practices have been compromised,” says Steve Shubitz, who operates stopscum.com.

“I don’t know if that step was necessary. There was no evidence of wrongdoing, so it was not an issue,” Pullen says. “If an individual publisher was concerned and wanted to ask any question of their account manager, that would be fine. I don’t see these as us needing to be proactive. We manage account relationships all the time and information is held in strict confidence,” Pullen says. “It was not identified as an issue in the past five or six years. The existence of the relationship has always been positive with no controversy or issues. There were no improprieties so that would be explaining a negative. Why would we explain something that is not an issue?”

Others think Commission Junction acted appropriately in dealing with the situation.

“The issue of staffers being publishers at CJ has been simmering for a long time and it’s great to see CJ take a leadership role and be protective,” Beth Kirsch, group manager, affiliate programs at LowerMyBills.com, says. “This challenges other networks with even stickier ethical issues to address the same concern. The affiliate marketing industry is maturing and focusing on these issues is part of that process. Personally, I think this is a great step.”

Putting up Your Guard

Meanwhile, the situation has left many affiliates skittish about revealing information – even to their own account managers.

“I’ve got to be a bodyguard in the future,” Viener says. “I can’t say or have conversations in the future about my business. It’s a catch-22. Because if you are secretive, people assume you are cheating.”

Some caution against disclosing many crucial data points with account managers at the networks.

“I would tell my account manager my payout terms with merchants, what keywords are converting, referring URLs or most anything else. I have the right to privacy, confidentiality and transparency with the networks, but since I’m not 100 percent sure that’s happening, I’ll opt to just keep my mouth shut,” says one affiliate, who asked not to be named.

Shubitz offers this advice: “Webmasters and publishers should assume that every single network engaged in the CPA/CPL does in fact have current employees who are stealing their data and using it to make money.”

He encourages affiliates to “Wash/obfuscate your HTTP referral code and never disclose any details about your marketing procedures, media buys, other sites you own or your site’s demographics to your network.” He goes on to note, “Immediately complain to senior management in writing if you suspect that your procedures have been compromised and in fact are being used by current network employees to make money. Continue to be a friendly ‘partner’ but don’t disclose any data that a network employee could use to steal money from you.”

Nature of the Beast

Many claim the entrepreneurial nature of online marketing breeds this type of behavior.

“People tend to be entrepreneurial and opportunistic, and you cannot fault anyone for that – it’s human nature.” Lingham says. “The difference between this and other businesses is that traditionally you just couldn’t start a business that easily, but online marketing efforts can be started with virtually zero cost,” 77Blue’s Lewis says.

Jeff Molander, president of Molander & Associates, an affiliate marketing consultancy, is surprised that it took this long for the issue to be raised. And while Molander agrees that most employers need to have policies in place to ensure the privacy of affiliate data, he says “insights and knowledge” are gained simply by virtue of job duties, daily work experiences and continually expanding knowledge of the market space. He also claims that much of what affiliates do is plainly seen in search engines.

While other industries have laws governing use and disclosure of sensitive information (lawyer/client privilege, doctor/ patient confidentiality); there is nothing like that for performance marketing, which has sparked talk of legal intervention.

“A class-action suit would damage the industry’s reputation and create unnecessary long-term distractions in our core businesses of building a sustainable and long-term industry,” Lingham says. “We need self-regulation. The government takes too long to get things done. It should be the stakeholders making these decisions.”

Instead, Lingham suggests that super affiliates and representatives from both the networks and search engines, should have a round-table meeting to discuss the issues about enforcing both data privacy and non-competes with their staff with respect to all their clients.

Most say it’s in the best interest of the networks to nip this in the bud and take a leadership role.

“The networks are in a precarious position here. Their business model only works because of the trust established with the merchants and the affiliates. If the networks aren’t open, ethical and forthcoming about these types of issues, then their role in this industry will be diminished,” says Shubitz.

Mining for Keywords

Now that you’ve set up your search engine marketing campaign and it’s chugging along nicely, how do you take things to the next level? You’ve picked out some good keywords, written some good copy and you’re getting a reasonable ROI, but every time you look at your pay-per-click campaigns, you just know there’s more that you could be doing to maximize your investment. And you know what? You’re right.

The next step is to start prospecting for keywords that are lower in price but still bring good results. Anyone can set up a keyword campaign with all the obvious keywords and spend a bunch of money. Smart marketers know, however, that one of the best ways to beat their competition is to go after those keywords that the competition hasn’t discovered yet. More than 500 million keywords are searched every month on the major search engines, yet only 15 to 20 percent of those keywords have bids. A veritable gold rush of keywords is just waiting to happen.

Admittedly those keywords will have lower volumes of search than all of the one-word and two-word options you are currently bidding on, but the conversion rates will be higher, and by spreading your budget over a larger number of words, you minimize your monetary risk.

The Mining Process

You’ll want to utilize two methods in the mining process. One involves brainstorming, the other research, but good keyword development strategies take advantage of both.

For the first, find yourself a big blank wall and a stack of sticky notes. You’re going to use this wall to start the brainstorming process, but don’t do this alone or, even worse, with your marketing team. You are too close to your website to be objective. You’ve watched its growth and development since it was nothing more than a twinkle in the designer’s eye, and although you may try to think like your customer, nine times out of 10 you will fail to consider all the different ways someone might search for your product or service.

People search in very random ways. Most of them don’t know all the buzzwords, jargon and abbreviations associated with your business, so they don’t use them. Your marketing team may be in the habit of trying to influence your customers to behave in certain ways on your site. Many marketing teams are great at this, but their influence doesn’t extend to the way people are accustomed to searching. They are going to search their way no matter what you think, so your job is to figure out their thought process and put your website in front of them.

The best thing you can do is conduct your own informal focus group. Gather a bunch of your friends, associates, relatives and others, and sit them down in front of that blank wall. Feed them (if that’s the only way you can get them), but try to get folks who know little or nothing about your business. Tell them, “I sell widgets. If you were looking for widgets online, what would you enter into a search engine?” Then get ready to write each keyword on a sticky note as fast as you can. The reason you will want to use sticky notes is that once you have all the keywords written down, it is easy to move them around to create “buckets.” These buckets usually correspond to specific products, price and volume. Once you have those buckets, you can easily set up your categories in Yahoo and your Adgroups in Google. Having these buckets established will also allow you to write relevant titles and descriptions for each, thus minimizing the amount of time spent copywriting.

The second step in the keyword mining process involves using tools to dig for more variations on your keyword bucket themes. You can take all the words your focus group has suggested and use them to expand your lists by plugging them into such keyword research tools as:

  • Yahoo Keyword Selector Tool (searchmarketing.yahoo.com/rc/srch)
  • Google AdWords Keyword Tool (ad words.google.com/select/)
  • KeywordSandbox (https://adwords.google.com/select/ KeywordSandbox)
  • Wordtracker (www.wordtracker.com)
  • KeywordMax (www.keywordmax.com)
  • Keyword Intelligence (www.keyword intelligence.com)

Taking It to the Next Level

While brainstorming and research are crucial to the keyword prospecting process, they are much more effective when combined with other techniques. Take advantage of all the tools and advice available to make your site a veritable gold mine. Here are some time-tested ideas that have worked for me.

Add an internal search engine to your site. This will give you tons of information on how users are finding you. It will also let you know whether users are finding what they want when they get to your site. A good search engine tool can be found at www.freefind.com, or you can find many others by typing “open source search engine” into any search engine. You will want one that just searches your site rather than searching the whole Web, as you obviously don’t want to encourage users to leave your site as soon as they get there.

Check out the source code on your competitors’ sites. You may be able to get ideas for your brainstorming process from some of the keywords they are focusing on. Remember, it’s not a good idea to use the same keywords unless you offer the same product or service, but it’s a good place to start looking for ideas.

Consider your entire website. Many folks stop their keyword research on their home page. They don’t know that their internal pages can provide a wealth of new keywords to attack.

Look for all related words. Make sure you include all variations of a term. Choose words that are singular, plural, misspellings, abbreviations, etc.

As you mine, remember that a “keyword” is not just one or two words. Many keywords are now three, four, five or more words in length – these are the keywords that are producing higher ROI with less investment.

Internet users are becoming more sophisticated in how they search and are utilizing longer keyword phrases to find what they need. Marketers, fortunately for you, aren’t keeping pace with this trend, and that’s what’s driving the prices so high on the one-word and two-word search terms. By thinking a little more creatively, and pursuing more of those niche terms, you can compete very effectively against the big keyword mining companies. After all, a little bit of gold from a lot of rocks is worth just as much as one big nugget. You may have to work harder to get it, but in the end, a gold baron is a gold baron, regardless of how he made his wealth.

MARY O’BRIEN is a partner at Telic Media. She was formerly senior director of sales at Yahoo Search Marketing and is currently presenting their advertiser workshops around the country.

Retooling the Web

Microsoft was late in recognizing the profit potential of online search. Meanwhile, upstart Google surpassed older search sites such as AltaVista, America Online and Yahoo to become the clear leader in search and, therefore, online advertising revenue.

In late 2005, Microsoft chairman Bill Gates and chief technical officer Ray Ozzie wrote widely quoted memoranda acknowledging Google’s success and stating that Microsoft would refocus the company’s MSN division to address the “Internet services disruption.”

The Microsoft executives said the software giant would introduce advertising-supported services to the company’s vast portfolio of services and software, which would enable it to access a greater portion of the growing online revenue opportunities. Microsoft, which had become accustomed to defending a leadership position in desktop and server software, is now on the attack, trying to catch up to hyperactive Google, which has become an incessantly moving target.

Who Should Be Afraid

Although some online entrepreneurs may be fearful of becoming casualties in the escalating competition between Microsoft and Google, it’s traditional media companies that are much more likely to see their revenue streams reduced.

For the overwhelming majority of online sellers and service providers, the Microsoft-Google tussle will create more opportunities than it takes away, observers say. Neither MSN nor Google are primarily focused on the areas of selling products, search engine marketing, developing interactive advertising platforms or generating content. MSN may even provide a boost for the partner companies in its shopping and content portals, since MSN search does not exclude other sellers.

Google likewise opens search to anyone and everyone, and one of its main tenets is to remain inclusive. The company’s unofficial motto is “Don’t be evil,” a play on the nickname “Evil Empire” given to Microsoft by high-tech insiders. So far, most industry watchers claim that Google has remained true to its original precept of exposing the universe of digital information and supporting search through ads. The company does not directly sell products or services, and it continues to derive revenue from sharing in advertising dollars, which creates opportunities for both publishers and advertisers.

However, Google is showing an interest, albeit limited, in software development and distribution. Google now offers a desktop search application and Picasa, an image searching utility that could someday become supported through advertising. Google also reached an agreement with longtime Microsoft foe Sun Microsystems to cross-promote products and jointly market “Microsoft-alternative” applications such as OpenOffice.

Regarding the heightened Microsoft-Google competition, Rachel Lyubovitzky, vice president at search engine marketing company Searchfeed, says she doesn’t see any negatives for her customers. She says that by aggregating consumers who were previously a fragmented audience, the companies are “helping to organize Internet populations so that they will be more receptive to people’s messages.”

By convincing a majority of consumers to have either MSN Hotmail accounts or Google home pages, both companies are gathering information en masse, which advertisers love. However, even these users will continue to spend most of their time enjoying the diversity of content and search services available outside of Microsoft and Google, enabling plenty of room for creativity and innovation.

The online advertising market continues to grow rapidly, and Microsoft’s announcement that it would begin to support some of its multi-billion dollars in software and services through advertising is likely to further accelerate the growth. However, it may take several years for Microsoft to develop ad-supported services for the company’s recently announced Windows Live initiative, so don’t expect a major impact in the next 12 months.

Google’s new search services – which will streamline consumers’ ability to find video, music and text published in books – will likely also create a wealth of new advertising inventory options and contribute to market growth.

During the first nine months of 2005 advertisers spent $8.9 billion online, a nearly 29 percent increase over the previous year, according to Pete Petrusky, director of advisor services for accounting firm PricewaterhouseCoopers.

Petrusky expects the double-digit growth of online advertising to continue for the foreseeable future, at the expense of other media buys. Online advertising revenue topped $12 billion in 2005, equal to the amount spent in consumer magazines, and closing in on the $16 billion spent on cable, according to Petrusky.

Increasing inventory through new services led by Microsoft and Google could correct what Petrusky sees as an imbalance between the amount of time spent online and the advertising dollars generated. “The Internet captures about 15 percent of people’s media consumption time,” says Petrusky, “… but only 3 to 4 percent of total ad spend” that includes magazines, newspapers, television and radio.

Newspapers, which have been losing revenue to online classified ad services such as Craigslist and Yahoo, will likely have more trouble competing online when both Google and Microsoft enter the arena. Television broadcasters will see their advertising revenue decline further as Microsoft and Google make it easier for people to browse video and audio content online.

Although both companies are rolling out dozens of new services, they cannot keep up with the wide variety of services created by entrepreneurs – there are too many moles to whack for either company to be dominant in all areas. In the areas where Microsoft and Google do compete with smaller companies, having a powerful brand alone isn’t enough to convince consumers to switch, according to Greg Sterling, program director with analyst firm The Kelsey Group.

“New services can’t be marginally better; they have to be much better” to prompt changes in user loyalty, Sterling says. For example, MSN search and Google’s comparison-shopping engine Froogle and Gmail email have had trouble gaining traction. Therefore, there will always be enough room for innovators such as Digg.com, Flickr.com or MySpace.com to innovate and carve out a niche (or be acquired by big players looking to expand).

Competition Is Good

The intensifying Microsoft-Google rivalry will create a better audience for advertisers and will spur innovation in the technologies that enable people to more quickly find what they are seeking. Microsoft’s interest in advertising- supported services will also provide a necessary counterbalance that prevents Google from becoming a dominant player.

“The more options, the better” for advertisers, says Michael Stalbaum, CEO of interactive marketing and advertising agency UnREAL Marketing. For several years Google has been expanding its reach as the largest player in the largest segment of online advertising dollars, so increasing competition from Microsoft could provide an important alternative solution.

According to Nielsen//NetRatings, the volume of Internet search queries grew 15 percent between June and October 2005 to more than 5.1 billion. Nearly 48 percent of those searches were performed on Google, a figure more than double the closest competitor, Yahoo, and more than four times MSN’s share of search.

If Microsoft were able to become a stronger competitor in search, “it would be a positive for advertisers,” Stalbaum says, because Google may have to revamp its pricing structure. “Prices may come down a little bit,” he says.

Technology at the Core

The primary front in the battle between Microsoft and Google is technology, which will force all participants to continually innovate or risk losing their audience. If Google or Microsoft enters an emerging service area, the existing companies have additional incentive to upgrade their existing products.

For example, in early 2005, Google and Microsoft announced separate projects for digitizing books and making the content searchable. In December, publisher HarperCollins responded by announcing it would do the same for its content.

Charlene Li, principal analyst as Forrester Research, says the increasing competition “gives better products, which leads to better spending options” for advertisers. Products tend to be not only better, but come out more quickly once the powerhouses are involved. “Microsoft and Google participating, and to a lesser extent AOL, accelerates the product development cycle,” says The Kelsey Group’s Sterling.

Google Labs produces a steady stream of new services that make information more accessible, and the company’s willingness to share unfinished ideas with developers is accelerating the rate of technological change. Not surprisingly, Microsoft has shown an increasing willingness to publicly preview technologies and similarly make available its application programming interfaces (APIs) for developers to tinker with and enhance.

Opening up the technologies has proved a boon for third-party development. Innovations from Microsoft and Google are giving momentum to the next generation of interactivity online, designated as “Web 2.0.” Google has included Web 2.0 technology AJAX (asynchronous Javascript and XML) to build interactive Web applications such as Google Maps and Google Reader, a program that aggregates RSS feeds.

Google is also testing new technologies for publishers to structure and describe their content to make it easier to search. Salar Kamangar, vice president of product management at Google, says Google Base (which he emphasizes is not a classified ad service) is an experiment in allowing publishers to tell Google how their data is structured so that the company can deliver better results to consumers.

Rather than requiring Google’s search algorithm to guess how to identify an online seller’s product inventory, Google Base enables publishers to disclose how they format information. Data entered into Google Base is then made available to any Google property, such as Froogle or Local listings. This “increases the amount of content that Google properties can draw from,” Kamangar says.

Similarly, publishers looking to optimize their presence in search results can use Google’s Sitemaps tool to reveal how their sites are organized. Sitemaps “enables us to crawl their sites more effectively,” says Kamangar, adding that spidering websites today relies on following trails of links, making it difficult to detect dynamically generated pages. These efforts give publishers more of a say in how technology is used to influence their search standing.

Microsoft’s next-generation browser, Internet Explorer 7, will automatically discover RSS feeds and include tools for managing feeds. Microsoft also built RSS support into the Vista operating system, which will greatly increase the ability of publishers to widely distribute content by opening up RSS to a mass audience. Microsoft is also developing extensions to RSS known as simple sharing extensions (SSE) that will enable feeds to be shared and synchronized. For example, SSE could give publishers and affiliates the ability to automatically share information about advertising inventories and campaign performance.

The efforts of Google and Microsoft to outdo each other with sophisticated publishing and search technologies increases the burden on marketers to keep up with the innovations or risk having their websites appear lifeless by comparison.

Some publishers are using the available APIs for these emerging technologies to create “mash-ups” that mix data from multiple providers to create new hybrid applications. For example, Frappr.com lets individuals map where their online friends are, while ChicagoCrime.org shows where crimes are committed by matching police data with Google Maps.

Targeting Targeted Ads

Advertisers and consumers will benefit from the increasing competition as Microsoft and Google implement technology that tailors the online experience for each person. Personalized searching and browsing will create audiences that are more receptive to marketing messages.

Through the MSN AdCenter platform, Microsoft began offering advertisers a method of targeting ads to a particular demographic by leveraging data collected from its millions of registered users. When a signed-in user comes to an MSN site, Microsoft anonymously matches the demographic information to the visit, enabling the company to know the gender, age and location of the people who frequent their properties.

By enabling advertisers to target users by demographic characteristics, Microsoft is introducing targeted marketing “in an innocuous way,” says David Berkowitz, director of marketing at online advertising agency Unicast. He says targeted advertising will become “arguably the most groundbreaking innovation for advertisers.”

Berkowitz says that rather than competing with Google based on audience reach (quantity), Microsoft is relying on superior information (quality) about its customers to sway prospective advertisers. “MSN’s plan is not really about better software, but about delivering demographics,” Berkowitz says. Having demographic information about a large audience of registered users gives Microsoft an advantage in targeted marketing. “Forty million Hotmail users is a huge asset.”

Senior director of advertising and marketing Eric Hadley says Microsoft will evolve MSN AdCenter to target ads to people who set up personalized home pages on its websites, including the recently launched Start and Windows Live destinations. MSN AdCenter was first launched to support advertisers on its websites, but then will be rolled out to third-party publishers, putting it as a direct competitor to Google’s dominant AdWords and AdSense products.

Hadley says a future version of the MSN AdCenter will integrate a consumer feedback mechanism. “If you hover over an ad [with your mouse], there will be a pop-up window to say ‘why am I getting this ad?'” Users would be able to request not to see the ad again if the product or service is not of interest to them. For example, married people might not want to receive ads for matchmaker services.

A not insignificant challenge for Microsoft to make MSN AdCenter a success will be to build the marketing relationships with national and regional online publishers and advertisers. Determining how to split the business model for its applications and online services between subscriptions and support through advertising places a learning curve on a company built on selling products.

Microsoft and Google are vying to create personalized experiences by customizing search results based on prior searches, tailoring information preloaded onto home pages, and delivering ads based on user actions.

For a user who has not signed in before visiting an MSN site, Microsoft will use behavioral marketing techniques to generate contextual ads based on the person’s experiences on its network of sites. For example, Hadley says if an unknown customer is browsing the MSN Music site and searches for artists Kanye West and 50 Cent, ads for other rap artists would appear.

Behavioral marketing is effective in generating high conversion rates for advertisers, says Unicast’s Berkowitz. However, because it tracks consumer actions in the background, “it is a bit creepy,” he says. Microsoft and Google need to respect privacy when building personalization services to maintain consumer confidence. “A consumer has to decide who is trustworthy and who is evil. That’s going to be a major wild card” in determining whether or not users will feel comfortable in visiting a website.

Berkowitz also says, however, that companies must be careful in their pursuit of personalization services to prevent consumers from having too narrow of an experience. Google is experimenting by personalizing search results based on prior searches, but this increases the “risk that exposure to other things that might be of interest” could occur.

“I wonder how far you want to go down that personalization road before you lose the communal experience entirely,” he says. For example, Berkowitz says that while he is primarily a New York Mets fan, he doesn’t want a search engine to stop recommending articles about the rest of the league.

Looking forward, Microsoft and Google will determine if and how to commercialize the myriad of beta services that are currently under development while keeping one eye on what the other is doing.

Microsoft will learn the ropes of the ad-supported model for services and software while trying to grow and leverage its audience of registered users. According to MSN’s Hadley, the biggest challenge for Microsoft will come after the AdCenter platform is opened to third-party publishers. “How do we absorb all this demand from [large companies like] American Express to mom-and-pop” marketing firms? “As soon as we open the gates, we have to bring people in quickly with high quality.”

Algorithm-obsessed Google will continue to refine its search technology to better match customer expectations. “We are very far from being where a person can ask a question that brings back a single answer” that matches what they were looking for, says Google’s Kamangar.

For the rest of the decade and likely beyond, Microsoft and Google will continue to play the leading roles in the unfolding drama of the growth of the Internet as a platform for commerce and entertainment. Their perpetual sparring will spur all of the players involved to perform their best to satisfy the audience.

JOHN GARTNER is a freelance writer in Portland, Ore. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com, AlterNet.org and MIT’s Technology Review.com.