An interesting debate has been brewing in the blogosphere about the implications of recent comments by Bill Gates, which were reported by John Ribeiro of IDG News Service.
Microsoft Corp. will share a part of its advertising revenues from its search engine with users, the company’s chairman Bill Gates said in a panel discussion on an Indian television channel…”Google’s business model is not based on free software,” Gates said. “Their business model is based on advertisements from which they make a lot of money.” But they don’t share these advertising revenues with the end users who help them get the revenue, Gates said. “Google keeps all of the money with itself,” he added…In its bid to share revenues with users, Microsoft may give free software or even cash to users, said Gates, who did not discuss further details.
Picking up on Gates’ comments, Nick Carr says “there’s too much profit right now in online advertising” and “the wide profit margins Google enjoys on internet advertising are unsustainable.”
Competition, from Yahoo and Microsoft as well as others, can be expected to reduce the profits that flow to the owners of Internet ad-serving mechanisms, while also making pricing more transparent. Moreover, advertising is a cyclical business, and at some point we’ll see a stemming of the flood of advertising dollars to the web. Combine greater competition with advertising cyclicality, and you end up with a Google that operates with a considerably lower profit margin than it enjoys today. Then add in the company’s free-spending culture, and, well, you’ve got a problem.
The online ad market is going to become more efficient. Much of the profit that now goes to the operators of the ad-serving technology will be redistributed. Some will go to the advertisers, in the form of lower rates, and some will go to the publishers, in the form of higher commissions. And if Gates is serious - and I’m betting he is - some will go to the internet users themselves, whose clicks, after all, make the whole system work. In the battle for eyeballs, bribery can be a powerful weapon.
Umair Haque acknowledges that the idea of Microsoft paying consumers for clicking on ads “may sound cool,” but he sees “three big problems which render it strategically meaningless.”
1) It’s fraught with moral hazard = click fraud^1000000. 2) It’s a very nice market for adverse selection. That is, the guys that will pay you the most to click on their ads will be exactly the guys you never want to see ads from. 3)Google can imitate it overnight.
Umair also takes issue with Gate’s assertion that Google “keeps all the money,” claiming that the search giant shares more than 50% and as much as 70-80% of revenue, which he says creates “huge incentives for competitors…not to compete, but to cooperate.”
Though he acknowledges that Umair makes some “good points,” Michael Parekh believes they are “not show-stoppers from a Microsoft perspective.”
1. Click fraud as a moral hazard exists in the current model as well. Not clear if sharing revenues with users INCREASES it. If anything it may DECREASE it, since end-user click fraud is likely to be more penny ante compared to the organized, institutional click-fraud that exists today in the “House” favored model. Alternatively, the model does not have to rely on end-users’ getting a piece of the pie, but rather tweaks in how the revenue pie is shared with the paid search industry.
2. See point number 1 above…existing problem not necessarily exaggerated.
3. Google can imitate it, but at the COST OF SHAREHOLDER CONFIDENCE. The stock and valuation would take a meaningful hit, which from Microsoft’s point of view is much of the battle. Decline a competitor a high stock valuation with which they can fuel additional competition for their core software OS and application model.
…In a trillion dollar plus world of global advertising, direct marketing and promotion, it’s not unreasonable for peers to collectively ask for a piece of the pie. Especially when there’s SO MUCH of it to go around.
Henry Blodget appears to side mainly with Nick and Michael:
When your mere click on a link generates a couple of dollars of pure profit, it’s easy to see how you might come to believe that getting paid something for your decision/attention is fair…Without a true network effect, there is no free-market justification for incremental profit margins in the 90%-plus percent range, as Google’s are now. And if MSN, Yahoo! et al can’t compete on functionality and user experience, then perhaps they can lure Google searchers away with other incentives. Especially because even the most ardent Google fan may someday begin to resent the fantastic amount of money that they make for Google each time they click—an amount that, arguably, vastly exceeds the value of search results Google is providing.
Commenting on Blodget’s post, Jope questions the extent to which Google’s search ad business would be threatened if Microsoft did go down this road. “Nothing would stop me,” he says, “from doing the search on MSN for the reward and on Goggle for the actual relevant results.”
Phil is skeptical that such a Microsoft strategy would fly with advertisers:
So let’s see, I get paid to click on paid search links? Hmm, wonder what the conversion rate (to sales) will be for this kind of traffic. I presume this is a way for Microsoft to buy seach share. How do you think the advertisers would view this kind of gambit?
And Anonymous Coward predicts it would attract serious efforts to game the system:
As the plan is currently described, I’d expect to see, not just a wave of entrepreneurial individuals flooding MSN to make a quick buck, but also networks of machines specifically programmed to game the system. (Eastern European and Asian hackers will see to it).
Rishi Khaitan sees ways for Microsoft to keep click fraud from getting out of control:
MS could possibly rely on an IE plugin or MSN toolbar that tracks the searcher’s behavior pattern to distinguish between valid searchers and bogus money-making bots (either automated or human slave laborers)
And Salim suggests a “Cost Per Acqusition Model” as a means to address click-fraud:
This could be a very good idea but I’m not sure how you prevent click-fraud…unless you shift it from a CPC model to a Cost Per Acquisition Model (affiliate program) model. Which means, if I click on a paid-search link and then actually buy something, the merchant treats Microsoft as an affiliate (paying them around 4-8% of the sale) and then Microsoft splits that check with me. If they go that route, it would be the same user model as eBates.com, except MSN has far more distribution.
Mitch Shapiro at 6:12 PM|Comments(0)
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