Love at first Site

Some of the more entertaining news of the past week has been from Google. But before this I talk about Google, I want to talk about a certain U.S. waterbed distributor in the mid-1980s. They had one product and one product only, waterbeds. They made lots of money through the mid-1980s selling waterbeds, but come 1989, they noticed waterbed sales were flatlining. Then, they came up with a brilliant strategy – their customers were spending more and more time and money in shopping malls, yet they had no waterbed stores in those malls! All they needed to do was go where all the traffic was… and they would be making lots of money again! Dozens of megastores in malls later, their sales were still falling. Despite being where all the people were, no one was buying their waterbeds. People just came to the mall to look and buy other things.

I forget what point I was going to make with that. Maybe nothing. Anyway, let’s talk about Google’s strategy on increasing their paid-click revenues.

After Google shares dropped 3.1% on Nasdaq following Comscore’s report that that paid click conversions were lower than the previous year, Google has responded with a number of campaigns aimed at increasing reach on Social Media sites like Myspace.

Google’s adsense solution however, has dismally low click-through rates on Social Networking, and Social Media sites, oftentimes a mere 5% of what they see in search. The logic is pretty basic: People go on to search engines because they are looking for something—and ads that show up are generally relevant to what they are looking for. Yet, when users go on to Social Media sites, they are there to look, not at ads, but at peoples profiles, to see what their peers do, wear, drive, eat, accomplish, etc. It’s not shocking that Google Adsense underperforms here. (interested in more, read here)

Banner Ads saw conversion click rates as high as 8% in the early days. Now, a successful banner ad campaign results in click-through rates of .25% to .5% The web2.0 and oncoming web3.0 user shows signs of this advertising fatigue. A new advertising model is needed for these sites.

I am going to refrain from being a Google doomsayer, but just suggesting the realistic course correction for a company whose stock is trading $300 lower than 6 months ago. If Google wants to assuage investor concerns, they would come out with a new product aimed for web 2.0 sites, not just a repackaged web 1.0 solution. Or they could acquire a company with a true web2.0 solution.

Alimama announced yesterday that they were doing away with the 8% commission, opening their advertising tracking tools free to users. However, contrary to a number of other commentators who suggest this is to grow market share, this is not about increasing market share at all, but growing the market overall. It is not a competitive move.

As you can see in my previous post, given Alimama’s recent earnings, estimated around $1200 USD a day, doing away with commision fees are very unlikely to affect the bottom line of the parent group, Alibaba Corp., currently valued at 77.5 Billion USD.

Rather, this is most likely a line straight from the Taobao/ Alipay playbook, Alibaba’s e-commerce and payment arm. Taobao was able to overtake Ebay/ Paypal in China by offering commision-free payment services whereas Ebay and Paypal, among other things, required users to pay commission fees. By the time Ebay had course-corrected, Taobao controlled the market.

However the nature of an advertising exchange is fundamentally different from an e-commerce site. Ecommerce sites tend to be a winner -takes all model, i.e consumers tend to go to the site with the most users, therefore making it very difficult for the market to support multiple competitors. Ebay in the United States, Yahoo Auction in Japan, and Taobao in China generally all claim roughly 90% or above of the e-auction space in their respective countries.

Ad buyers function differently. While they will use ad-exchange such as Alimama for a portion of their ad buys, they will generally supplement their ad buys with portal buys, ad-networks buys, Google adwords, and others. Adify’s company blog states this concept well:

“When an advertiser wants to maximize the return of their advertising investment, they need their agency Media Planners & Buyers to create a balanced portfolio mixing direct investment in large on-target sites + reach to engaged, targeted audiences through vertical ad networks + broad reach from low cost remnant networks. The share of voice and audience engagement is highest on the premium, topically relevant sites of Vertical Ad Networks while the reach is highest through direct investments and remnant networks. This is the appropriate balance for high return online brand advertising campaigns where audience engagement is critical. ” - Adify company blog

Recently an inside source at Alibaba talked about the progress of Alibaba group’s recently-launched advertising exchange, Alimama. While still early stage, Alimama is averaging roughly 100,000 RMB in daily turnover, and with openly acknowledged 8% margins, are pulling in roughly 8000 RMB before operating costs.

Not an impressive amount, but considering that advertising exchanges in China, let alone online advertising in general, are early-stage, expect this story to become more interesting as Alimama’s volume develops.

However, I suggest a few upgrades before that type of volume can be acheived:

1. Packaging smaller publishers together based on advertising categories:

Which advertiser will spend the time to place a 5 RMB ad buy for one site? Ultimately, having better packaging features enables them to monetize the long tail sites that currently account for the majority of their publisher base. For overseas ad networks such as Blogads, packaged buys account for up to 75% of sales.

2. Better filters for demographically and geographic targeting:

I expect that most of the larger media buys are posted manually through a sales agent, rather than the advertiser wading through the filter controls and attempting to actually find enough interesting sites to make a reasonably-sized ad buy. Ultimately, better controls will allow them to become more automated, and the profitable long-tail of advertisers to better place buys.

3. Instituting benchmarks for posting:

Should the webmasters whose sites have 1-10 visitors a day (and plenty of them!) be allowed to litter Alimama’s interface? This makes filtering results by CPM nearly irrelevant as most of the smaller websites have either gargantuan, or miniscule CPMs. Though the name of game for an advertising exchange is trudging through sludge to find advertising bargains, online advertising is still relatively new in China, and the majority of potential advertisers may need an easier and less cluttered interface to get them to spend more time, and money, online.

Though the entrance of a Chinese household name such as Alibaba entrance into the online advertising market may be construed as competitive to many other online ad players, the prevailing attitude from most of the online advertising companies I have talked to is positive. Overall, it should help spur more spend into the online advertising sector, ultimately increasing the size of the pie available for existing online ad players.