We’ve had some interesting news from the search world recently. We had the crack-induced MSFT-YHOO partnership rumors last week. We had Amazon dropping Google in favor of someone closer to home. Then we had the launch of MSFT’s adCenter (press release here) and more news of Yahoo’s new ads system. (Some more in the NYTimes piece.) I still need to do a more detailed investigation, and will keep an eye out for YHOO’s May 17th analyst presentation, but at first glance Yahoo’s system is more evolutionary than revolutionary.
Taking a step back, what’s going on in sponsored search? Here’s a very high level overview, especially for you students who might be interviewing with Internet firms in just a few months. Ten years ago, we saw the emergence of banner-ads and premium listings on portals. They were sold as campaigns in negotiated ad-buys. Overture (GoTo.com, now part of Yahoo) was one of the first to introduce an innovative keyword auction model. This opened up the keyword market to anyone who wished to bid on one, and it made keyword-based adverting far more efficient. But the early Overture model used first price auctions, which are neither stable nor efficient. First price auctions beget all sorts of “strategic” bidding that in turn produces a lot of price volatility.
Today, Google and Yahoo! appear to be using a “generalized second price” auction model for keyword sponsors. (There are some differences between the firms’ auction mechanisms. For example, Google incorporates historical ad click through rates into its calculation when it ranks bids for a particular keyword.) GSP auctions are more efficient and stable than first price auctions, but interesting there is still a theoretical auction model called Vickrey-Clarke-Groves that is more efficient than the today’s GSP-based search ads. The curious thing is that the cost of switching from GSP to VCG is huge for an incumbent. At the same time, the revenue gain an entrant could gain from VCG may not be sufficient to take on dominant players. (One interesting question is what mechanism is Redmond using with adCenter.)
One dominant trend today is a dramatic expansion of the keyword universe. Not only are the number of keywords (presumably) increasing, but the dimensionality of keywords is growing. Five years ago, if you were a Mom-and-Pop Chinese restaurant in the Mission, you’d have been crazy to advertise in “chinese food” searches. Soon, you will be able to pay money to advertise on “chinese food” searches from users in the 94110 zipcode at lunch time and in the evening. As search engines get to know their users, the ads they deliver to users are worth more to both the advertisers and the users. (I imagine that one day soon, my visits to Autoblog will be greeted with regular ads from Carlsen Porsche detailing recent additions to inventory in Midnight Blue Metallic.)
For those who want to know more about online search, I highly recommend Ben Edelman’s publications, especially “Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords” and “Strategic Bidder Behavior in Sponsored Search Auctions”.
