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updated 5/13/2004 10:51:56 AM ET 2004-05-13T14:51:56

Antonella Pisani considers herself a portfolio manager, but she doesn't trade stocks and bonds. Instead, the 28-year-old Gateway Inc. executive spends her days bidding on words and phrases as part of a behind-the-scenes marketplace that generates virtually all of Google Inc.'s sales and profit.

Gateway is one of more than 150,000 advertisers that participate in a continuous electronic auction for the right to place an ad on the screen when a computer user types keywords in English and other languages into the Google search engine. The ads appear either above or to the right of Google's free search results.

Through a system known as pay-per-click, advertisers pay Google a fee, equal to their bids on keywords, each time a computer user doing a search clicks on one of their ads. Last year, those clicks generated about 95 percent of the company's nearly $1 billion in revenue.

Today, Google is rolling out a new product in test form that will enable marketers to include photographs and graphics in ads distributed to thousands of Web sites. Previously, ads purchased through Google had been text-based.

The hefty advertising revenue at Google, as well as its use of a sophisticated auction market for keywords, were described in the company's recent filing for its upcoming initial public offering of stock. Though Google was guarded about its plans, the filing makes it clear that the auction market for search terms is a central part of its growth strategy.

Every advertiser willing to pay at least a nickel gets the right to place an ad, but only the top bidders as determined by Google get placement on the first page of search results.

To find buyers online for its computers, cameras and other products, Gateway spends millions of dollars quarterly on Google. One day last week, Gateway's bidding for the words "digital camera" averaged about 75 cents, while its bidding on the plural, "digital cameras," averaged $1.08. Pisani said plural terms often cost more because consumers using them in searches are more likely to end up as buyers.

"My average on Google is just under 50 cents per click. It is a very efficient marketing program," Pisani said. "You are capturing people while they are interested."

All of this is a marked departure from pop-up ads and the banner ads that dominated online advertising a few short years ago. In contrast to a banner ad, which a company paid for whether a computer user read it or not, a company pays Google only when a potential customer clicks on one of its ads. That click typically takes the consumer directly to an Internet page where a purchase can be made.

"Google is a marketer's dream," said Les Kruger, manager of online marketing for AT&T Wireless. "It is extremely efficient. It is a great place to acquire customers."

At the same time, Kruger said that while advertising on search engines is extremely cost-effective, it would not, by itself, be a sufficient way for AT&T Wireless and other corporations to market their products and burnish their images. He said online searching has limits when it comes to driving volume of sales. "There is a limited inventory available in search," Kruger said. "There are only so many people searching."

Google did not invent the concept of auctions for search terms. That distinction belongs to Overture Services Inc., which is now part of Yahoo Inc., Google's biggest competitor. But industry experts say Google refined the bidding process and attracted thousands of businesses to participate in its giant marketplace, where consumers looking for information online carry out hundreds of millions of searches daily.

Google also made it extremely easy for businesses large and small to sign up and start bidding. All a company needs is a credit card so it can pay the search engine every time someone clicks on one of its ads.

"You can launch a Google ad in 10 minutes," said Dana Todd, executive vice president of SiteLab International Inc., an interactive ad agency. "It is a ready-made market."

From 5 cents to $30 a word
On Google, the minimum bid for a search term is a nickel, but that is about the only price that is stable. The rest rise and fall depending on what companies are bidding at any given moment as they try to tweak their positions on the results pages. One of the most expensive search terms these days is "mesothelioma," a type of cancer caused by exposure to asbestos. Top bids for the word hover above $30, a premium price. The reason: The ads are for pricey legal or medical help.

Kruger's goal is to bid high enough so that AT&T Wireless shows up among the first several ads whenever the phrase "cellular phone" is searched. Yesterday morning, that meant AT&T Wireless was bidding around $1.49 to get the prominence Kruger sought.

"The pricing absolutely changes and varies very widely," Kruger said. "It is still the wild West out there in the search world today."

AT&T Wireless and many other large corporations rely on search marketing specialists and online advertising experts to do the bidding on search terms for them. They also seek help in designing Web sites that will enable them to show up in Google's free search results, since consumers are even more likely to pay attention to the free results than the paid ads.

The buzzword for maximizing the chances of showing up in the free results is search engine optimization, or SEO. Kruger said that to maximize revenue for AT&T Wireless, it is crucial to show up consistently in both the free search listings and the paid ads.

"I manage both the natural and pay-per-click side of search marketing," Kruger said. "You want to get as many clicks and orders as possible coming through natural search since you are not paying for each click. That said, you want to be on the paid side as well. You want to have a presence on both."

Google's business model reflects that twofold desire. In many ways, the search engine has come to resemble a free-circulation newspaper that makes its profit by selling ads. In Google's case, the company gives away the search engine for free to Internet users seeking information on the Internet, and then, like the newspaper, makes its money on clearly marked ads.

One difference is that in a free-circulation newspaper, top dollar can buy prime positioning for ads. But on Google, just being the highest bidder doesn't guarantee that an ad will appear in the top-tier position.

Popularity can mean more than cash
The ranking of ads on Google is the product of two factors: the price a company is willing to bid on keywords and the frequency with which consumers click on the ad. Even if a company bids higher on certain words than any other firm bids, if consumers are not clicking, that ad will move down to a less prominent spot.

Google said it takes this approach so that computer users see the most relevant ads first. Industry experts say the practice also makes good business sense since Google gets paid only when consumers click on an ad.

"They don't want dead ads at the top of their Web site," said Scott T. Newman, president of US Markerboard, who spends a few hours each day tweaking his ads and bids and said he has built a profitable, growing business entirely through search. "They give you a little bit of a break if you get a good click-through rate."

In contrast, Yahoo guarantees that the highest bidders for words will show up at the top of the list of sponsored ads. Industry specialists said this is one of a number of differences in style between the competitors.

Yahoo "is strictly capitalistic. Pay more and you are number one," SiteLab's Todd said. "Google has more socialist tendencies. They like to give their users a vote."

The science of consumer behavior on the Internet is still young, but some early evidence shows differences between how men and women use search engines. A recent survey by iProspect.com Inc., a leading search engine marketer, found that 15.2 percent more women than men said they abandoned search results and looked elsewhere if they did not find what they were looking for on the first page.

"Someone targeting homemakers must be found on the first page," said Fredrick Marckini, founder and chief executive of iProspect, whose clients range from Citibank to the New England Journal of Medicine. "Most importantly, all research confirms that if you are not found on the first three pages of the search results, the top 30 matches, you have built a billboard in the woods. No one will find it."

Google remains the undisputed market leader in search, Marckini said. According to a recent analysis by StatMarket, Google has a 41 percent market share in the United States and a growing edge over second-place Yahoo, which has 27.4 percent, and Microsoft Corp.'s MSN, with 19.6 percent.

Banner ad move suprises some
Google's free or "natural" search results are not influenced by payments, a practice it described as "evil" in its recent IPO filing. That was a shot at Yahoo, which does accept fees from companies to ensure that they are included in its searches. Some in the industry say that as a public company or when its growth slows, Google is likely to be tested on this and other practices on which it has staked out purist positions.

Yesterday, Andy Beal, vice president of WebSourced Inc., said search industry insiders were surprised by Google's launch of a new product that includes banner ads that advertisers could choose to place on Web sites of some of Google's smaller partners. To Beal, it sounded as though Google might be bending its lofty principles in a grab for more ad revenue. "Is Google starting to bow to pressure?" he asked.

But Tim Armstrong, Google's vice president of advertising, defended the company's new ad product, saying it is grounded in the same fundamental approach the company has adhered to in the past: making cost-effective, contextually relevant ads available to computer users on thousands of Web sites that are part of its distribution network. In this case, Armstrong said, the new product, dubbed "image ads," will give advertisers the opportunity to distribute ads with graphics and photos, enhancing their quality. For example, he said a car ad might be more effective if it included a photo of the vehicle.

He also said computer users would have the opportunity to give Google feedback on the ads during the beta test. The ads will appear in one of four configurations, one of which is the traditional banner ad. "This is a natural link from what we are doing now," Armstrong said. "We have the same core principles. We are sensitive to the fact that we want image ads to be useful."

At the same time, Google's filing for an IPO -- in which the company plans to auction shares to investors of all sizes in a manner influenced by the way it auctions keywords -- has sparked a new kind of chatter among the specialists who spend their days bidding on words.

"Everyone is trying to figure out if they are going to bid and how much they are going to bid," iProspect's Marckini said.

AT&T's Kruger has already made up his mind. "I'm rooting for them," he said. "I'll be putting in a bid for some shares."

© 2013 The Washington Post Company

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