Yield Thoughts
As talks of AOL narrow to a simple search syndication agreement, something struck me: For MSN to win, they would have to sign a significantly loss-making commitment. Here’s why:
1) Raw number of advertisers. MSN has only just begun building direct relationships with advertisers and has far less than Google. It’s not hard to get critical mass, but it will still take 18-24 more months.
2) Yield management. The yield improvements ($ per search) Google has been able to eke out through technology and science in recent times is nothing short of amazing. Even if MSN had the depth of advertisers it still would not be able to earn as much money per search.
Now given that Google already gives 85+% of the revenue to AOL, and will likely be happy to share a few more points, that means that a profitable deal for MSN would be impossible.
Even if they gave 100% of the revenue to AOL it still would not be enough. That’s because 90% of the revenue Google is able to deliver per search is still well in excess of 100% of the revenue MSN could deliver. Further, it is likely to be that way for at least the next two years.
Therefore, it would be very surprising if AOL decided to switch and instead it just makes fiscal sense to keep tarting around and squeezing a few more points from Google.
What if MSN viewed AOL as a loss-leader and AOL took a non-profit maximizing approach.
AOL must look at Google now as what AOL was in the late 90’s - they have a strangehold on the space. AOL can look to MSN as being a worthwhile investment in time and lost short term revenue in exchange for long term goal of a paid search industry with more than 2 big players.
MSN also needs lots of high quality volume to get it’s prices and back-end performance to compete with Google and Yahoo. So it may be worthwhile for it to lose money on AOL in the early stages.
In the end, a short term revenue minimizing approach may be viewed by both as a the right path.
I agree that MSN would have to be willing to take a loss to secure distribution across AOL, but I still think it would make sense for them to do so. Two points to note:
1) It might not take as long for MSN’s CPC’s to rise (close) to the level of Google as you might imagine. A possible AOL shift to MSN search could release the latent value of the AOL user base through the integration of MSN’s demographic/behavioral targeting capabilities — targeting that requires bids above and beyond what you’re already paying for a click. The partners would reap incremental revenue from AOL’s existing user base of 112MM unique visitors to its web properties. The pairing could ultimately create some of the most valuable traffic in the market - traffic that is free from the equivalent of spam sites.
2) AOL represented 10% of Google’s overall revenue in the third quarter. Losing that could be a big hit to their financials.