tirsdag 13. april 2010

Do the economics of real-time search ads work out?

Now that Twitter has revealed that its advertising strategy largely hinges on search, will its approach prove to be as much of a blockbuster as Google’s AdWords?
The company, which long evaded questions about monetization, is pitching marketers with a variation on search ads. One prong of its strategy will be to sell sponsored tweets that stay atop results about different keywords. If the tweets don’t take off with Twitter users and aren’t replied to, retweeted or clicked on, they’ll disappear from view.
Search advertising clearly made Google the powerhouse it is today, with $23.7 billion in annual revenues last year. But a big question is how well it will work for real-time search, which is Twitter’s bread and butter.
Real-time search is fundamentally different. Users look for what’s happening now — like news about the Polish president passing away or Justin Bieber. They’re not searching for general information or advice on what type of car to buy. So the percentage of queries that have commercial intent is probably lower.
An interesting case example to look at is OneRiot, which is the best-funded amongst the dozen or so real-time search startups that launched sites last year with $27 million in capital. Its real-time search engine mines Digg, Twitter and Delicious for signals about longer-form content like news articles or videos that are popular and relevant to search queries.
After Google and Microsoft launched their own real-time search engines last fall, it became clear that neither company would make near-term acquisitions in the space. Hence the crowded field of real-time search startups that launched last spring would have to consolidate or find sustainable revenue models.
OneRiot prepped for this by launching RiotWise last year, a real-time ad network that promoted links to content, and securing dozens of distribution partners or startups that wanted real-time search streams to be part of their products. When you search for a topic like “Conan O’Brien,” through OneRiot, you’ll see the most highly shared results about the comedian plus text ads in a right-hand column linking to stories on TMZ or the Huffington Post. OneRiot ads also appear in a user’s news feeds on some products, similar to how Twitter’s “Promoted Tweets” will eventually show up in the stream too.
Advertisers pay on a CPC basis (or for how many times visitors actually click on their ads and end up visiting their properties). Publishers can engage in a neat kind of arbitrage by bidding on clicks for less than the value of their pageviews.
So far the company says it’s seeing an average click-through rate of more than 2 percent and CPCs of between 5 and 15 cents. (For reference, Google says that an average click-through rate to shoot for in its flagship AdWords product is also in the neighborhood of 2 percent.)
OneRiot splits ad revenue 50-50 with partners that distribute its search results and estimates that it will host about a half-billion impressions this month. If you assumed that OneRiot sold its entire inventory, the company and its partners earn between $500,000 and $1,500,000 a month on those clickthrough rates (which vary widely by query) and CPCs.
Considering that the company launched its ad network a little over half a year ago, it’s definitely a start. With a few months of solid growth, it is conceivable that such a revenue stream could support the company’s current headcount of 32 employees. (The two caveats are that I don’t know what share of those impressions are delivered via partners versus OneRiot’s core site and I don’t know what share of inventory the company is actually selling every month.)
Now if you take that those figures and think about Twitter, which raised six times as much capital as OneRiot, the real-time search ads opportunity is obviously much larger. Twitter.com hosted 91 million searches in February, according to Comscore. That figure excludes all the Twitter searches that might happen through Google, Bing, clients like Tweetdeck and mobile apps.
Of course, Twitter’s search ads will be slightly different in several ways.

They’ll be conversational and in the stream, rather than in a right-hand column like Google’s search ads.
Advertisers will pay initially on an impression basis, not on a CPC basis. Ultimately, the vision is to pay for ads based on brand lift compared to a standard tweet. That means quantifying the actual benefit of paying for a promoted tweet beyond just tweeting it out from a regular business account.
Unlike other search engines like Google, which has never seen a runaway success with its social strategy, Twitter benefits from having its ads attached to a social network. Brands will probably pay for tweets that push users to follow their official corporate accounts. (This happens on Facebook all the time with paid acquisition of fans.) That creates a nice virtuous cycle connecting advertising to another pillar of Twitter’s revenue model: paid corporate accounts that help marketers track and manage their communities.
Twitter’s ads also play off a trend we’ve been seeing all year: “likeable” ads. Most of the social startups we cover across the space want brand advertising to be unobtrusive. Hence, Facebook made “like” button for its ads, Digg launched “Digg-able” ads and another Twitter-dependent company Tweetmeme created retweetable ads last fall. If Twitter ads aren’t literally resonating well with users, they’ll take them down and they won’t charge marketers for them.

However, the core principle of search ads remains consistent from Google to Twitter to OneRiot: connect users to information sources and ads they might be looking for.
While it may not be sexy brand new idea, judging from the initial traction of other real-time startups, it seems like search ads could go a long way toward helping Twitter prove that it’s really worth $1 billion.
Tags: advertising, Social Media
Companies: OneRiot, Twitter

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