Yesterday, I had the opportunity to present, as part of a panel at DM Days, my thoughts on the changing search landscape. My piece focused on CPA search, a topic that fascinates me in no small part due to the arbitrage activity taking place on the engines whether opportunistically or by necessity. Just how much of this activity takes place is hard to say, but it would not be unreasonable to say that at least 25% of all money spent on search comes from sophisticated marketers looking for an action - be it a sale, a lead, a click on their sponsored link. Ebay and Shopping.com are not just owned by eBay but perhaps the two biggest advertisers on search. Not only do they spend more than ten million dollars monthly combined, they count among those looking to hit a cost per action, bidding on a CPC but getting paid on some other metric.
EBay is but one piece in the CPA search landscape. Those in mortgage and online education spend at least $20 million monthly, and when you factor in other verticals such as automotive, ringtones, dating, travel, VOIP, and credit cards, that number should top $200 million monthly. A wide range of companies benefit / contribute to this number, not the least of which are ad networks such as Azoogle and affiliate networks such as ValueClick's Commission Junction unit, a company whose main rival sold for $425 million in September 2005. These companies though don't drive the vast majority of the traffic; their affiliates do.
While CPA networks and affiliate networks both have affiliates and affiliates that use search, Azoogle and CJ differ vastly. The CPA networks, e.g. Azoogle, focus on fewer offers and, in many respects, operate in a more competitive landscape. Their market acts more like a commodity, with their offers rarely being truly exclusive. As such they must fight for price and do their best to differentiate through better payment terms and applying internal resources to help out top affiliates. CPA networks disclose the advertiser but maintain the relationship with the affiliate. A company such as CJ on the other hand pitches itself as a technology solution provider and marketplace creator. They offer the interface so that a company can easily start to accept affiliates and manage them without building any technology on their own. They play a limited role in matching up affiliates to merchants, and in most cases require exclusivity from merchants, which means that an affiliate will not find it elsewhere.
An affiliate network does not create custom brands, e.g. a Wendy's that is really run by McDonalds, or guarantee that offers will perform. They let the merchant handle this. It means that the merchants must have an understanding of the landscape if they are to compete and gain affiliate's volume. A CPA network will only take on offers it thinks can work; thus, on the whole, they service fewer clients, but the affiliates will have a better success rate as a percentage of the whole. It's one reason why a company such as Azoogle does more revenue than ValueClick, and both companies success with CPA and search helps explain the interest by others in getting a piece of this ecosystem. Some of the entrants include a startup search engine, Snap.com, ad network Revenue.net's CPA Search Network, search engine marketing firm Efficient Frontier, and numerous arbitragers who have built technology meant not for others to use but for them to become better affiliates.
All of these companies – from affiliates to networks – have one thing in common, Google. Each relies on the search engine's traffic for a good piece of their revenue. This has left many in the Internet advertising space wondering when the search company would switch to accepting CPA ads instead of CPC. The big news is that they have, but in typical Google fashion they have done so in a blue ocean way, i.e., they didn't do the obvious. My thanks to Beth Kirsch for making me aware of the entrance by Google into CPA and for pointing me to fellow ReveNews blogger Jeff Doak, Scott Jangro, and the one who first broke the story in addition to posting a copy of the letter sent by Google, David Jackson's impressive Seeking Alpha.
Many pieces have already been written, and many more will be written. What I find so interesting about Google's Content Referral Network (CPA Network) is, as alluded to earlier, that they didn't begin with the finished product. As a marketer, I would want to buy Google.com search on a CPA basis. That's not what Google unveiled. They unveiled a content strategy, a means for web site publishers to promote CPA ads on their site in addition to the existing contextual ads which pay on a CPC basis. This benefits the select marketers as they will receive conversions at a fixed price. It will benefit Google as they will have a chance to gain increased learnings about the performance of offers across various channels. (As many know the search engine already has perhaps the largest advertiser base and has performance tracking placed on a large number of them.)
Only time will tell Google's true intention. Is the Content Referral Network a sandbox for accepting CPA on their search inventory? Is CRN a future replacement for AdSense, for content which works for some but has serious quality / click fraud issues? Is it a means to compete with eBay's new network by having a future version showing optimized, merchant driven ads? Perhaps this new network has something to do with the new Google payment system so that the company can own the whole process, from click to conversion to payment? Maybe Google doesn't know, and they simply wanted a way to test the business in much the way they started to test video by showing not pre-roll / post-roll as might be expected but simply video ads on sites. By rolling out what seems like an affiliate network they play with other people's inventory, the online equivalent to other people's money.
I don't think Google's affiliate network is meant to hurt arbitragers (they'll just turn around and take Google merchants and bid on Google) or take that activity in-house. Google could probably make more money doing CPA Search in-house (controlling where offers show based on a CPA goal), but that gets away from their core competency, and makes them too liable for placement. Additionally, I think that they make more letting others bid inefficiently, i.e. paying a higher effective CPA than they would if they could bid on a CPA basis the way they do now on a CPC one. Nor will Google's Content Referral Network hurt affiliate networks right away. Google operates famously opaquely, and affiliate marketing as it is practiced today involves the exact opposite. That doesn't mean CJ/LinkShare, et. al. shouldn't be worried. Google is, according to them, a technology company, and that is the exact role of the true affiliate network. Even though they will start with weekly stats via email (huh?), don't think they can't build leading interfaces. Whatever it is, and however rudimentary it appears, with thousands of employees, chances are this is but one tiny step in a much bigger plan. More than anything, Google continues to solidify their position as a force that cannot be ignored in online advertising.
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