Yahoo! and MSN move toward Paid Inclusion in 2004

Outlook: Paid Inclusion Needs to Change its Ways
By Sean Michael Kerner

Next year could be one in which both the Yahoo! and MSN portals fully embrace paid inclusion in their search strategies, but don’t expect much growth in the market until 2005, according to a recent study on the paid inclusion market by Jupiter Research.

The December report, “Paid Inclusion Market Opportunity Assessment,” is calling 2005 a better growth year for the search sector, while also calling for the industry to do away with its cost-per-click model. (Jupiter Research and this publication are owned by the same parent company.)

“Paid inclusion programs that currently have a cost-per-click pricing component must eliminate it, as the model has a fundamental and inherent conflict of interest,” the report said. For one, it continued, until paid inclusion programs are solely based on a time-based pricing model (i.e., an annual fee per URL), uncertainty and doubt will continue to cloud the industry.

The report, written by lead Jupiter analyst Niki Scevak, along with analysts Matthew Berk, Nate Elliott, Andrew Peach and Gary Stein, forecasts revenue rising in the sector to $293 million by 2006.

“Under a cost-per-click model, claims that the rankings of paid inclusion customers are unaffected cannot be believed, as the search index has a clear financial incentive to promote rankings. Currently, paid inclusion programs are sold on the basis of providing publishers with a certainty that content will be crawled at a set frequency over time. Paid inclusion programs should be priced according to this premise as well.”

For the purposes of the forecast report, Jupiter focused only on paid inclusion as a category, which it defines as a method in which a company pays for the right to be automatically and periodically included in a search engine index, either by regular harvest (pull) or submission (push). “Paid inclusion programs help companies with complex Web sites overcome the mechanical problems of having their dynamic content indexed.”

By contrast, the report did not include the “paid submission” category. “Paid submission programs or software allow companies to pay for the ability to have one or more URLs automatically submitted to multiple search engines, which then index the pages. Whereas paid inclusion programs are ongoing services, paid submission efforts are generally not.”

Search engine industry leader Google does not use paid inclusion as part of its search index. Technically speaking, URL’s are added to the Google index without fees or payment by site owners. But Google does have sponsored listings (AdWords) that are not intended in any way to populate or dilute the integrity of the actual search listings and are listed separately.

The report found that the dissolution of LookSmart’s distribution agreement with MSN in January of next year is expected to erase about $150 million from the paid inclusion market in 2004, an event that has “brought further doubt and confusion over the sustainability of the industry as a whole.”

MSN recently dumped the LookSmart paid inclusion service for what Jupiter believes to be “the philosophical basis that displaying a human-edited directory as the primary collection of results is less relevant to consumers’ needs than those from an algorithmic index, rather than because of paid inclusion fees.”

The key finding of the report said spending on paid inclusion will decline by about one-third next year, from $167 million this year, to $110 million in 2004.

But the research also found some upbeat trends in the search sector, “with paid inclusion continuing to enable greater measurement and acceleration of the effects of search engine optimization initiatives.”

For advertisers looking for better returns on their search engine optimization (SEO) efforts, “paid inclusion brings greater certainty as well as greater transparency, through more granular measurement to SEO efforts.”

The paid inclusion market, according to the report, is dependent on a small number of firms. “Jupiter Research estimates three-quarters of paid inclusion revenue is currently derived from searches on MSN,” which helped MSN’s third quarter paid inclusion revenue more than double from the same quarter last year.

Also, Yahoo! has made a number of strategic acquisitions in the paid inclusion market including Inktomi, Altavista, and FAST/AlltheWeb. The report said it expects Yahoo! to capitalize on those acquisitions in 2004 and create some semblance of synergy across its properties by further integrating paid inclusion.