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Analyzing Google's Analytics Strategy

The surge in online ads has spawned hundreds of companies whose purpose is to help advertisers figure out how to get their message across via the Web. Some define their work as analytics. Others call themselves search-engine optimization companies. Whatever the name, they all aim to help businesses manage online advertising, distill what works, and determine where ad dollars are best spent.

These companies have another thing in common: At least until recently, they could thank Google (GOOG) and Yahoo! (YHOO) for a lot of their success. The Web giants are at the forefront of the online-ad spending spree (see BW Online, 10/21/05, "Google and Yahoo!: Rolling in It").

Pretty soon, they may be blaming Google for taking it away. Google became a competitor when it bought a small analytics company, called Urchin Web Analytics, back in March. It upped the ante when it slashed the price of Urchin's software to about $200 from about $400. But the final nail may have come when Google announced on Nov. 14 that the software is now free.

RAPID-FIRE LAUNCHES. "When they first announced Urchin, I speculated about a couple of possible outcomes," says Eric Peterson of Jupiter Research. "The most frightening for Web analytics companies was that they would do tag-based analytics, freely available and supported by the global Google brand, and that's exactly what they've done."

Google has been making new-product announcements at a rapid clip. Many have been aimed at getting the search giant into other companies' businesses. This one is directed at protecting Google's home turf of paid search, where the company generates sales from advertisements -- so-called AdWords -- that run alongside search results.

Some analysts saw the timing of Google's latest announcement as significant: It came on the heels of a Microsoft (MSFT) manifesto that Web and ad-subsidized services were the future (see BW Online, 11/10/05, "Microsoft: Ozzie's Online Charge"). "It's a bit of a slap of the face to Microsoft, reminding them, 'We're in this game,'" says Marc Strohlein, vice-president and lead analyst at Outsell, a market research firm.

INEVITABLE CASUALTIES. It also sends a message to larger Web analytics companies like WebSideStory (WSSI), whose stock fell nearly 9%, to close at $16.42, on Nov. 14. WebSideStory Chief Executive Jeffrey Lunsford says he has little cause for concern. His company sells products tailored for big, sophisticated businesses. Its software costs about $40,000 a year -- not $500.

Lunsford notes that the stock also took a hit when Google bought Urchin, and when it cut the price to $200, though neither affected his business. "If cutting the price in half didn't materially impact us, I don't believe cutting it to zero will impact us," he says.

Efficient Frontier also handles search ads for major clients, relying on a sophisticated algorithm that analyzes not only Web traffic but also where advertisers should spend more money. Efficient Frontier CEO Ellen Siminoff says she's similarly unfazed. "If people don't have good technology, they will get washed out," she says. "Hundreds of companies are trying to do this. Only 10 are doing it well."

Of course, with such a fragmented market, it's hard to say which companies will suffer most. All of them will say they have defensible methods or technologies. But, no doubt, there will be casualties -- particularly among those aimed at small and midsize businesses.

"ANOTHER ARROW." While Google says several members of the Fortune 500 use Urchin's products now, this is clearly a play at the middle market, which makes sense for Google. Increasingly, software vendors want to reach the mass market, but that can be a logistical challenge. No deal alone is very big, and it's difficult to call on individual companies without a large, direct sales force.

But Google has a ready-made sales infrastructure: According to Nielsen/NetRatings, the site has 380 million unique users every month. And thousands of small businesses already rely on search ads to lure customers to their sites and products. According to Jupiter, some 83% of businesses advertising on the Web aren't using analytics now and don't know they need to. Many of those are likely small companies.

By offering a free service -- and one that's tightly integrated with AdWords -- Google is almost the de facto standard. This approach also helps it build up a disparate base of small companies for its local search efforts -- which many consider the next frontier of search, one where Google will have to compete hard with Yahoo and MSN. "This basically put another arrow in the quiver," Outsell's Strohlein says.

"BETTER WEB EXPERIENCE." Google says the free-software move is not about going after former partners or competitors: It's about making the Web the best it can be. Google is betting the technology will be used not only by its advertisers but by all Web publishers, who can use the software to determine what parts of their Web sites resonate most with viewers.

"Our objective is to take what are extremely powerful tools and make sure all advertisers have access to them to make a better Web experience," says Richard Holden, director of product management at Google.

That may be true, but it's likely cold comfort for Google's erstwhile partners.


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