And You Thought the Web Ad Market Was Dead

Sales of so-called paid placement listings are soaring

It's called the Holy Grail of Internet advertising, and no wonder. In a European online ad market that grew 12% last year, sales of so-called "paid placement" listings soared a delirious 450%, reaching nearly one-tenth of the $1.1 billion total. This year, paid placement revenues will triple again, predicts U.S. Bancorp Piper Jaffray analyst Safa Rashtchy. It almost feels like the heady dot-com days all over again. "Web portals have awakened to an enormous and previously ignored opportunity," says Rashtchy, who generated considerable industry buzz in March by forecasting that paid listings will be a $7 billion business by 2007 -- $1.9 billion of that outside the U.S.

Hard to believe, but all this excitement is about unadorned links tucked into Web pages on sites such as Google, Yahoo, and MSN. Ah, but what links! In paid placement, pioneered by Overture Services Inc. of Pasadena, Calif., advertisers bid to be associated with certain words. When Net surfers search for those phrases -- say, "cheap holidays" -- they get back a list of Web sites plus a half-dozen come-ons from the advertisers who paid the most for placement. The sponsored links are usually highlighted with a label.

Advertisers love the concept because it offers great economics. They only pay for referrals, at a cost of about 37 cents, when somebody clicks on the link. With banner ads, they pay whether anyone responds or not. The paid-listing providers split the take with the search engines. Another bonus: Customers segment themselves via the words they enter. Somebody searching for "fish & chips" on Yahoo, probably isn't looking for caviar. That makes paid-listing ads among the most cost-effective direct-marketing techniques. "This is what Internet advertising was meant to be," says Daniel C. Ishag, the 29-year-old founder and CEO of London-based Espotting Media, which helped introduce paid placements in Europe three years ago.

Now, the battle for the European market is heating up. On Apr. 14, Overture, the industry's top player, announced plans to use its beachhead in Britain, France, and Germany to advance into seven other European countries by yearend. Espotting, which boasts Yahoo Europe as its biggest partner and says it has 15,000 advertisers in 10 countries, is also looking to expand. Then there's Google Inc., which aims to leverage its dominant position in Web-searching to grab a larger share of paid-listings revenues.

The rising tide may lift all boats, but Espotting will have to paddle hardest. The privately held company, which reached operating profitability in 2002 on estimated revenues of $40 million, is aiming for $100 million in sales this year. Still, that's only a fraction of the $688 million Overture logged last year worldwide. "Espotting is trying not to get squashed between the big boys," says Michael Rohowski, head of business development for Lycos Europe, which has inked deals with both Overture and Espotting.

The biggest problem: Overture has nabbed most of Europe's biggest players, including Microsoft's MSN unit and Germany's T-Online International. "We're indisputably No. 1 by just about any metric you can name," says Nick Hynes, president and managing director of Overture Europe.

To fight back, Ishag is casting a wider net. He's courting online publishers, such as Britain's Dennis Publishing Ltd. and Hemscott Group Ltd., who want to sprinkle paid links throughout their online content. He's also pursuing interactive-TV channels and mobile carriers such as Britain's mmO2 PLC.

But all paid placement players could lose their footing in this fast-changing landscape. The major portals are so few in number that they can drive hard bargains. Overture was forced to trim back its share of click-through revenues from 51% in 2001 to just 36% at the end of last quarter. Espotting says its cut remains above 50%.

More vexing, portals are moving to squeeze out middlemen by developing their own paid-search capabilities. "It's less important to look at the deals these companies have won than at the potential for them to go away," says analyst Derek L. Brown of Pacific Growth Equities Inc. in San Francisco. If that happens, Ishag and crew will have to swim against a riptide.

By Andy Reinhardt in Paris

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