Search Engine Revenues and Online Advertisements

February 3rd, 2005

From Marketwatch – On Google

Late Tuesday, Google said fourth-quarter profit rose to $204 million …
Google also said quarterly sales shot up to $1.032 billion from $512 million a year earlier. Excluding the payments Google makes to other companies to acquire Internet traffic, the company generated sales of $654 million, more than the $590 million analysts expected. Google is benefiting as companies spend more of their advertising dollars online and as the prices paid for keyword search results rise.

From CNN – On Yahoo

Five years of stagnant online advertising ended in 2004, according to jubilant executives at Yahoo Inc., helping the Web giant nearly triple its fourth-quarter profit and boosting its financial outlook for this year. The Sunnyvale, California-based company … earned $373 million, or 25 cents per share, for the three months ended December 31.

From MarketWatch – General Trends of online advertising

TNS Media Intelligence forecast a 5.1 percent rise to $150.5 billion in 2005 on top of last year’s estimated 10.6 percent bump. The first half should see the strongest rate, with rise of 6.9 percent; that will tail off to 3.5 percent in the second six months of the year. Media categories that stand to benefit the most include online, expected to gain 11.2 percent …

Online Ads and Search Engines are hot! Search engines make most of their income from paid advertisements. They get paid based on number of advertisement clicks by users. As per my understanding some companies commit a preset amount of money(over a duration of time) to paid advertisements and some don’t. So a search engine’s income largely depends on how many clicks it can get to advertisements on its search pages and on other pages on the Web which explicitly display content specific ads.
One obvious way for search engines to exploit the latter to increase their revenues would be to skew results so as to rank pages which display their advertisements highly. This way the number of visitors to these pages increase resulting in a proportional increase in advertisement clicks.
This raises some interesting questions. Can search engines come up with optimization algorithms so as to maximize their overall income with the following constraints:

  1. Income from individual companies do not exceed committed boundaries.
  2. Search ranking skew towards pages displaying paid advertisements are not so as to effect search users significantly.

I don’t believe Google or Yahoo dies or would ever consider doing this, but they are not the only search company and their success will build a market in which other companys will offer similar services. There remains a risk that an unscrupulous company might be tempted to skew its search to increase profits.