Saturday, April 5, 2008

Flat-Rate Pricing for Online Services

Warner Music is toying with the idea of charging everybody with an online connection $5 per month, and users can download unlimited music. With 150 million online households that would be ~ $9 billion per year in the US, collected by the ISPs, which can significantly improve margins. Colleges have about 32 million students – another $2 billion. At workplace, people listen to music - that's another 138 million – with 50% conversion, this is another ~$4 billion. In total, $15 billion per year that can put the music industry back on track, and that's just the US! Well, at least this seems to be the rosy version.

Ironically, a similar idea was rejected when a proposal was made in 2004 by the Electronic Frontier Foundation. The idea has re-surfaced, and with a very different music industry outlook, it certainly looks a lot more attractive to the labels than it did last time around. The concept of collecting a flat fee for unauthorized use of music is not new. The idea was developed in France in 1851 as a way of reimbursing composers whose work was being performed without permission in public venues. Nor is the idea new to the US: it has been used in the radio business since 1914 and also applies to webcasts and live performances. However, not everyone believe a flat music charge is a good idea. In fact, in many parts of the internet sector the new proposal may appear like a tax. In fact, some people might think that a dose of reality in the music sector wouldn't be such a bad thing.

The idea of a flat charge is not without appeal – and it might get some traction with the ISPs. What if you had the option to take broadband at say $30 per month with an agreement that you could only use limited P2P services but could pay $35 per month for service with unlimited P2P? The ISPs would want a cut, arguing that they would incur incremental capacity costs, but unlimited legal P2P – or even P2P that the ISP could throttle back at peak usage times – would be hugely attractive to the online public. So much so, that a large number of the users would likely go for it. The idea also lends itself easily to tiering and bundles – the cable guys' favorite. Say $5 per month extra for "managed" P2P, but $6 per month for unlimited P2P, and so forth. But if the regulations were managed well, the user would still have the choice and not be obligated to buy something that they didn't really want. Despite Microsoft's near abandonment of the DRM software that allows P2P services to exist, Real Rhapsody, Napster and Yahoo! Music are still managing. And, we must draw a distinction here between the subscription services and Apple iTunes – which is still a pay to download model.

Subscription services account for approximately 18% of the online market, and this might increase dramatically if Apple introduces a music subscription service as expected in H2 of 2008. The problem is, what happens to these services if the industry goes over to all-you-can-eat pricing? Possibly they would be able to adapt, at least to some degree but their role would change. Presumably, somebody would have to negotiate with splits with the bands, compile playlists, provide the music playing software to users etc. Apple is also rumored to be considering an all-you can-eat music service by charging a bit more for an iPod – say $100. If we assume that an iPod has an effective consumer life of 2 years, the extra amount works out to around $4 per month – not far from the suggested $5 per month by Warner Music. But given the potential pool of 115 million worldwide an additional $100 per unit would be some serious incremental cash – another $11.5 billion potentially.

At first blush, all-you-can-eat movies for a fixed price looks attractive – certainly to the consumer. But the concept is fraught with challenges. The MSOs and Telcos have invested a fortune in providing pay-per-view services of their own. And these services work pretty well too. The interface may leave something to be desired, but we can attest to the fact that Time Warner Cable has a fairly compelling movie-on-demand service. Would they forego $4.99 per movie for an all-you-can-eat package charged at the average pay-per view movie take rate? Time Warner Cable might actually like it because it eliminates billing and fair amount of customer service, but HBO probably wouldn't. Who would pay extra for a movie channel if you could have any movie any time direct from the cable provider? Provided users are not "taxed" by charging everyone in a service pool, the idea of flat rate pricing for music and possibly movies has a lot of potential. It might be one of the very few business models that could actually work online and still fit within business models of the existing players, albeit with some adjustments. The concept is not without precedent online either. Many would argue that the consumer internet was really born when AOL introduced flat rate pricing for dial-up access to the internet. AOL definitely is the one to keep an eye on , going forward.
With inputs from Jeff Lindsey in NY, April 2008

Wednesday, April 2, 2008

Keyword Buying Process on GOOG, YHOO & BIDU

Comparing the process of buying keywords on Google US, Yahoo! US, Baidu China, and Google China; we find some interesting insights:

- Baidu has a roughly $400 USD minimum upfront account setup; Google and Yahoo! have no minimum and no upfront account setup
- Unlike Google and Yahoo!, Baidu does not use ad relevancy (you can purchase the first sponsored listing; competitor bids are public)
- Google AdWords China is identical to AdWords US
- Google and Yahoo! keyword buying processes are very similar, but quality control measures could be better at Google

While Google, Yahoo!, and Baidu all offer simple online interfaces for users to engage in keyword bidding, Google's interface seems to have the fullest features to optimize the search experience for end users and advertisers.

To set up a paid search campaign, neither Google nor Yahoo require the user to create an account until the user has entered in her list of desired ad locations, keywords, and bids. The user can then activate the account by entering a credit card; there is no minimum ad spend amount on Google or Yahoo! In contrast, Baidu requires the user to establish an account before beginning any keyword bidding. Baidu also requires the user to commit to a minimum 2,400 RMB spend (about $380) to activate the account. While this requirement helps Baidu to promote spending and potentially increase average revenue per customer once the user is committed to Baidu, it may limit participation of long tail advertisers with whom Google has had success.

Both Google and Yahoo apply a quality score to assess the relevancy of your ads to the keywords associated with it. The quality score of a user's ad along with her bid price determine the ultimate paid position of the ad. An ad with high relevancy may be positioned higher than a competing ad with a higher keyword bid price and lower relevancy. Competitor bids are never disclosed directly on Google or Yahoo. Baidu, on the other hand, does not apply a quality score to paid search ads; the highest bidder gets the best placement, regardless of the relevancy of the ad. Baidu also discloses the bids of the highest three bidders for a desired keyword, showing competitors the bid price to own top paid position.

The interface of Google China's version of Adwords performs identically to Adwords US, including payment. Google China accepts many credit cards for payment; however, credit cards are less prevalent in China than in the U.S. and other developed countries. Baidu accepts only local Chinese credit cards, but has established relationships with many Chinese banks to facilitate non credit card payment, which may ease the keyword buying process for local Chinese Baidu paid search customers.

The user experience for setting up search marketing accounts and buying keywords on Yahoo is very similar to that on Google. Google does incorporate some quality and protection measures that Yahoo does not. Google's system automatically flags keywords such as Pharmacy or Gambling and requires the buyer to be registered with an appropriate online bureau for the vertical. Google also flags and disallows direct calls to action in a search ad, such as "Click Here," and instead requires the buyer to enter more information about their website. Finally, when the keyword buyer is entering his search ad, Google scans her site and suggests relevant keywords based on the site scan. Although these are minor differences, they exemplify Google's focus on quality of the product for the end search consumer and advertiser.

The General Keyword Bidding Process:

Step 1 - Get Going
Google and Yahoo! start with simple interfaces to start a search marketing campaign; neither requires a initial account or credit card set up to begin bidding on search keywords. Baidu requires an account to be set up before keywords can be bid upon. As you start, Yahoo! offers to upsell its services to create your keyword campaign for for $199; Google and Baidu do not offer this service.

Step 2 - Geographic Targeting
Google and Yahoo! allow users to specify specific geographic locations to be targeted. The region could be a state, DMA, city, zip range, etc. Targeting is done through a combination of IP address and/or geographic location entered in search query. Local maps display and highlight the targeted region. Baidu offered no geographic targeting measures.

Step 3 - Create Your Ad
Ad creation on all of the 3 search engines is very simple. To create the ad, the user enters the URL to his site, the headline link, and a description link. Google actually scans the user's website and recommends keywords based on the scanned content.

Step 4 - Choose Your Keywords
All 3 search engines offer plenty of help upselling keyword buyers with additional keyword suggestions based on their entries. Users can enter one or many keywords in a single campaign depending on how the user would like her ad displayed for a given keyword.

Step 5 - Bid
In terms of bidding ease and direction, Google seems to do the best job. Google guides users to appropriate bid levels based on desired rankings, without explicitly stating other current bids (like Baidu). Google offers the user insight into projected position of a keyword/bid combination including an estimate of clicks per day. Yahoo! offers projected performance on the entire campaign, rather than specific keyword/bid combinations. Baidu, on the other hand, does not apply a quality score to paid search ads; the highest bidder gets the best placement, regardless of the relevancy of the ad. Baidu also discloses the bids of the highest three bidders for a desired keyword, showing competitors the bid price to own top paid position.

Step 6 - Activate
The final step in the process for all 3 search engines is to enter payment information and begin serving ads.