Berk Sure Has A Way

Enhance / GoClick / TrafficLeader still comprise the majority of Marchex’s revenue.  Assuming that TrafficLeader is still a small business (if it is not, that means that Enhance and GoClick are shrinking), it means that Marchex’s biggest business is paid search syndication.  In my first post, I said “Enhance and GoClick (search syndication) are deteriorating low-margin businesses riddled with traffic quality problems and a lack of scale”.

Paid search syndication is a tough business for the non-winners:

1) Network Scale drives Revenue Yield. Search syndication revenue yield is determined by CPCs, breadth of keywords, quality of advertisers and algorithm.  Advertisers are busy and they focus their money and energy on their biggest and best outlets.  A big syndication network leads to more advertisers which leads to 1) higher CPCs, 2) more keyword coverage, 3) more “budget depth” in each keyword covered, 4) better advertiser optimization of campaigns.  Google has over 200,000 advertisers and Yahoo has over 100,000.  Enhance and GoClick do not have scale and consequently do not have high CPCs, broad keyword coverage, budget depth, or frequent advertiser optimization. 

2) Revenue Yield drives Network Scale. In a virtuous cycle, as yields grow higher, the leading search advertising network can attract more scale via new distribution partners. In search syndication, scale drives advantage. Google has decimated the competition in this area.  Yahoo is a decent number two and way ahead of the second tier. Both Google and Yahoo have scale with their own sites and can therefore outbid the second tier for new distribution (MIVA, LOOKD, MCHX, INCX).

3) Traffic sources go with Google (or maybe Yahoo!) – Case in point is Marchex’s direct navigation businesses – Yahoo! provides the paid listings to these sites.   The yield using Google or Yahoo!’s ad network is higher for Marchex even though revenue is split with the network.  Since Enhance and GoClick don’t have the yield of Yahoo!, Marchex’s revenue and profit from these properties would plummet if they made Enhance or GoClick the primary source of paid listings on direct navigation.  Another quick example:  LookSmart.com uses Google paid listings instead of LookListings. 

4) The Golden Traffic Rule – he who has the traffic gets the gold.  Traffic owners get the vast majority of revenue – Google gives out north of 75% of their revenue to their partners.  Yahoo has a hard time signing new quality distribution partners against Google as Google’s yield advantage has grown.  Similarly the only high-profile distribution deals that the second tier have retained or won in the past few years have been low-margin technology platform licensing deals (e.g. MIVA for Lycos, LookSmart for AskJeeves, or Marchex for Yellow page companies) or meta-search deals where more providers improves the value proposition to consumers. Therefore, even if Marchex could compete with Google, Yahoo, etc. to sign up quality distribution partners for Enhance / GoClick – they would end up paying most of the money to partners (plus 3% to Yahoo! for the patent settlement!).

Where is Enhance / GoClick’s traffic coming from?

Some clearly comes from Yahoo!  Marchex’s 10Q’s listed Yahoo! as it largest distribution partner (13% of revenue in Q1, 10% in Q3).  MSN and AskJeeves are also announced partners. What is unknown is how much of the revenue from these partners is related to TrafficLeader customers and how Marchex books revenue for that business line.  Other revenue likely comes from recycled traffic – what I call the rats and mice of the search business – the distribution partners Google and Yahoo didn’t want or rejected.  These distribution partners often include players that utilize pop-unders, pop-ups, adware, spyware, browser-hijacking, gambling-related traffic, international traffic, or just plain fake clicks.  I’ve seen instances where distribution partners have their own distribution partners that have their own distribution partners – creating a kind of traffic laundering that obscures the original source of the click.  Advertisers only want quality traffic – you will notice that all the larger search syndication players talk about traffic quality as an overarching issue.  Now clearly, I don’t know where MCHX’s traffic comes from or how high quality it is, but Overture, Miva and LookSmart all took a hit to revenue and profitability at some point in the name of “cleaning up their traffic”- I suspect MCHX will be no different.

As a starting point, I would encourage all of Enhance and GoClick’s advertisers to use Google’s conversion tracking feature to track the performance of their clicks from Marchex’s distribution providers.  If you have an issue, call Marchex’s customer service line.  If you are thinking about using GoClick or Enhance, you can read what other customers had to say:  Enhance Interactive customer reviews and GoClick customer reviews.

Where about advertisers?

A quick review of some competitive queries suggests Enhance and GoClick do not attract enough advertisers to form a competitive market.  Since Google’s algorithm is more flexible (and therefore higher yielding), we will use Yahoo’s data as a lower-bound proxy:

Oftentimes, second tier search providers will redistribute each other’s listings on their networks. The interesting thing about the rest of the tier two is that they have suffered revenue declines – it will be interesting to see if Marchex can escape the same fate.

What about cross-pollination of advertisers between their products? 

Simply put, I doubt it.

1) Direct Navigation’s revenue share from Yahoo is far superior than MCHX’s yield – MCHX won’t be putting too many (if any) of Enhance or Goclick links on their direct navigation pages – it will hurt revenue and profits

2) TrafficLeader’s larger advertisers would likely bolt if their account rep sent them too much traffic from the lower quality Enhance / GoClick networks.  I have seen local advertisers from their yellow page deals placed (often irrelevantly) within Enhance results from time to time, but on the whole TrafficLeader’s customers are likely sent mainly to the big quality networks. 

3) IndustryBrains has traction with advertisers precisely because they do not distribute beyond the specific sites you buy when you purchase through them.

I own MCHX puts at various prices.