In our previous blog post, we had looked at how GoTo.com introduced the concepts of real-time auctioning of online ads and pay per click advertising. Google later adapted it and refined it further to create the AdWords behemoth, which today is the single largest source of revenue for the company. In the last financial year, advertising accounted for $50 billion of Google’s $55 billion annual revenues in 2013.

We had also seen that the auctioning system built from the ground up by Eric Veach for Google charged only a penny more than the second highest bid for the AdWords auction winner for a given keyword. This was surprisingly similar to the Vickery Auction model used by the US Federal Reserve to auction government securities. William Vickery was an economist and Nobel laureate. Veach had created his real-time auctioning system without being aware of the Vickery model! Simply amazing.
HOW THE VICKERY MODEL WORKS
In the traditional Vickery auction, “all bids are placed in a sealed envelope. When the envelopes are opened to determine the winner, the highest bid wins. But there’s a twist. The winner doesn’t pay his or her bid. Instead, the winner only has to pay the second highest bid,” says Avinash Dixit and Barry Nalebuff in their celebrated Game Theory work, The Art of Strategy. 

Notice that this is slightly at variance with the real-time AdWords auctions, which takes place online, and where the winner has to pay only a penny more than the next highest bid. Dixit and Nalebuff explain using clear illustrations that in a Vickery auction, bidders have the ‘Dominant Strategy’ of bidding their true valuation. They go on to define Dominant Strategy as the best play of an auction participant, no matter what others are doing.

English and Japanese auctions are two other formats which exist at slight variance to the Vickery Auction model. In the English Auction used by auctioneers like Sotheby’s or Christie’s, the auctioneer stands in a room calling out bids which increase at every call. The authors say that in an English auction, “a bidder learns something about what others think the item is worth by seeing some of their bids”. Their advice to bidders in an English Auction is that they have to bid until the price exceeds their ‘Value’, and then drop out. Dixit and Nalebuff define Value as the bidder’s “walkaway number…the highest price at which the bidder will still want to win the item”.

In the Japanese Auction, “all the bidders start with their hands raised or buttons pressed. The bidding goes up via a clock. The clock might start at 30, and then proceed to 31, 32…and upwards. So long as your hand is raised, you are in the bidding. You drop out by lowering your hand. The catch is that once you lower your hand, you can’t put it back up again. The auction ends when only one bidder remains.

“An advantage of the Japanese Auction is that it’s always clear how many bidders are active. In an English Auction, someone can remain silent even though they were willing to bid all along. The person can then make a surprise entry late in the contest.”

So in the Japanese auction, everyone sees where everyone drops out. In contrast, the authors say, bidders in a Vickery Auction doesn’t get a chance to learn anything about the other bids  until the auction is all over. Again, in both the Japanese and English auctions, what the winning bidder has to pay is the second highest bid amount.

THE DUTCH AUCTION
Google is also famous for using the Dutch auction to pick buyers for its shares when it first went for a stock market listing in 2004. Dixit and Nalebuff say that in the Dutch Auction, which is used to sell flowers in the Netherlands at places like Aalsmeer, the process is the reverse of the Japanese Auction. Here the auction starts with a high price that declines. “Imagine a clock that starts at 100 and then winds down to 99, 98…The first person to stop the clock wins the auction and pays the price at which the clock was stopped.”

e.o.m.

GoTo.com, the pioneer search engine founded by Bill Gross, which changed its name to Overture and was subsequently acquired by Yahoo! and shut down, has now reclaimed its original domain name and returned to familiar turf.

In interviews online, as well as on its Facebook Page, the team behind the new site has given enough indications that it’s a serious attempt to revive the brand. It has received $6 million in funding from VC firms, including the storied Draper Fischer Jurvetson. The 25-strong team is led by Jeffrey Brewer. Another name associated with the revived site is Joshua Metzger. Brewer was the CEO of Overture before it was acquired by Yahoo! for $1.6 billion in 2003. Metzger was SVP of Overture. So what we are seeing at GoTo.com now is a major comeback attempt by more or less the same team which was originally behind GoTo/Overture.

GOTO REVOLUTIONISED SEARCH ADVERTISING
GoTo.com was incubated by Bill Gross’s Idealab. It revolutionized the staid world of internet search engines by offering paid searches for the first time. Though initially considered distasteful, the model was later on adapted by Google and others. AdWords, which accounts for the bulk of revenues at search engine behemoth Google, traces its origins to the innovations brought about by Bill Gross and team.

GoTo.com was the first to introduce the system of real-time auctioning of ads triggered by keyword searches. Gross and his team also were the first to introduce the concept of pay per click or PPC, wherein advertisers only paid for their ads when viewers clicked on them. Until then, internet advertising too was following the traditional print and television advertising metric of cost per thousand impressions (known as CPM).

What made everyone sit up and take notice about GoTo.com was that its innovations raked in revenues in spades. In 2000, a mere two years after it was founded, GoTo boasted of $100 million in revenues. It went public soon after, while still in the red. The IPO brought in a billion dollars and plenty of market recognition. For its non-paid results, GoTo.com licensed the technology from Inktomi, a then popular search engine.

GOTO FAILED TO PATENT ITS INNOVATIONS
Through a management oversight, GoTo.com missed patenting both its real-time auction and pay per click innovations within the mandatory one-year window after commercial operations began. It ended up paying a heavy price for it. Google, an upstart search engine which wanted to index the world, was still groping for a revenue model when its founders were struck by the strides made by GoTo/Overture on the paid search front. According to the Google Story by David A Vise, Brin and Page though were turned off by certain GoTo.com practices like selling “guarantees that websites would be more frequently included in Web crawls, provided a business was willing to pay extra for it”.

They also tweaked the bidding process for AdWords. Unlike GoTo.com, which ranked its ads based on how much the vendor paid, Google used a formula. Apart from how much someone was willing to pay, it also factored how frequently users clicked on the ad. “More popular ads drifted up. Less popular ones drifted down. So they trusted their users to rank the ads,” wrote Vise.

In another crucial difference, while Overture made advertisers pay what they had bid, under the Google system devised by Eric Veach, the winner was charged only a penny more than the second-highest bid. Google innovated on this because it found that Overture’s system  encouraged what was known as bid shading, writes Steven Levy in his book In the Plex. Because Overture made advertisers pay the amount they had bid, even if the next lowest bidder had offered significantly less, they always had an incentive to lower their bids in subsequent rounds, Google reasoned. The Google leadership also noted that a cottage industry of software providers had provided programs to automate bid shading on Overture.

Incidentally, Veach’s auction scheme which he created from the ground up on his own, was later found to mirror the famed Vickery second-bid auction model adopted by the US Federal Reserve to auction government securities.

A third tweak made by Google on the GoTo.com model was the introduction of the Quality Score. If your ad had a higher Quality Score, it got a better placement even when someone had bid higher. Levy observes that Quality score made the advertiser work hard to stay relevant. “You paid less if your ads were relevant. So you had a reason to work on your keyword, your text, your landing page, and generally improve your campaign.”

Nevertheless, there’s no arguing that the innovations introduced by Bill Gross and his team at GoTo.com had provided a way out for the Google founders to monetize their search engine. Though Gross and team had missed the window to patent their innovations, they scrambled and patented everything else they could think of, basically a bunch of obscure things like the way they accepted bids.

This came in handy when Overture later sued Google for patent infringement. Though the Google founders were determined to fight the suit, in the run-up to Google’s IPO when many things started going wrong on the PR front, the company’s VC backers forced Brin and Page into settling the Overture suit. In 2004, ahead of its IPO, Google gave Overture owner Yahoo 2.7 million shares to drop the litigation.

SO WHAT’S NEXT FOR GOTO.COM?
As we can see, GoTo.com has plenty of history to boast about. Though Google dominates the search arena, there’s still room for a nifty competitor to innovate since search is not a done thing. Will the GoTo.com team be lucky in their new avatar? In an interview to domainhioldings.com, Metzger said the team bought the GoTo.com domain in a private deal with the owner. He had this to offer on the future plans of the team: “We’re doing a fair amount of experimentation and testing in the area of search — let’s call it enhanced search — and it’s likely we’ll continue to do that for a while.  You can check it out at the website, which has been resurrected as a simple search engine with the look and feel of the old GoTo.com.”

A post on its Facebook Page also states that the team is focused on fixing search. Here’s wishing them all the best in becoming great at what they are trying to do.

e.o.m.