PAY-PER-CLICK INVENTOR HAS HIGH HOPES FOR NEW MODEL

By Elise Ackerman

Mercury News

Bill Gross, the entrepreneur who first showed Google how to spin cyberspace searches into real-world gold, hopes his new search engine will teach Silicon Valley a new lesson in Internet advertising.

The irrepressible inventor of the pay-per-click advertising model rolls out his latest take on search technology today -- a relaunch of Snap. Gross says the search company represents the ultimate in marketing: a system where advertisers pay only when customers buy.

The idea ``sounds like a dream come true,'' said Jinenne Sutherland, a manager at Organic, an online marketing agency.

That's because the $16 billion market for online advertising has a secret. The small text-based ads that made Google a Wall Street superstar do not seem to be working as well as they used to.

``The returns have been diminishing for the past couple of years,'' said Bob Dashtizad, director of online marketing at the Intermix agency.

Web users, he said, ``have gotten more savvy and they really use search engines just to find out information, to research a product. . . . They very rarely go to the search engine to purchase.''

Dashtizad said the conversion rate -- how often a person who clicks on an ad and either buys a product, makes a donation or signs up for a service -- has gone from one new customer per every 20 or 30 clicks to one new customer per every 50 clicks.

That means the cost for search advertising is going up. Meanwhile, Google Chief Executive Eric Schmidt said last week that competition in the Internet advertising market will cause ad prices to rise as advertisers are forced to pay more to acquire new customers.

Increasingly, advertisers could find themselves paying more for less effective ads. And therein lies Bill Gross' opportunity.

Gross said he got his start in arbitrage buying drugstore candy and selling it to neighborhood kids. The kinetic businessman has founded about 50 companies, including Tickets.com, Cooking.com, PETsMART.com, eToys, NetZero/United Online and Free-PC.

While many businesses hatched at Gross's Idealab incubator died in the dot-com bust, he has seen his share of success, selling companies to Lotus Development Corporation, Cendant Software, Ticketmaster and Google.

Gross' grand slam was selling Overture Services to Yahoo for $1.6 billion in 2003. Overture pioneered pay-per-click advertising in 1998 -- to widespread ridicule -- then quickly became profitable with nearly $1 billion in sales. The tech industry stopped laughing.

``The fundamental proposition to the advertiser was so strong that it was irresistible,'' Gross said. The small text-based ads were able to so accurately target their audience that they reduced customer acquisition costs by more than 85 percent when compared to direct mail.

Gross said he thinks his new company can be as powerful an idea.

With Snap, advertisers decide how much they are willing to pay if a customer completes a certain action -- like buying a product or filling out a form. Advertisers submit their bids and create a keyword campaign.

If a Snap user visits an advertiser's site and completes the desired action, the advertiser pays Snap. Otherwise, the only cost is a $50 non-refundable sign-up deposit.

``For the advertiser, it's the ultimate,'' said Snap Chief Executive Tom McGovern. ``They only pay when they ring the register.''

The company has been developing its technology since 2004, when Gross realized software existed that would enable a cost-per-action advertising model on the Internet.

He tried it out almost immediately, using a combination of different search engines to deliver results. But the search results weren't good enough to attract users on their own and traffic was low.

The Snap team decided to develop its own search technology to create a user interface that offered something new. They hit upon fast, full-page Web site previews that let users quickly page through results by using the down arrow to find what they are looking for. They could also scroll down a list of sites and highlight the ones they wanted to look at.

``The interface I think is excellent,'' said Charlene Li, an analyst at Forrester Research.

But Chris Sherman, editor of Search Engine Watch, an industry newsletter, predicted it could be difficult to get traction. ``They are competing with giants,'' he noted.

Both Google and Yahoo said they believe advertisers who use the pay-per-click model are getting a good return. While Yahoo has no plans to move to pay-per-action, Mike Mayzel, a spokesman for Google, said his company is ``always considering new ways to provide value, including various pricing models.''

Marketing agencies who like Snap's model say that what they want, more than anything, is a search engine with lots and lots of traffic.

``If you don't have a large enough query volume on your search engine, you are basically going to be irrelevant,'' said Rob Murray, president of iProspect, a search engine marketing firm based in Watertown, Mass.

While Gross was once too early with companies like FreePC and NetZero, which offered a computer and Internet service supported by advertising, there is a chance he may be too late with Snap.

It could be too hard to successfully launch a new search engine with Google and Yahoo already dominating the market, he acknowledged. But he harbors no fear of failure.

``One way or another, we think cost-per-action is such a powerful proposition, we will find a way to make that successful in search,'' he said.