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Pay-Per-Click Concept Gets GoTo.com Farther

TIMES STAFF WRITER

Search engines work pretty much the same for users. Web surfers type in subject keywords to find pertinent sites on the Internet.

What sets apart Pasadena-based GoTo.com from its search-engine rivals is how the company conducts its searches.

GoTo.com provides users with a list of Web sites ranked in the order of how much money companies pay to have their Web sites listed at the top of GoTo.com’s search results. The premise is similar to the way advertisers pay extra to have prominent Yellow Pages ads.

While competing search engines such as Yahoo, Excite and Alta Vista have morphed into all-purpose portal sites, offering everything from breaking news to auctions and online tax returns, GoTo.com has stayed focused on its basic Web-search capabilities.

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GoTo.com’s advertisers select the keywords they want--such as “mortgage” or “car stereo"--and decide how much they’re willing to pay to have users visit their sites. Then, when a GoTo.com user types in one of those keywords, the sites belonging to advertisers who bid on that keyword are included in the list of search results.

GoTo.com collects money from advertisers only when users click through to their sites.

So the keywords “golf clubs” produce 240 search results on GoTo.com. At the top of the list is GolfandTennisWorld.Com, which will pay GoTo.com $1.48 if a customer clicks on to that site, while Onlygolfgifts.com is ranked 100th on the list because it will pay only 1 cent per click. An additional 140 or so sites also turned up, at the bottom of the list, because they didn’t pay anything.

But this search method also has its oddities.

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For instance, when searching on the keywords “heart disease,” the first listing is for Drkoop.com, a medical information site that bid $1.01 to be ranked at the top. The second listing is for HealthAllies.com, a site that helps consumers reduce the prices they pay for health care that bid $1 for the second ranking. But the Web site for the American Heart Assn. is ranked only 46th because it didn’t pay for a listing.

If advertisers want to bump themselves higher up on the GoTo.com list, they can increase their bid--usually between a few cents and a few dollars--for that particular keyword.

With this business model, it’s no wonder GoTo.com has shunned the portal game and concentrated on Web searching, said Danny Sullivan, editor of SearchEngineWatch.com in London.

“Other sites have turned into portals because they realized that everybody who did a search and went off their site is a revenue opportunity that went away,” Sullivan said. “GoTo.com loves people to leave their site because that’s when they make money.”

So far, GoTo.com has signed up more than 25,000 paying advertisers such as Web guide About.com and online retailer Amazon.com. The advertisers have made 4 million bids for 500,000 keywords on GoTo.com, with an average bid price of 17 cents per keyword. A typical advertiser bids on 40 to 50 keywords, gets about 3,500 visitors a month from GoTo.com, and pays the company $600 a month for all the referrals.

Last year GoTo.com did $26.8 million in revenue, up from $822,000 the year before. But the company lost $29.3 million in 1999, compared with a $14.3-million loss in 1998.

GoTo.com executives say their company would be profitable if they weren’t investing in computer systems to handle massive growth and developing new services to expand overseas. The U.S. search business will be profitable by next year, as will its new comparison shopping and auction services, they said.

“The question is, when do you want to be profitable?” said Jeffrey Brewer, a GoTo.com founder who serves as its executive chairman. “Should we need to be profitable, we could do so in the short term. But we’re investing in new products and international expansion.”

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But the company’s biggest expense isn’t infrastructure investment or product development. According to its most recent earnings report, its marketing, sales and services cost GoTo.com $34.5 million last year. Many of those dollars went to the Web browser makers and partner Web sites who deliver 90% of GoTo.com’s 20 million users.

Investors seem to have lost patience with such heavy spending. GoTo.com went public last June and its shares jumped 49% on their first day of trading to $22.38 and rose to a high of $113.13 in November. But GoTo.com shares have fallen drastically in the last six weeks and closed at $41.06 on Friday, down $3.75 in Nasdaq trading.

GoTo.com was created two years ago by the Pasadena Internet company incubator Idealab.

But analysts say GoTo.com’s pay-for-placement search engine can become a sustainable business, especially with the growing number of online retailers who comprise the company’s core group of advertisers.

Because companies effectively choose their own ad rates through their keywords bids, GoTo.com can also attract smaller advertisers who can’t afford to buy banner ads on sites like Yahoo, said David Marks, an industry analyst for Gartner Group in San Jose.

As a result, GoTo.com’s list of 25,000 advertisers dwarfs the number of advertisers on other major Web sites, Marks said. At the end of 1999, DoubleClick, which places banner ads on sites throughout the Web, served 4,400 advertisers, while Yahoo had 3,550 advertisers, according to the companies. By comparison, GoTo.com is more like a Penny Saver, he said, because the company charges less for advertisers than its search engine rivals.

Indeed, GoTo.com’s success in attracting advertisers has not gone unnoticed among other search engines.

“A number of GoTo.com clones have popped up, like FindWhat.com, RocketLinks.com and Kanoodle.com, and plenty of even smaller ones,” said Sullivan of SearchEngineWatch.com. “But I think it’s going to be harder for new people to come in and have pure pay-for-placement search engines. GoTo was the first mover in the market, and they built the service into a a sizable search engine.”

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The company has also fared well in its trademark infringement legal battle against Walt Disney Co.

GoTo.com began using its logo of a green traffic light with white letters in December 1997. Disney began using a similar logo in January 1999 when it launched its Go Network of Web sites in January 1999.

So GoTo.com sued the entertainment giant and after two appeals, a federal appeals court sided with GoTo.com and ordered Disney to stop using its logo.

So far this year, GoTo.com has also committed about $392 million for a pair of acquisitions designed to bolster its ability to search shopping and auction sites. In January, the company spent $250 million in cash and stock to buy San Mateo, Calif.-based Cadabra, whose comparison-shopping technology scours prices offered by a variety of online retailers. Six weeks later, it committed about 3.5 million GoTo.com shares in stock to buy AuctionRover.com, a Morrisville, N.C. firm that compares prices offered at EBay and other online auction sites.


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