A Brief History Of Paid Search Advertising

In the beginning, there were websites.

Human-compiled directories like Yahoo sprung up to help users find interesting things on the web, but after a while, it became obvious that the manual process for indexing the exponentially growing number of websites was futile and thus search engines arrived to fill the void with scalable, technology-driven solutions. Hundreds (if not thousands) of search engines competed for the job but the early algorithmic driven engines were ineffective and a source of frustration as spammers cluttered search engine results pages (SERPs) with irrelevant content. Those of you who remember searching on the early engines in the 1990s may recall that sometimes as many as half of the listings on various SERPS were blatantly unrelated to your query.

It was Google, among others, that finally created a search engine that ranked pages in a way that made sense (read more here about that) and by 2000, search engines in essence became the best starting point for finding web content. Since then, the number of searches has grown dramatically (and steadily) and with the widespread adoption of broadband access, search engines have become utterly vital to our web experience.

The first monetization of SERPs began in the mid-90s with a flat-fee directory listing in line with how the Yellow Pages sold their advertising inventory. However, by 2000, with companies such as Overture (purchased by Yahoo in 2003) and Google with its AdWords program, the transparent, auction-based, pay-per-click model we see now in paid search had become the standard. In the early days, any advertiser was willing to pay the most per click would get secure the highest position for their ad on a SERP.

Over time, though, it became increasingly obvious that this wasn’t the most effective model as the engines would gladly have an advertiser pay $1 for ad that got clicked 10% of the time versus a $5 ad that was clicked only 1% of the time. Thus, a major shift occurred in the mid 2000s when Google introduced Quality Score, a way to determine which ads should appear on the page (and in which order) based on various optimization factors—foremost of which were criteria that ensured the ads which generated the most revenue would get pushed to the top. Yahoo and Microsoft followed similarly with their paid search platforms.

Paid search is now the biggest revenue driver for most search engines. In fact, according to eMarketer, Google was on pace to generate $22 billion worldwide in paid search in 2009, with 37 billion clicks at a $.60 average cost-per-click (CPC). That’s a lot of dough!

Not only are search engines profiting from paid search, but advertisers as well. Advertisers spent almost half of their 2009 online ad budgets on SEM ($11 billion out of $22 billion total online advertising) with most of that being paid search.

Generally, Google, Yahoo and Microsoft are referred to as “top tier” engines with a multitude of smaller engines representing the “lower tier” market. According to online marketing research company comScore, the major search engines in the United States include:

  • Google (64.9% market share)
  • Yahoo (18.8% market share)
  • Microsoft (9.4% market share)
  • Ask (3.9% market share)
  • AOL sites (3.0% market share)

Paid Search has now become a “must do” marketing effort for almost every online and offline business and the demand for search marketing experts has been growing every year.

For a timeline of key milestones in search, see Danny’s The Google Decade: Search In Review, 2000 To 2009, which covers developments in both paid and organic search.

This week’s question: With SEM now amount to a full 50% of U.S. online advertising budgets, do you see that percentage going up or down in the next few years? Please respond in the comment section below.

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: Channel: SEM | PPC Academy

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About The Author: is the director of marketing research for Kenshoo, the leading provider of bid management software. You can follow him on Twitter at @mediatechguy.

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  • http://www.payperclickhouston.com ppcHouston

    Most of the time when I talk to small business owners or just people in general, they do not know what pay per click is, so I guess the numbers will only grow.

  • sDeez84

    I don’t see SEM budget allocations declining–more and more businesses will continue to view search as a necessary medium to run alongside any campaign, whether online or offline. It is still the most relevant form of online advertising and will continue to be the medium most attributed to (and closest to) website conversions.

    That said, I do think search engines’ trends to “bump off” smaller advertisers and lower CPC ads will continue, changing the competitive landscape in the space drastically in coming years.

  • http://www.ymarketing.com/ Ryan_Lash

    Hate to show my ‘internet age’ but if you go back far enough, there are some pretty fun factoids about how the Paid Search industry came to fruition:
    -Bill Gross (idealab!) accidentally stumbled upon a PPC business model that worked by syndicating GoTo.com’s sponsored listings; it was not proven until they partnered w/Alta Vista (the #1 algorithmic SE at the time) in 2000
    –Due to brand ‘confusion’ with Go.com [read: cease and desist], GoTo.com became Overture in 2001
    —As noted above, was then acquired by yahoo in 2003, their #1 customer. (Owning the media and model = Smart)
    -After a somewhat unsuccessful attempt at monetizing their own SERPs via a CPM based program (later known as just AdWords Premium and eventually phased ) Google purchased Sprinks for the pay per click auction based technology it was licensing for “AdWords Select” (launched in 2002)
    –Yahoo, who literally Powered Google’s own brand building initiative by outsourcing their natural SERP technology to the now-Search Giant, subsequently sued for much less than they could have ever anticipated losing in future market share & revenue
    The rest, as they say, is history.
    -Ryan
    PS: funny thing – idealab is now in the business of exporting solar power [via blueprints for plants] to China; couldn’t see that one coming a mile away!

  • http://www.1stpagelocal.com rickfalls

    Wow what a cool overview and history of adverting on the internet.

    I’m a little late to that whole party, but Thankfully I’m early to the “help small businesses understand and use some of these amazing tools” party and it’s still always changing as I help them save money, make money, and get seen more often on the internet where everyone is looking.

    What a terrific time to be a “big kid”.

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