Thursday, January 05, 2006

The Most Interesting Press Release You Didn’t See

“During the Christmas season, certain online search engine costs increased significantly over the prior year, and as such we made the decision not to pursue the resulting high cost order volume.”

That comment was contained in the long first paragraph of a press release from FTD Group, the flower delivery people, that was issued at 5:54 E.S.T. last Thursday night, when almost nobody was around to care.

Now, I don’t follow FTD closely, but its business model depends more than you might guess on internet searches—after all, somebody searching for “flowers” on Google is probably not doing deep scientific research into botany. They are very likely a guy, running late, kicking himself for putting it off until the last minute.

Indeed, Google the word “flowers” and you will find an FTD ad, third from the top:

Get it There Today. Fresh Flowers

Satisfaction Guaranteed-Order Now!

What is also interesting about the FTD release is that the company states that despite a pull-back in online ad spend and the resulting revenue shortfall, the company will still hit its EBITDA and earnings targets:

“As a result, despite this slight decline in order volume for the Christmas season, we are reiterating our EBITDA and EPS targets for the year.”

This suggests that at least in the floral delivery category of online search, and assuming FTD is not just blaming an innocent bystander like some companies we could imagine, the marginal cost of a new customer has reached parity with the marginal profit from that customer. Which is not something anybody expected happening any time soon.

So what is FTD doing about this turn of events?

“…we have begun making additional investments in our marketing staff to help build a more diversified marketing portfolio. We believe these initiatives will enable us to regain our competitive position in the marketplace and continue to deliver long term bottom line results for our shareholders.”

I’m not sure what it means to build “a more diversified marketing portfolio.” 30 second spots on Howard Stern? Sandwich boards in Times Square?

Whatever it means, the fact that FTD says the cost of using “certain online search engine(s)” has increased so significantly that the company cut back its online marketing is worth investigating.

Therefore, the question before the house is this: is there any indication from anybody else who uses online search that online search is no longer economic in any field outside the flower delivery business at FTD?

Informed responses are welcome.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


ron s miller said...

It can't be good news to Google.

d reeves said...

Jeff -
Much of the cost of online ad placement comes from a company's success in turning site visitors into actual clients. Certain keywords can result in lots of site traffic, but if people using that keyword tend become buyers, it's just wasted money. This is on eof the main features of web analytics apps.

To really be successful, the marketing team has to be really creative and analytical, always trying out different keywords, measuring the results, and tweaking it to optimize ad spend per paying customer.

I don't know the specifics of FTD; but it's possible that they're just not as good at this as some other companies. Or maybe their website isn't as well designed, and fails to get people to purchase.

Just some ideas.
thanks for a great site.


I think FTD is a bad example. Who doesn't know about FTD and 1800 Flowers? Who would use google or any other search engine for that? Or simply - you may use google to find the actual website - so you'd just put in those words.
(think about it - would you use google to find light bulbs? no, you'd just go to GE or Philips)

Internet search is for finding a "Rififi" poster or X-men #56 - not major known commodities like flowers or light bulbs.

tfp said...

This probably isn't the case but...


cdub said...

I think FTD is a great example, and could pose a problem for PPC ads. People searching for flowers are ready to buy them. Period. You're not browsing for fun, or to get ideas. My guess is that a large percentage (at least large relative to other types of sites) of traffic to FTD turns into actual sales. My guess would be that IF FTD isn't seeing traffic that turns into sales, it is mainly because of click fraud...not becuase people decide not to buy anything. Who goes to an online flower shop to check out the latest bundle of tulips??

Tahoe Kid said...

Search engines work for an important reason-people will take the path of least resistance/max. convenience to find what they are looking for. In other words, they are lazy. Using the light bulb example, what is the url for GE light bulbs? ( Or for Phillips? ( engines make the process of finding that information very easy and it's free. One of the best examples of this type of consumer behavior is the car wash business. Everyone knows how to wash their car. And everyone knows that it's much more expensive to pay someone to wash your car, but we use them just the same because it's easier. That's why search engines are so popular.They work and the price for the user is free. Never used FTD online. Have always used 1-800-FLOWERS myself. FWIW.

A said...

I've been to FTD site and never bought flowers from them - I kind of always shop around, and their prices were through the roof compared to some smaller competitors. I'll have to do it again soon, so I'll pay a bit more attention.
Small Investor Chronicles

A said...

Oh, and i always use a search engine to find flowers, even though I have a bunch of bookmarks already because there may be new companies, sales, etc.

dkman said...

The question this begs for me is how do search engines get compensated for placing an ad or a link. The potential options I see are:

1) Get paid each time the ad/link is displayed on a page
2) Get paid each time someone clicks on the ad/link
3) Get paid a percentage of the sale generated as a result of a customer clicking on the ad/link

Does anyone know? Can it be a combination of the above?

If FTD (and potentially other advertisers) thinks that marginal return from each new customer is diminishing, will this prompt them to re-allocate more of their advertising budget to a pay-for-results scheme (like #3)?

hundredyearstorm said...

Jeff and others, I suggest reading this month's Hi Tech Strategist by Fred Hickey. He has a pretty devastating take down of GOOG. Keyword prices for all things mortgage and debt related are costing north of $20 per click, and Hickey asks, in a consumer recession, what are those clicks worth? 50 cents? $1? Given that the price of keywords is determined by auctions, and that auction markets tend to exhibit manic moments of euphoria, and that every marketing officer now HAS to be in the paid search game, it seems pretty likely that there is a "bubble" in keyword prices. Google is a media company tied to the state of the advertising market which in turn is tied to the state of the consumer economy. For all the great things Google does, it cannot escape this reality, and thus when the inevitable slowdown in consumption occurs, the operating leverage of Google's model will cause lots of pain. Oh heck, what do I know, GOOG to $700!

Harry DeMott said...

Jeff- I had heard a similar comment from Provide Commerce back in the fall (PRVD). The CEO claimed that search costs had reached parity with off line marketing costs, and that they were switching a lot of their budget to catalogs. On the other hand Meridith CEO claimed that magazine subcription acquisition costs were in the $4 per sub range compared with offline at $17 per sub. Hearst has confirmed this in some conversations I have had with them vis a vis IVIL. I guess what it tells me is that some categories of commerce are quite efficient and others are not.

black bart said...

eBay's Bill Cobb "paid search as a 'bubble'"¶m=archive&siteid=mktw&guid=%7B43262C83%2D94B4%2D40EE%2D80EB%2DDE09E6759765%7D&garden=&minisite=

The Claw said...

NFLX said this three or four quarters ago when they shifted ad dollars over to television. I believe that SAC subsequently fell. There is some aspect of short and long term customer payback here. If its a category where the advertsier expects to lose money on the first transaction than cutting customer acqusition in the near term can impact margins. However, if an acquired customer orders multiple times, over their life as a customer they could still be very valuable. It's a function of growth, SAC, GP per order, frequency, etc. That said, flowers strike me as a one and gun relationship without much recurring revenue.

Meg & Tom said...

google gets paid when a searcher clicks on the advertiser's ad.

i work for a major search marketing company - we manage paid search campaigns - and we see inefficient bidding strategies all the time. my guess would be that FTD is either trying to bid on lots of different keywords manually or using a crappy tool to automate bid prices.

or maybe it is massive click fraud ...

MMB said...

I have nothing to add regarding keyword pricing etc, but I predict we are going to hear a lot more about click fraud this year and it will not be good for the industry.
I wish I had the link, but I read a great story last weekend about click fraud and the massive amount of resources, people and money behind it.

Dan said...

Tom, Google also gets paid if you use froogle to find/purchase an item. I recently used it to find a necklace. The invoice I received from the company had a line that read, "google revenue share".

aralls said...

Dan - what was the amount/percentage?

Unknown said...

The problem is that they're too expensive. I was thinking about buying something for my answering service, and I found FTD's prices extremely high. Instead of blowing $90 on a decent set of flowers, I spent about $50 on Godiva chocolates from Amazon. Much better deal, and I'm sure the answering service liked the chocolates (they called to tell me so).

Albany Lawyer Warren Redlich

Its_strange said...

Interesting....Abramoff & Tyco , perfect together .....

WR. So right you are . I work in the nursey business ( trees , bushes ) A few years ago a local business had me deliever 45 pointsettas to seperate people for Xmas. Now these things need to be indoors if its cold so i had to talk with the people. I couldn't help but laugh how many just said " Thats OK, just leave it on the door step " It was 22 degrees .....

Pete LoBrutto said...


Your posting hit the nail right on the head. In our small neck of the woods, we came to the same conclusion as FTD in December.

We closely track all of the relevant click-thru metrics, and we feel that the bidding on Google has just become too expensive. In fact, it had gone up dramatically in the previous 12 months. (And from our data, I don't suspect much click fraud in our industry.)

Why would it be considered strange to anyone that bidding for business leads against your competitors could make the leads become too expensive and economically not worth it?

We've already significantly cut our google budget (50%), and if the bid prices continue to rise, I could envision cutting back further and eventually to zero. Why pay anybody for leads that cost too much?

I have no thoughts on their stock price, but I do see them approaching a ceiling (and eventually a pullback?) on their ad revenue.

Pete LoBrutto - President
Azure Vehicle Graphics

Jeff Matthews said...

Pete, this is fascinating.

Is some of the cost increase due to arbitrage in the words you are buying, done by sites that do not actually offer the products or services you do?

Also, what are your alternatives to Google, and where are you spending the money now?

Thanks for this.


Pete LoBrutto said...

Hi Jeff,

I don't really see much in the way of arbitrage in our industry..

I believe that the cost increase stems from just more competitors finding out about and deciding to use Google Adwords. The number of advertisers has steadily increased over the course of the past year.

Each time a new competitor joined the action, we took a hit in traffic (which is how we noticed) and we had to go in and increase our bids. Because from what we can tell, only the top 4 or 5 advertisers get much traffic in our industry.

And let's face it, there are no barriers to entry. All a competitor needs to get started is: internet access, a basic understanding our the major search terms, and a credit card.

I'm not an economist, but I imagine that if a large number of bidders bid on a finite resource (top 4 or 5 listings), then things can get out of hand.

In our case, we've been moving resources taken from Google to direct sales.

Pete LoBrutto - President
Azure Vehicle Graphics

Anonymous said...

Sometimes I wonder whether you guys are consultants or shoppers - smile. I spend thousands of dollars a year on internet stuff. I buy lightbulbs on line all the time (I need lots of exotic bulbs - like mini bi-pin halogens - for my house). GE doesn't sell lightbulbs to consumers - it makes lightbulbs. You buy lightbulbs at places with names like or And you usually have to go 2 or 3 pages down in Google to find them. And when you find a decent place - you bookmark it in your favorites - so you don't have to find it next time (turns out one of the bigger bulb websites is in my hometown - relatively small city - so I just call them on the phone now to order).

Froogle is - in my opinon - almost worthless. I'm shopping for new A/V equipment now. Froogle frequently lists dozens of half-assed websites (e.g., they don't tell you where they are) while it doesn't list your local Best Buy or chain higher end store that is selling the stuff cheaper.

After shopping on the internet for years - I find that my "Favorites" folder is a much easier and dependable way to do my shopping than Google. Robyn

Anonymous said...

BTW - I really don't know who pays what and why on Google. But I don't think I accept the concept of wide-scale "click fraud" (although I'm not exactly sure what it is). E.g., I was looking for a new clock this weekend. And one that interested me was the Philippe Starck Oregon Scientific clock. I must have looked at about 50 websites that had it or talked about it. To get good pictures - complete explanations of features - reviews - to see if "trendy stores" were carrying it (I'm a design snob). Note that I have high speed access and am a very fast clicker/reader. And - if I want to buy it - I'll probably buy it at a bricks and mortar store - albeit one which may have a web presence (want to see it before I spend close to to $300 on a little clock - note that this is a "fixed price" item - no discounts available).

Do you mean to tell me that 50 web sites had to pay because I clicked on them to look at a clock? Is that how it works? I must be a disaster for these guys if that's the case. Robyn

Anonymous said...

And because this blog deals more or less with investing - I have the following thoughts. If advertisers pay "per click" - then the people buying this space are a bunch of old guys who really don't have a handle on how things work. Keep this image in your mind - the guy who sits at the TV with the remote - clicking through the stations - perhaps multiple times through a lot of them in an hour or two. That's my husband - smile.

Well I am the female on-line shopping equivalent. Was looking at Sony Bravia TVs this weekend. Must have clicked on sonystyle 30 or 40 times (too lazy to bookmark). J&R too. Now - I'm almost 60. Can you imagine how more tech-savvy kids trained on video games click? And don't underestimate the impact of the increasing use of high speed access - where going from one site to another is almost instantaneous.

In other words - I think this is a dumb model for people who are buying - certainly great for Google as long as the people paying them don't wise up.

Disclosure - I have no financial interest in Google except that I trade Fidelity sector funds (many of which own chunks of Google) on a long only basis. My trading is based on TA - not fundamentals. I'm writing this post because I think it's a very interesting issue. Robyn

TimingLogic said...

I hate to be critical of Google because I rather like that they are the anti-company company. ie, They have a philosophy and culture which we would all love to work for. That said, the trend followers are out in force with Google. The leader is good ole Jimmy Cramer. PE*Projected Trend Following Earnings=Outrageous Price Appreciation. I do think ultimately Google could trade for $2,000. That might be three years from now or thiry years. But there are alot of potential pitfalls including the fact that online ad pricing is getting a little out of hand. Incremental revenue from people willing to pay more will surely lead to revenue loss from those who won't. Eventually, all will cut their ad spending on a per click basis so Google will need to find incremental revenue elsewhere to continue its assault.

In today's world, I believe success is predicated on the concept that the majority of smart people don't work within the walls of your company thus partnerships and win-win business strategies are the best way to build long term growth. ie, The Power Of We. Google is building a list of enemies at a rapid rate with a counter strategy. Is that based on the relative business experience of its two founders? We all are led to believe the founders understood all of this from the beginning as they now gloat. The reality appears to be something different. Barry Diller, who has quite a successful legacy, stated in an interview that the reality is something significantly different. That Google's founders didn't understand the potential and had a backup strategy of selling out for a measly sum to DoubleClick or some other worthless bubble company. The reality is this team creates an environment of risk taking, creativity and openness so that in itself is a tremendous strategy but Google is surely fallible. Time will tell.

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