An investor’s guide to search engine optimization (SEO)

Search engine optimization is about getting a website to rank higher in search engines.  The goal is to increase web traffic without having to pay for ads.

This primer on search engine optimization is relevant to these stocks:

  • RetailMeNot (SALE)
  • Demand Media (DMD)
  • Search engines (GOOG, Yahoo Japan, IACI/Ask.com, MSFT/Bing)
  • Phone book companies (YLO.TO, DXM)
  • Somewhat relevant to online e-commerce companies (AMZN)

Different approaches to SEO

Making sure that search engines don’t unfairly penalize you

Suppose that the website only contains the Canadian/British spelling of the word ‘theatre‘ while the business’ potential customers search using the American spelling of ‘theater‘.  In the past, search engines weren’t able to figure out that ‘theatre‘ and ‘theater‘ refer to the same thing.  Google has gotten better and solved this problem.  There is no longer a need to include certain words on a webpage.  For example, the Ontario PC party ranks #1 for “Ontario Conservatives” on Google even though the word conservative doesn’t appear once on the website.  (You can use archive.org to look at old versions of the website.)

In some cases, there are subtle technical issues that can cause problems.  If a web designer uses Dreamweaver templates to design websites in a straight-forward fashion, many links on the website will point to domain.com/index.html rather than domain.com.  Even though both URLs result in the same webpage, search engines may think that the two pages are different.  This would result in lower search engine ranking positions (SERPs) for the webpage.  Nowadays, modern search engines fix this issue.  The search engine will compare the two pages to see if they are identical.

These forms of SEO will become less important over time as search engines get better.

“Blackhat” SEO

Blackhat SEO refers to unethical SEO tactics that blatantly game how search engines work.  For example, it is known that Google ranks webpages based on incoming links.  So, blackhat SEOs would setup link farms to generate large amounts of links to specific webpages.  They would comment on blogs to generate a link to their website.  As bloggers started deleting spam comments, blackhat SEOs changed their blog comments to compliment the blogger or to ask for “advice” so that their comments would not be deleted.

Historically, the general pattern is this.  Somebody develops a new blackhat SEO tactic.  It becomes popular as other blackhat SEOs copy the tactic.  The tactic starts to take over search results.  Google works hard on a countermeasure.  In the end, Google wins.  The blackhat SEO tactic more or less stops working.  (*Some of them may still work in moderation.)  The big picture is that Google has a team of software developers working on web spam.  Fighting this team tends to ultimately be a losing battle.

“Whitehat” SEO

Whitehat SEO refers to legitimate SEO practices.  For example, making sure that a website isn’t unfairly penalized is a very legitimate tactic.

Another legitimate tactic is to write useful content for a website.  Google wants its search engine to connect the user to the information that he/she is searching for.  Providing useful information on a website helps it rank higher.

Companies that provide services will often put up information that would be useful to its clients.  Auditors for example tend to have excellent white papers on accounting concepts.  These are often very useful to investors.  As an investor, I’m not particular interested in hiring an auditor.  However, as a blogger I will happily link to their white papers.  Links from other websites will help the white paper rank higher in search engines, where they will be found by potential clients of the audit firm.  Clients will read the white paper and understand that the audit firm really knows what they are talking about.  This may generate excellent leads for the audit firm.

Amazon has spent a lot of money into making an awesome website.  It has excellent reviews on books.  Amazon also reveals the sales rank of its products.  For investors, the sales rank information can be useful for determining the legitimacy of MLM companies such as HLF and NUS.  Herbalife for example has the third best selling weight loss powder on Amazon.  Because Amazon puts useful information on its website, people link to it.  And because of these links, websites for specific products will rank higher whenever somebody searches “buy Herbalife Formula 1”.  Currently, Amazon is currently #1 for that search in Google.

Questionable SEO

There is a middle ground between blackhat and whitehat SEO.  Many companies have embarked on a “content farm” strategy, where they will pay writers to generate lots of content to put on websites.  Then, the company will create a large network of interlinking websites using a huge number of domain names.  The idea behind using lots of domain names is to try to game how search engines work.  It’s a variation on the link farm strategy where you buy a huge number of domain names and have the websites link to each other.  Demand Media applied this strategy.  They were punished after Google developed new algorithms to combat the “content farm” strategy.

In the long run, investors need to be careful about such business models because the cash flows don’t last very long.

Make a great product

This sounds silly but I’m not kidding.  If you have the #1 or #2 product in your niche, you will rank highly in search results.  Satisfied customers will naturally talk about the product and link to the website.

In some cases, putting zero effort into SEO isn’t a bad business strategy for great businesses.

RetailMeNot (SALE)

What this company does is a little silly.

Sometimes buyers will decide to buy a product and start going through the checkout process.  Then they see a box for coupon codes.  Many users aren’t aware that their are discount codes available for their purchase.  However, the coupon code box is a reminder that they should search via Google to look for the best coupon/discount code.  RetailMeNot wants to use SEO tactics to rank high in SERPs so that people stumble across their coupon codes.

Often, these coupon codes are used as a way to drive commissions to people marketing the product.  Using a specific coupon code will generate a commission for the marketer.  What RetailMeNot wants to do is to take credit for a sale without doing marketing work that generates sales.  Vendors may one day stop sending commissions to RetailMeNot because the company is parasitic and generates little value.

Their cash flows may not last a long time.  I would not apply a high multiple to their stock.

EDIT (9/20/2014):  Priceonomics.com has a great article on The SEO Dominance of RetailMeNot.  The comments are particularly interesting as one commenter pointed out the company’s use of widgets as a way to game Google’s search algorithms.  I’m pretty sure that the widgets technique is something that Google’s web spam team wants to get rid of.

Search engines

Blackhat SEOs make it more difficult to make a good search engine.  Making a wonderful search engine requires lots of different things:

  1. Ability to generate relevant search results.
  2. Ability to fight web spam.
  3. Scaling the technology to handle a massive database and being able to index a large number of websites.  Google is superior to Bing here.
  4. Figuring out that certain words like theatre and theater have related meanings.  I’m guessing that it took Google an incredible amount of work to figure out this problem.
  5. Correcting webmasters’ SEO mistakes, e.g. Dreamweaver templates that link to domain.com/index.html and therefore split a webpage into two.
  6. Designing a good user interface.  While Google’s user interface appears to be rather simple, it has put a massive amount of work into it.  It has studied the highlighting of words, ad placement, colors, the width of the columns of text, how to generate the best site summaries, etc. etc.
  7. Running data centers around the world to make search engine results load faster.
  8. Generating different search results for items in the news.  People making news-related searches generally only want to find content that has been recently added to the web.  What they want is very different than traditional search.

Putting together a good search engine is becoming more expensive.  Blackhat SEO is one of the reasons.

This trend is favorable for Google (writeup).  As search engines become increasingly complex, it will be harder for new entrants to compete.

Phone book companies

Phone directory companies are getting into the business of offering SEO services.  Personally, I’m not a fan of SEO consultants.  Here are the main problems:

  1. For some clients, SEO will not make sense for them.  The expected return on hiring a SEO consultant would be negative for them.
  2. Many SEO consultants will try to sell their services to such clients anyways.
  3. There are many SEO consultants that aren’t good at what they do and won’t be able to generate value for their clients.

Some of these problems mirror the problems of phone book ads.  The salespeople at phone book companies will try to sell the product to every small business owner.  They don’t particularly care if the product makes sense for the buyer.  Because it is sometimes difficult to track the performance of these ads, many of the buyers don’t even know that they are losing money on their ads.  To be fair, I think that phone book advertising is (was?) a very legitimate form of advertising and generates excellent returns for some advertisers.  However, many small business owners get hurt by the salesmanship.

From the phone book company’s standpoint, SEO is far less attractive than its traditional business.

  1. While the phone book business is a local monopoly, the SEO business is highly competitive.
  2. You can easily track the results of SEO.  The clients can track their web traffic to see if it has gone up or not.  This is bad for repeat business.  Phone books are better because most small business owners will not track the success of their phone book ads.

In general, phone book companies will have a difficult time transitioning into selling online advertising services.  They have no moat.  The reason why online revenues are going up is because salespeople are selling it as part of a bundle to the customer.  The customer was likely sold on the phone book advertising, not the online advertising.

Phone book companies also have to compete against pay-per-click advertising.  Google, Bing, and Facebook all give away lots of free advertising to entice business owners to try their platform.  Anybody can easily obtain hundreds of dollars of free advertising.  While PPC advertising won’t work for every small business, it is incredibly attractive for some businesses because:

  1. The targeting on search advertising is very good.  The mesothelioma lawyers (asbestos lawyers) of the world can advertise to their potential clients.  These lawyers have difficult finding their niche via other forms of advertising.
  2. Tracking the results of this advertising is easy.
  3. It costs very little money to try.  Coupon codes and vouchers are given away like candy on Halloween.

Overall, I am not bullish on phone book companies.

*Disclosure: No position in any of the companies mentioned here.  I do not currently own Google even though I like the stock.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s