Is Search Shrinking?

I spent this week moderating a dozen or so sessions at the biggest Search Engine Strategies (SES) conference ever. More than 6,500 delegates packed the New York show.

Outside the exhibit halls, meanwhile, it appeared the sky was falling — not that any of the hardcore search insiders at SES paid all that much attention, frankly. What happened was Google CFO George Reyes publicly uttered the unspeakable: “Clearly our growth rates are slowing.”

Google’s share price slid and — poof! Search is over, or at least you’d think so judging from this week’s headlines in mainstream and financial media. Dispatches concerning Google included headlines such as: “sounds an alarm,” “spins its wheels,” “spooks market with specter of slow growth,” “bubble banners,” “loses its go-go,” “soft underbelly is contagious,” and “investors focus in on its risks.”

ComScore Media Metrix, meanwhile, issued the dire pronouncement that search queries grew a mere 11 percent in January 2006 compared to January 2005 (oh, and by the way — Google’s market share increased).

Back in New York City, 6,500 marketers and advertisers were packing SRO sessions on search at the four-day, four-track event. Talk about cognitive dissonance.

Is search over? Hardly. Not when Carat CEO David Verklin told an audience at a Yahoo event last week that search is, in essence, the future of advertising. When, in fact, virtually all the global ad agencies are developing in-house search expertise. Not when a friend who launched a new search ad firm six months ago told me over dinner last week of the blue chip clients his new shop has landed. That’s led to near-immediate positive cash flow and profitability.

So what’s going on here, anyway?

For one thing, search is a maturing industry. It’s moving out of a period of hypergrowth, not to mention hyper-hype, fueled largely by Google’s own dazzling IPO. It’s come a long way since 2003, when advertisers paid an average $0.35 per click on a paid search ad.

According to the Search Engine Marketing Professional Organization’s (SEMPO’s) most recent survey, North American advertisers spent $5.75 billion on SEM (define) in 2005, 44 percent more than 2004’s reported $4 billion. This year, they plan to spend $7.2 billion, rising to $11.1 billion in 2010. The bulk of this spend (83 percent) will be on paid placement. And more and more marketers will look to search for branding, not just direct sales.

Piper Jaffray says the paid search industry hit $10 billion globally last year and estimates it will reach over $33 billion in 2010.

Sure, there’s some flattening in the market. Internet adoption in the U.S. has slowed to a crawl, for one thing.

Search Engine Watch’s Chris Sherman also believes there’s a technology factor behind Reyes’ statement. He told me this week, in essence, that Google has optimized the black box as much as it can to squeeze the most revenue out of its advertisers. There’s a limit to how good the algorithm is going to get.

Spiraling keyword prices have also conferred a bit of a bad rap on the engines. As Did-It cofounder, SEMPO head, and ClickZ colleague Kevin Lee likes to say, keyword auctions are populated by two types of participants: savvy marketers and total lunatics. Follow the lunatics’ lead and you’ll be burned.

Recently, seasoned Internet businesses, including FTD, eBay, and Blue Nile have publicly and vociferously complained of keyword prices rising as high as 50 percent. In Blue Nile’s case, “irrational behavior” in Google’s keyword pricing took the blame from founder Mark Vadon for the company missing its Q4 2005 numbers.

Sure, keyword prices are rising. In some verticals, they’re soaring to dizzying heights. But as advertisers become more creative in their use of keywords (not to mention their integration with broader campaigns) and as new Fortune 500 and brand advertisers enter the fray in 2006, it’s hard to see search advertising flat-lining any time soon.

We’ve Only Just Begun

Contextual advertising from the search engines is another burgeoning marketing. OK, so it’s not exactly search. But revenues from Google AdWords, Yahoo’s still-in-beta Publisher Network, and the service everyone expects MSN to release sometime this year will all be counted as search advertising in financial statements. The major search players know this and are rolling out inventory-creation opportunities for their users in the hopes of monetizing these services. These include blogs on MSN, Yahoo Small Business, and the latest entrant, Google Page Creator.

Meanwhile, a wealth of features is being developed for contextual. I had a peek yesterday at what Google and Yahoo are doing to tailor and customize ads for publishers. Features include adding a media kit page to ads with seasonal features and the ability to run ads on tiny site sections, such as individual blog entries. About.com’s SVP of product management Dae Mellencamp is fairly certain behavioral features will be integrated into future contextual products to target ads on a more individual level. I doubt she’s wrong — not that the engines are telling right now. If she’s right, behaviorally targeted contextual ads open up a premium-priced product for the search engines.

Like contextual placements, classifieds aren’t exactly search, either. But still. Google Base is up and running, and this week MSN launched a beta of its own classified ad product. They’re going up against the craigslists and eBays of the world. After all, eBay does bill itself as the world’s largest shopping search engine.

Then there are the barely-off-the-ground specialized search products from the majors: shopping, mobile, and local. Local search alone is forecast by the Kelsey Group to be a $13 billion industry by 2010.

Search’s period of hypergrowth may well be coming to an end. That’s hardly a bad thing. But rumors of its death? Greatly exaggerated.

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