SEM Predictions for 2004 (The SEM CEO’s View)

Anyone attempting to predict the future risks looking silly. But hey, who’d read Nostradamus if the predictions were tame? So, disclaimer in hand, I’ve attempted to predict where I see search engine marketing (SEM) going over the next 12 months.

If even one of these comes true, I hope you recognize my visionary genius. If none come true, please forget I wrote this column.

What will drive SEM in 2004? Money and momentum — lots of both.

Google’s IPO will fuel acquisitions of SEMs

Google’s initial public offering (IPO) is expected early in the year. Some predict the company will be valued at $25 billion. They may underestimate it.

Prediction: The Google IPO will be a landmark event. It will create unbelievable market momentum that will lead to further acquisitions in the space. As Van Halen says, “Everybody Wants Some.”

Three to six SEM firms will be acquired in 2004

The Google IPO will be in the news, but here’s another news flash. Often-overlooked SEM firms are often quite profitable, and are flush with cash.

Some public companies with strong multiples have already spotted this and are looking for the right acquisition for their accretive value.

Acquisitions in the SEM space have been slow but steady (thanks to Seth Alpert of AdMedia Partners for helping with this list):

1998 Outrider (later WPP) acquired 40 percent of Multimedia Marketing Group (MMG) of Bend, Oregon (though MMG was not a “pure-play SEM firm.”).

2000 Outrider acquires 75 percent of St. Louis-based WGI for $1.5 million (balance acquired later in 2002).

2000 24/7 buys Website Results for $95 million.

2002 aQuantive (formerly Avenue A) acquires iFrontier.

2003 Marchex buys TrafficLeader. (Marchex also purchased Ah-Ha!, renaming it Enhance Interactive.)

2003 aQuantive buys GoToast.

Prediction: In 2004, SEM acquisitions will accelerate with a fury. At least three SEM firms, possibly as many as six, will be acquired. The majority will be bought by agencies, at least one will be bought by a publicly traded search engine.

Agencies will fight harder to get into the SEM game

The 2004 Boston Search Engine Strategies conference was relocated to New York for one reason: SEM isn’t about Webmasters anymore, it’s about marketers. New York is where the ad agencies are.

As they did after the introduction of database marketing in the 80s, large agencies will continue to seek entry into SEM, usually into PPC search advertising, not natural search. However, they will fast discover that it’s more complex and less profitable than they expect. Many have already come to realize this.

They’ll discover SEM, whether PPC search advertising or natural SEM, requires esoteric knowledge they don’t possess. When they attempt to hire individuals away from boutique SEM firms, they’ll discover the knowledge doesn’t transfer.

Much of it’s built into proprietary tools and knowledge bases that don’t come with the employee. To be effective at search engine marketing, agencies will require custom software tools that aren’t commercially available. They’ll determine they’re also too expensive to develop in-house.

The rudest of awakenings will occur when agencies discover PPC search advertising’s margins are too thin to sustain their overhead.

Prediction: Agencies will outsource to SEM firm partners (as many already do), or acquire these firms to work under their umbrellas.

SEM will learn branding

2004 will bring brand marketers to SEM. Metrics will be established around search engine advertisements. Marketers will learn how to determine bid prices based on branding value, not merely on post-click conversion ROI.

Even direct marketers will develop successful metrics to track the power of offline conversions, not just those that occur on the Web site. Understanding offline conversions will encourage many marketers to increase bid prices on various keywords after they discover the majority of their search referral traffic buys offline at a later date.

Prediction: Branding metrics will be established for PPC search advertising that validate the power of this ad channel to impact brand lift, brand favorability and brand awareness. Bid prices on many keywords will rise beyond the reach of many marketers who justify bids based on post-click Web site conversion ROI alone.

Contextual advertising will change the shape of SEM

SEM will change because search as a medium is evolving. The introduction of contextual advertising means an ad originally created for searchers can now be displayed on a contextually relevant Web page.

Today, many advertisers aren’t yet convinced of contextual ads’ effectiveness. Google and Overture will eventually lure more marketers to play with contextual advertising by offering additional control over the ad unit — for a premium price.

When this happens, some advertisers will opt into these programs just for the opportunity to buy back previously successful media placements that were lost when Google or Overture bought the entire advertising inventory from a particular publisher.

This was the case with a client of ours whose successful ads on MapQuest ended when MapQuest sold its entire inventory to Google. MapQuest now displays Google’s contextual ads instead.

Further advertiser adoption of contextual ads will signal the beginning of the recognition of vertical search destinations.

After all, what’s Amazon.com but a book search engine? What’s WebMD but a medical information search site? How about ESPN? One could argue it’s a sports information search destination. These content destination Web sites have yet to acknowledge they represent a new mega-trend: the vertical search portal.

Contextual ad programs offer the promise of placing your search ad in the path of highly qualified searchers who will elect to launch their query on a non-traditional search site, a vertical search portal such as those I’ve just described. Though the search ad won’t be displayed in the site-search results, it will appear on the page the searcher selects from those results.

Prediction: Contextual advertising programs will be changed to allow advertisers limited controls, such as a unique tracking identifier (perhaps the first of the three ads typically displayed will be made available for premium controlled placement) on a particular site in their network or on a group of vertical sites. This will lead to more success for the ad unit and adoption by many more advertisers.

Some affiliates will be turned away

Affiliate marketers and search advertising was a hot topic in 2003. In 2004, merchants will reign in their affiliates by amending contracts as they relate to PPC search advertising.

Though counterintuitive, it will be a boon for affiliates. Why?

Many merchants currently forbid their affiliates from bidding on trademarked branded terms. Next year, these same merchants will see the light and allow their affiliates to bid on these higher-conversion keywords, so long as they don’t outbid the merchant.

Because some PPC platforms don’t allow bidders complete control of their position, merchants will request affiliates submit to program management by a governing vendor, an SEM firm or a PPC campaign manager who will oversee bids and positions on branded trademarked terms.

Prediction: By next November, Google will remove many affiliates whose ads send searchers to the merchant’s site or to a nearly identical version of the merchant’s site. They’ll do this with the stated intent of improving user experience.

In 2004, the words “rock and roll” will be inextricably linked to the SEM space. From 1997 through last year, the theme song was Bob Seger’s “Against the Wind.” In 2004, the theme will change to Van Halen’s “Unchained.”

Apologies to the under-30 set. I promise Brittany Spears and Blink 182 references in a future column.

Editor’s note: Compare and contrast SEM predictions — read what our online advertising analyst Gary Stein has to say about search trends next year.

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