Stock Prices and the Future of Search

At a search marketing conference I hosted last week, Jordan Rohan, lead analyst from RBC, made some insightful comments. One was that when he talks about the investment prospects of a stock, he’s not passing judgment on the company, only on the opportunity of the stock. The other was that in several years, revenue flowing through Google, Yahoo, and MSN will be far more diverse than just search, a continuation of a trend that’s already quite clear. As marketers, we must remember the analysts’ take on our industry is all about growth and profits for the companies to whom we write checks, not the viability of the industry as a whole.

The financial media are obsessed with Google, Yahoo, Microsoft, and Ask. Yahoo recently made headlines due to a very negative investor response to its delay of the Panama launch. The combination of this delay and search marketing revenues that weren’t as high as some analysts expected sent the stock into a tailspin, with Yahoo losing 21.8 percent of its value ($10.4 billion in market capitalization). As this column goes to press, Yahoo’s stock price has somewhat recovered.

Project Panama is primarily a shift by Yahoo Search to a yield-managed auction for keyword/contextual traffic. It will also include several other enhancements to the DirecTraffic Center (DTC) and the overall Yahoo platform. The fundamental Yahoo Search system hasn’t changed dramatically since its introduction, except for the addition of contextual traffic, changes in minimum bids, and the way billed CPCs (define) are calculated off a max bid. Panama’s architecture improvements should allow Yahoo to earn more money per million searches, which is why the investment community punished Yahoo for the unexpected delay.

Google also released quarterly earnings. Its revenue and profit numbers are amazing. Almost any other company can only dream of being able to report profit and revenue growth like this. However, in Google’s case, investor expectations were set so high that even astounding growth numbers weren’t enough to stimulate buyers to bid up the stock price. So, Google stock is pretty much flat or even down a bit.

Marketers must recognize several important things about the stock market and the way Wall Street reacts to changes in outlook for the companies involved in online advertising and marketing. First, we don’t make media placement decisions based on the engines’ stock prices. Wall Street’s investors collectively set stock prices based on their estimates of a company’s future profit and growth. Sometimes, Wall Street is right and sometimes it’s wrong, in both directions. Wild swings in either direction stem from surprises. Those can be positive or negative changes in earnings information or projections or, as in Yahoo’s case, a company’s failure to adhere to a promised release date of a PPC (define) algorithm change that promises higher revenues per million searches.

Yahoo isn’t a less attractive place to allocate PPC budget simply because it chose to delay Panama and its stock price is down. We owe it to ourselves to allocate media budgets wherever our dollars work hardest. The right place to put your dollars, of course, is determined by the predicted profit you’ll earn from a particular placement’s clicks. This is based on the percentage of clicks on your site, as well as through other marketing channels and click prices.

MSN tends to be a huge bargain right now because its adCenter is fairly new. For the time being, not as many marketers are in the system bidding up CPCs. This will change as more marketers get campaigns live. In the meantime, MSN is an investment opportunity for most marketers, even though its user interface and reporting are still undergoing improvements.

Microsoft says it’s revamping its entire business to allow ad-supported software, perhaps in response to the Google threat of browser-based software that could replace Microsoft’s staple word-processing and spreadsheet products. Regardless of whether ad-supported software takes off or not, as the marketplace evolves we’ll have more opportunities to spend money with the companies now considered to be search engines. Wall Street will watch as we spend money. The more we spend, the more valuable the companies they cover will be.

Those of you who attend Search Engine Strategies in San Jose in August will likely see more financial analysts swarming about than ever before. Don’t be surprised if those analysts pull you aside to ask about your plans to spend money with Google, Yahoo, MSN, and Ask. They may even inquire about the second-tier engines.

Meet Kevin at Search Engine Strategies in San Jose, August 7-10, 2006, at the San Jose McEnery Convention Center.

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