As investors look ahead to Google’s first-quarter earnings report Thursday, they’ll be looking for further signs of how much search advertising has been hit by the tanking economy. Here’s an early look released this morning by search marketing firm Efficient Frontier, and signs are mixed at best:
First, it’s clear that even search, often seen as the most effective indication of consumer intent, hasn’t escaped the downturn. First-quarter search ad spending fell by 3.3% from the fourth to the first quarter. And that’s not just because of a post-holiday letdown, because spending was down 13% from a year ago. What’s happening, says David Karnstedt, a former Yahoo executive who joined as CEO of Efficient Frontier recently, is that marketers are focusing less on getting high volumes of clicks and instead focusing on making sure they get a better return on those ad buys in the form of cold, hard sales.
Some analysts think things could be worse yet. J.P. Morgan analyst Imran Khan thinks Google’s revenues could decline by 13% from the fourth to the first quarter, thanks to fewer commerce-related searches. At the least, consumers aren’t clicking the buy button as quickly, according to SearchIgnite, another firm that helps marketers hone their search spending. Its report, also out today, says the average time between when a consumer clicks a marketer’s ad and when they “convert” on the marketer’s site (buy something, subscribe to a newsletter, etc.) has risen by almost a third since a year ago.
Meanwhile, advertisers are paying less for those clicks, Efficient Frontier reports. So-called cost per click is down by 19% from a year ago and 13% from the fourth quarter as advertisers cut budgets. Google’s CPCs are down 14% from the last quarter, while Yahoo’s are down 16% and Microsoft Live Search’s are down 28%.
Marketers’ frugality paid off, as return on investment in search ads rose 10% in the first quarter over the fourth. Interestingly, Microsoft, the smallest player, saw by far the biggest boost in ROI, 43% from the fourth quarter. But Karnstedt said that’s largely because relatively fewer marketers run ads on the site and therefore there’s less competition for keywords.
The good news there for the search engines? When ROI improves, spending starts to come back: After marketers’ ROI rose 30% from January to February, they upped their search spending by 6% in March. SearchIgnite found a similar turn up in March.
Google remains far and away the leader, with a 72% market share, though it was down a little under one percentage point for the year. The reason: Yahoo improved its search service and got better click-through rates, the percentage of people clicking on an ad. It now has 19% market share, with Microsoft bringing up the rear at 3.5%, down 1%.
Although the first quarter is expected to be the first time Google’s revenues will fall quarter-to-quarter, there are some positive glimmers in the reversal of spending declines in March. But while I’ve heard similar sentiment from other search marketing firms, Karnstedt says it’s too early to tell if that increase will continue in coming months.
Another ray of light for Google is that its AdSense program, which places ads on other sites based the context of those pages, saw a huge improvement in click-through rates. They rose 250% from a year ago.
That doesn’t necessarily mean a big revenue boost, though, since the reason for the rise is likely that Google is purposely running fewer but more relevant ads on those pages: The number of ad impressions on Google’s network fell 57% from a year ago. But it can’t hurt that the fewer ads Google is serving on those sites are more relevant and thus eliciting more clicks—which is how Google gets paid.
This report is one of the more authoritative in the industry, thanks to the size of Efficient Frontier, which handles $750 million a year in clients’ search ad spending. The company analyzed 84 billion searches and 785 clicks among its clients, which include large brands. However, Google serves many smaller companies, and this report doesn’t account for new customers Google may have attracted, so the reading it gives on the company isn’t conclusive.
Still, the upshot for the one company that matters in search: While we already know Google isn’t immune from the poor economy, it seems likely to do better than its rivals. The question is whether it will be good enough for Google’s investors.