Google: The Hollow Echo of a Click

The soft economy could hit the search giant, but beyond that, the basic ad model may need an upgrade

It looks like the consumer spending crunch may even hit Google (GOOG). On Feb.26 the Internet giant's stock tumbled 4.7% after a research firm reported a decline in the number of clicks on the ads alongside Google's search results. The report, from researcher comScore (SCOR), fueled fears that as cash-strapped consumers ignore online ads, marketers will trim their spending on the Net. It also undermined assertions by Google co-founder Sergey Brin and others that the company could thrive in a recession as ad spending shifts.

The issue for Google may be broader than just a slowdown in consumer spending. There's a growing realization that the company's advertising model may not deliver quite what it promises to clients. Google, along with Yahoo! (YHOO) and Microsoft (MSFT), has long maintained that online advertising is the ultimate in pay for performance, because advertisers only pay if someone clicks on an ad.

But the correlation between clicks and sales is becoming less predictable at the same time Web surfers are clicking on fewer ads. That has Google, Microsoft, and others scrambling to develop compelling alternatives for advertisers. "The novelty of clicking is gone," says Mike Leo, CEO of Operative, consultant and software developer for digital media companies.

Consider the results of one study, released on Feb. 12 by comScore, media agency Starcom USA, and the ad network Tacoda, owned by AOL (TWX). It found that just 6% of Web surfers account for more than 50% of all clicks on display ads, such as the rectangular banner ads that stretch across the top of many Web pages. In addition, most of these heavy clickers earn less than $40,000 a year, and they account for less than 15% of the actual shopping online. "What we have seen is that optimizing for [clicks] alone tends to get you an audience with a propensity to click," says Daniel Jaye, Tacoda's president.

Advertisers don't really care about clicks, of course. They care about selling their products or services, or creating a positive brand image with their customers. "In the end, advertising isn't about the click," says Operative's Leo.

Google declined to comment for this article. But the company acknowledges the limitations of having advertisers pay for clicks online. During a Jan.31 earnings call, Google co-founder Larry Page announced the company was rolling out a new product that will allow its advertisers to pay only when they acquire a new customer—say, someone who buys something or signs up to be on a mailing list. "We're really excited about that," said Page. "That really improves the advertiser return on investment."

Microsoft is also pushing beyond clicks. On Feb.25, the company unveiled an initiative that allows advertisers effectively to pay based on the number of people who watch a video, provide their e-mail address, or take some other desired action. "Basically we give our customers the ability to create these models to define what's important," says John Chandler, principal analyst at Atlas, part of Microsoft's ad network.

Of course, Google gets most of its revenues from clicks today. And it has no plans to move away from the model altogether. That's why investors were so spooked when comScore reported that clicks alongside Google's U.S. search ads declined 12% from the fourth quarter of last year. Google's stock is off 36% from its peak of $741.79 on Nov. 6. "What happens with Google will indicate what happens with the whole search [advertising] market," says David Hallerman, senior analyst at the research firm eMarketer.

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