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A Sign of Slowing Search Ad Spending


Search advertising is finally feeling the full impact of the weak economy, according to a new report out this morning from online marketing analytics firm Covario. In fact, search spending fell from quarter to quarter for probably the first time ever, by 1.4% in the first quarter.

The report isn?? comprehensive??t?? based on Covario?? largely tech and consumer electronics customers??o it may not be typical of overall spending on search ads. But with those clients spending $250 million a year on search ads, it?? also worth mentioning.

Although search ads seemed to hold up decently in the fourth quarter thanks to holiday budgets getting set before all hell broke loose last September, there was no such luck in the first quarter. Virtually all the decline came in Europe and Middle Eastern and African countries, which were down 16% from the fourth quarter. U.S. spending was actually up a little under 1% and Asia-Pacific rose 7%.

What?? more, search ad prices??nown as cost per click??ontinued to fall, to their lowest level in two years?? result of falling demand as marketers cut back on all ad spending. ??he pullback is starting to happen,?says Craig Macdonald, Covario’s chief marketing officer. “We expect this erosion in spending to continue the rest of the year.”

Google, which had reported surprisingly good fourth-quarter results, came in for the worst of it—oddly enough, mostly because of its dominant position. For one, it commands around 95% of search spending overseas, so all of that decline landed on Google.

Also, marketers simply saturated their spending on Google, as they started to see lower returns on their search spend: Click-through rates, or the rate at which people clicked on search ads, fell to 0.7% in the first quarter, way down from 1.8% in the fourth quarter. That trend sent them to Yahoo and Microsoft to find more clicks. Yahoo’s click-through rate rose to 1.7% from a little under 1%, and Microsoft’s rose a bit, to 2.3%.

Of course, you have to put this in perspective: If Google’s problem is that it’s essentially selling out its inventory because it has about 80% market share, that’s a problem Yahoo and Microsoft would love to have. Also, I’ve been hearing that while January and February were pretty awful for all of online advertising, search ads, at least, saw an improvement in March.

Still, Google could report a pretty tough quarter on April 16 when its first-quarter earnings are due out. The company will have to hope that its recent cost-cutting, spurred by relatively new Chief Financial Officer Patrick Pichette, will help save the bottom line.


Steve Ballmer, Power Forward
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