Google: Are Ad Concerns Overblown?

The number of ad clicks fell in January for Google and Yahoo. But how important are those click-through rates, anyway?

by Catherine Holahan

A closer look at numbers showing that Web surfers are clicking on Google (GOOG) and Yahoo! (YHOO) ads less frequently than in the past underscores why counting clicks may not be the best way to measure the effectiveness of Internet advertising—and suggests concern over an online ad slump may be overblown.

Google stock slumped 4.6% on Feb. 26 after Web measurement firm comScore (SCOR) said clicks on ads placed on Google were little changed in January from a year earlier, and that they fell 12% from the last three months of 2007. For Yahoo, ad clicks fell 3% from the fourth quarter. Google shares closed at 464.19, down 37.4%, from a record 741.79 reached on Nov. 6.

Different Explanations

ComScore's latest numbers can be interpreted in different ways, many of them negative. UBS (UBS) analyst Benjamin Schachter wrote in a Feb. 26 research note that unless there's a problem with comScore's data, the most likely scenario is that "advertisers are simply bidding on and buying fewer keywords." He lowered his share price target to $590, from $650.

Another explanation is that credit-strapped consumers are simply doing less shopping online, and therefore clicking less often on the ads that direct them to retail sites. Under its so-called pay-per-click advertising model, Google and other search advertisers get paid when consumers click on an ad. Fewer clicks mean less revenue. "A pullback in shopping is going to affect clicks," says David Hallerman, senior analyst at research firm eMarketer.

Fears over an ad slump were heightened by a flurry of economic reports (BusinessWeek.com, 2/26/08) pointing to rising prices, falling house prices, and worsening consumer sentiment. "We remain concerned that a slowing U.S. and possibly global economy could further hinder Google's growth," Stanford Group analyst Clay Moran wrote in a Feb. 26 note to investors.

Recession Planning

It's true that if marketers rein in spending on Internet ads, Google, Yahoo, and other companies that rely on online advertising will be hurt. But some holdouts say it's too soon to call an ad slump and insist they haven't seen evidence that marketers are slowing their online ad spending. Even as consumers and marketers curtail spending in general, they may continue to search for bargains online.

ComScore itself notes that U.S. Google queries rose 53% in January from a year earlier, compared with a 49% increase in December. Not all of those searches are related to purchases, of course, but queries are the lifeblood of electronic commerce, analysts say. "If the consumer stopped showing up, we would be worried," says Marianne Wolk, a senior Internet analyst at Susquehanna Financial Group. "But, right now, the consumer has continued to search vigorously."

Some executives, including Google co-founder Sergey Brin, contend that an economic downturn will accelerate a shift in spending from radio, print, and TV advertising to the Web (BusinessWeek, 9/10/07). "It makes a lot of sense for advertisers, if they want to be careful about their spending and they want to make sure they are getting a good [return on investment] to use the exact kind of advertising that we are offering," Brin said during Google's Jan. 31 earnings call. "I think lots of advertisers recognize that." Google declined to comment on ComScore's Feb. 26 numbers.