Google's Gamble

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"That really improves the advertiser return on investment," said Google co-founder Larry Page during a Jan. 31 earnings call.

The idea is that, as marketers and small business owners such as Twiddy see more clicks translating into paying customers, they will value clicks more and ultimately increase the amount they bid per click to offset the reduced volume of clicks. Indeed, Google has reported that the price per click on most keywords has steadily increased as it has improved the quality of those clicks. (Google won't say what those prices are because the system is an auction model.) Google executives hope advertisers will be happy enough with the increased sales per click that they will spend more money with Google overall.

Twiddy's experience supports Google's theory. After seeing more customers, he ultimately increased his advertising spending on Google. He now buys more than 1,000 keywords, instead of the 50 to 100 keywords he started off buying four years ago. Twiddy says he now spends tens of thousands of dollars with Google each year. (He declined to give the exact figure because of competitive concerns.) "When I see some of the changes Google has done, I get very excited," says Twiddy. "They are very strict about keeping the advertising relevant."

Pressure on Google

Twiddy may not be the average AdWords user, however. A sale to Twiddy is worth tens of thousands of dollars, maybe more if he can get a repeat vacation home renter. He's not that sensitive to the cost per potential customer. That's not necessarily the case for someone selling lower-margin items such as $10 vinyl records or a $20 book.

It's also not clear how much of comScore's reported click declines derive from quality improvements at Google and other search engine providers, and how much are due simply to people shopping less online. In its Jan. 31 earnings call, Google executives said they have not seen economic-related softening to date. However, comScore's report of industrywide declines has convinced many analysts that the numbers can't simply be explained by efforts to cut down on bad clicks. "The data supports our cautious near-term view on Google shares," wrote UBS (UBS) analyst Ben Schachter in a Mar. 26 note to investors. "Regardless of comScore, we believe that without meaningful monetization improvements, Google will have trouble meeting [first-quarter] consensus numbers."

There are other signs that online advertisers simply want to cut back on their spending as the economy slows. On Mar. 18, research firm eMarketer reduced its estimates (BusinessWeek.com, 3/18/08) for the U.S. online advertising market this year by $1.7 billion, to $25.8 billion.

To allay the concerns swirling around Google, the company will have to post strong financial results for the upcoming quarter. Doing so will be the only thing to convince Wall Street that, when it comes to online ads, it's about much more than the number of clicks.

Holahan is a writer for BusinessWeek.com in New York .