A Sign of Slowing Search Ad Spending

Posted by: Rob Hof on April 2, 2009

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’t comprehensive—it’s based on Covario’s largely tech and consumer electronics customers—so it may not be typical of overall spending on search ads. But with those clients spending $250 million a year on search ads, it’s 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’s more, search ad prices—known as cost per click—continued to fall, to their lowest level in two years—a result of falling demand as marketers cut back on all ad spending. “The 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.

Reader Comments

Blown Rotator Cuff

April 3, 2009 1:17 AM

Adwords clickthrough rate may be lower, but quality is much higher. I don't know if the reason is click fraud or something else, but one may often sell more on a 1% Adwords clickthrough than a 1.5% AdCenter or Yahoo clickthrough.

Online Advertising

April 3, 2009 11:27 AM

As people search for lower CPC new ad networks will begin to emerge such as http://www.FreeKii.com

This is not an indicator that Online Advertising is on a decline, but preparing for a large growth pattern as is seen with all trends as they progress through the S-curve.

Does anyone have an updated figure of online ad spending VS offline ad spending worldwide? Last #'s I saw were 8-9%.

Mike @ Epic

April 3, 2009 11:43 AM

Rob, thanks for covering the topic. I'm not sure this is such a great data point, though, because decline in search in the Cons.Elec. sector probably follows consumer demand in that sector. There are in fact other verticals within search that are doing quite well as we know from experience...education, insurance, seasonal items from Q1 (valentine's day), and others. So I'd say this definitely isn't indicative of the broader space and success some are seeing.

Mike @ Epic

April 3, 2009 12:25 PM

@Online Advertising: Online ad spend is now currently 3rd in the U.S. versus other ad-supported media. This is another interesting stat: The first 14 years of Internet Advertising (1995-2008) were charted against broadcast television (1949-1962) and cable television (1980-1993), presented in current inflation-adjusted dollars. Internet Advertising revenues continue to far outpace the growth of Cable Television and Broadcast Television during each of their first 14 years.

meshach

April 3, 2009 2:14 PM

verrrry good.matter of fact that was exellent.

Betty

April 5, 2009 8:43 AM

The decrease in ad spend for each company advertising is the big factor in this situation especially to companies in the electronics industry which has the hard hit in this economic crisis. The company I'm with slashed about 60% of our online ad budget and have laid off more than a dozen people.

Sharon

April 15, 2009 12:16 PM

Are the click-through rates sited in this blog for consumer electronics, or are they a cross-industry average? Are these stats reported by Google, MSN and Yahoo? Or some other organization?

Rob Hof

April 15, 2009 12:48 PM

Sharon: As the post says, these numbers are for Covario's customers, which skew to consumer electronics. The numbers are from Covario, not directly from Google, Yahoo, etc.

Sharon

April 15, 2009 4:46 PM

Thanks Rob. As an AdWords customer, I would love to know what the cross-industy average is for clickthrough (and in particular for my industry - management consulting) but I rarely find anything. Google seems to have data for everything, but won't provide this. I'll keep following your blog (which is excellent) in hopes of finding out more.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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