Even Search Not Immune to Financial Malaise

Google Preps for Worst as Ad Budgets Get Cut but Might Actually Benefit

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NEW YORK (AdAge.com) -- How bad is the economy getting? Bad enough that even Google is learning to cinch its purse strings.

The online-advertising giant -- which reports earnings this week -- has, as usual, been tight-lipped about its business outlook. But last week Tim Armstrong, president-sales and commerce, Americas, told a group of travel advertisers that the company is "watching the economy closely and making sure our expenses and revenue are very much aligned."
Tim Armstrong, president-sales and commerce, Americas, Google
Tim Armstrong, president-sales and commerce, Americas, Google Credit: Scott Gries

The comment is likely just a reminder that companies need to be prudent during an economic crisis in which neither the end nor the bottom is clear. But it came during a week when several analysts reduced estimates for many companies in the internet sector, including Google. Search, as it turns out, is not immune to a big, broad economic downturn.

"Failed banks ... job losses and lower consumer confidence now characterize the macro economy," wrote Sandeep Aggarwal, an analyst with Collins Stewart. "We believe this will hurt the internet sector more than currently believed."

While online might be the most efficient, accountable way for marketers to reach potential customers, if people aren't buying stuff, that's bad news for every marketing channel.

Still holding strong
There's no reason to believe search-engine spend has significantly slowed. Several search-engine-marketing companies surveyed last week said they didn't notice any reduction in third-quarter search-ad spending.

On a same-advertiser, quarter-over-quarter or year-over-year basis, "we're seeing increased spending levels across the engines," said Roger Barnette, CEO of SearchIgnite, a search-technology company that helps big marketers track search spending. Earlier in the week, Peter Hershberg of Reprise Media and Steve Lagnado from Didit Search Marketing told J.P. Morgan analyst Imran Khan they hadn't seen a slowdown in spending either.

"It's either because the return [advertisers] are getting from search is still superior, or ... their search spend is more profitable than other forms of media," Mr. Barnette said.

An economic downturn could actually be good for Google in terms of its goal to increase spend from big national advertisers. Adgooroo, an online-intelligence company, released a report on third-quarter search activity and saw deceleration among all search advertisers but greater deceleration from small and medium ones.

"It's part economy, part Google algorithm changes," said Rich Stokes, Adgooroo president. Unlike small and medium businesses, which might cut ad budgets to save money -- much of which might be spent on search -- larger firms spend tens and hundreds of millions on other channels that can shift to search as media mixes are altered.

Product research
There may also be scenarios that cause marketers to rethink how they view search. For one, more people will use search engines to go price shopping. TNS's Compete and Google recently completed a study that found the economy is affecting retail shoppers and leading to more research activity around purchases. If that increased activity is coupled with fewer overall sales, conversions would go down -- but don't mistake that for a loss of effectiveness.

"If you just measure search activity only by direct response, you may be unfairly discounting search and see its effectiveness starting to drop off, when in reality, it's still playing a strong role in overall process of influencing," said Jeremy Crane, managing director of online media and search at Compete.

Last week, the Interactive Advertising Bureau released its first-half online-ad-revenue figures, which indicated overall second-quarter revenue had grown 12% year over year, a downshift from 25% growth in the same period a year ago. Search, however, grew 24%. What's more, it's clear marketers want to buy media that's accountable: Performance-based advertising accounts for 52% of all online-ad revenue, while deals based on cost per thousand account for 44%.

And while people might be converting less, there's no reason to believe search won't become a more important tool for consumers. As Hal Varian, Google's chief economist said, "I think we'll see an increase in internet use. ... It's free."
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