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Online Ads & Search: Looking Back, Looking Forward

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Paid search led the resurgence of online advertising in 2004 with a 34% increase in growth, and this trend is expected to continue over the coming five years.

A special report from the Search Engine Strategies conference, December 13-16, 2004, Chicago, IL.

Gary Stein, a senior analyst at JupiterResearch, addressed the state of the online advertising industry today, and analyzed how the market will grow over the next five year at the recent Search Engine Strategies conference in Chicago. He also introduced Niki Scevak, another JupiterResearch analyst, who discussed the forecast models that are driving the numbers presented in the session.

Stein began with a look at the advertising numbers.

"The U.S. online ad market is surging," he said. Online ad spending has increased from $3.5 billion in 1999 to $8.4 billion in 2004, and is projected to grow to $16.1 billion in 2009.

During the past year, online ad growth has significantly outpaced other media. Spending on Internet advertising increased 27% from 2003 to 2004, while cable advertising increased 14.1%, broadcast TV advertising was up 8.2%, radio advertising was up 7.0%, magazine advertising increased 5.0%, newspaper advertising increased 4.8%, and Yellow Pages advertising was up 3.2%.

According to Stein, "Online advertising will overtake magazine advertising in 2007" - when total online ad spending hits $13.8 billion, or 6.0% of off-line ad spending.

He also forecast "rich and streaming media will quadruple by 2009" - from $1.0 billion in 2004.

Stein then took a closer look at the search numbers.

"Paid search will continue to grow faster than any other sector of online advertising, increasing from $2.6 billion in 2004 to $5.5 billion in 2009," he said. While "paid search growth remains strong," he added it "is beginning to slow."

Stein said, "A sharp increase in the average cost-per-click is the primary driver of this market, with incremental growth in the number of searches also driving spending." The cost per click was $0.29 in 2003 and $0.36 in 2004. It is forecast to reach $0.40 in 2005 and $0.42 in 2006.

(According to a recent report from Majestic, based on proprietary Comscore data, the average cost per click for Google AdWords is already $0.54. This indicates that the JupiterResearch model is very conservative.)

Stein forecast local search will grow more slowly than overall online advertising. He said it was $502 million in 2004 and is projected to reach $879 million in 2009.

While Stein said paid search in Western Europe will experience "strong near-term growth," he added it will then begin "slowing with market maturity." It was €576 million in 2004 and is projected to reach €1,525 million in 2009.

Growth Drivers

Next, Stein and Scevak analyzed the drivers of growth.

One is what they called the "always-ons," who are always connected to the Internet from home. How big is this segment? According to a JupiterResearch/Ipso-Insight Survey, an astounding 56% of individual users in the U.S. go online several times a day, and another 33% go online about once a day. Only 8% go online once every few days, 2% about once a way, and 1% every few weeks or less.

Many of these "always-ons" are users of cable modems and DSL lines in the U.S. While 66% of Internet users are still using dial-up connections, 19% are now using cable and 14% are using DSL. It is these broadband users who are driving search growth and utility.

Another driver of growth is user satisfaction with search. "Users see results are getting more relevant and better," said Stein.

The JupiterResearch/Ipso-Insight Survey asked individual users in the U.S., "Have search engine results pages (SERPs) gotten more or less relevant over the last 12 months?" And 20.6% said significantly more relevant and 45.8% said somewhat more relevant. While 29.2% said there was no difference in relevance, 3.7% said somewhat less relevant, and only 0.6% said significantly less relevant.

While people are happy with search overall, they still have some concerns. According to the JupiterResearch/Ipso-Insight Survey, 31.2% say, "Too many results are sponsored links" and 18.8% say, "I am concerned about confusing sponsored links with regular search results."

What to expect in 2005

Stein divided his list of "Things to pay attention to in 2005" into a consumer edition and a business edition.

The consumer edition featured four items:

  1. Vertical search for such data-intensive jobs as doctors, architects and engineers;
  2. Sowing the seeds of search by providing an interface and an index everywhere;
  3. The coalescing of services into a platform, with search as the core; and
  4. Searching audio and video, which still faces a technology hurdle, to say the least.

The business edition also featured four items:

  1. Market compression, especially for contextual ads;
  2. Fraud as a primary underminer of confidence;
  3. Big player missteps, capitalized upon by small players; and
  4. The data market getting some controls.

After Stein concluded his presentation, one of the more interesting questions from the audience was about the percentage of people who click on organic listings versus paid listings. According to Scevak, six out of every seven search engine queries results in a click on organic listings and only one out of seven clicks on paid listings. To get these numbers, he said JupiterResearch looks at records of companies and define where their sales are coming from.

If this is the case, then spending on search marketing is out of whack.

According to a recently published research paper by the Search Engine Marketing Professional Organization (SEMPO), 81.8% of the $4.087 billion spent last year on search marketing programs in the U.S. and Canada went to paid placement, while only 12.0% went to organic search engine optimization. Another 4.4% was spent on paid inclusion. The State of Search Engine Marketing 2004 provides a summary of this SEMPO research.

While the SEMPO research underscores why industry analysts are focused on paid search (because that's where the money is going), marketers should be focused on regular search results (because that's where their sales are coming from).

Greg Jarboe is the president and co-founder of SEO-PR, which has formed a strategic partnership with PR Web to provide search engine promotion services through a network of more than 40 search engine marketing firms.


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