Bernstein Research Predicts the Future of Paid Search

Will paid search advertising remain the largest online advertising format? If so, for how long?

If your career is built on the foundation of expertise in paid search, how long will that online advertising format remain the most in-demand by advertisers?

The answer may rely, in part, on how Google fares in hearings in Washington, D.C., today.

Google will be the focus of a hearing before the Senate subcommittee on antitrust, competition policy, and consumer rights. That’s the committee that crucified Microsoft 10 years ago.

They’ll be looking into Google providing ad services to Yahoo, and what that consolidation of market share means to the public and Internet advertising.

The U.S. Department of Justice has also started a formal investigation of the Google/Yahoo partnership that was formed to derail Microsoft’s takeover attempt.

We’ll be watching closely to see what impact — if any — these hearings have on Google’s dominance of paid search and share of searches.

Paid search has been the dominant form of advertising for the first 10 years of the Internet. Many people, though, have forgotten how weak paid search was around the year 2000, when AOL and other large players took the lowest-cost search algorithm and blended in natural and paid search results with display ads.

The result? Many ads were irrelevant and completely unrelated to the search keyword typed in. In those days, the quality of natural or organic search results was low. Sales teams couldn’t sell paid search effectively. So display was the number one online advertising format.

Everything changed in 2002 with Google.

Google’s innovation was using an algorithm similar to PageRank to sell ads. With Google, the position of a paid search ad was determined by the size of the bid and how frequently users clicked on the ads.

That created a virtuous cycle of relevant ads and advertisers getting the most clicks rising to the top. Thus, Google was able to monetize ads at a two-times-higher return compared to competitors.

So what does the future hold for Google and paid search?

Bernstein Research just published a fascinating and exhaustive study, “U.S. Internet — The End of the Beginning” which answers that key question.

Bernstein analysts expect paid search to continue to “outpace display advertising with or without rich media for at least the next five years.”

The report states:

“Although we expect paid search to be the largest single category by a factor of 2x by 2011, we expect new formats for IP video and mobile Internet advertising to show faster growth from a smaller base.”

So who will be the winner?

Google, naturally.

“Paid search advertising, like most Internet businesses, naturally favors the largest player. Unless the leader makes a mistake, it becomes increasingly difficult for the No. 2 and lesser players to dislodge the players above them. Advertisers prefer Google because it has the largest search audience and, as more advertisers use Google, the company has superior data about online searches and more money to spend on R&D — creating another self-reinforcing cycle. Unless Google makes a mistake that lets the lesser players back in, its market share should continue to rise.”

The final characteristic in favor of paid search, according to Bernstein analysts, is that it’s significantly more resistant to deteriorating economic conditions than display. As transactional advertising, paid search depends on ROI and is eminently measurable. Plus, paid search has a long tail of small advertisers that won’t pull their small marketing budgets when times get tough.

So if your career includes paid search, you’re in the perfect position for anyone who’s conducting an executive search.