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The State of Search Engine Marketing

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New research from SEMPO sheds light on what's happening in the search marketing industry today, from the size of the industry to key trends that will shape the year ahead.

A longer version of this story for Search Engine Watch members discusses pricing trends revealed by the survey, including where search marketing budgets are coming from, keyword pricing trends and how search marketers plan to deal with financial challenges. Click here to learn more about becoming a member.

The SEMPO sponsored survey was conducted by Radar Research, LLC and Intellisurvey, and drew 553 respondents. This is the second annual industry-wide survey; last year's 2004 State of the Search Marketing Industry was released a little more than a year ago.

The report had both predictable findings and a few surprises. According to the study, the U.S. and Canadian SEM industry has grown from $4 billion to $5.75 billion, with paid placement accounting for 83% of the total spend.

Despite its demonstrated effectiveness and the amount of time and energy search marketers spend discussing organic search engine optimization techniques, SEO accounted for just 11% of overall spending, or $643 million.

Paid inclusion, the controversial practice only offered by Yahoo, drew just 4% of overall spending, or $246 million.

And the market for SEM technologies, including leasing, agency solutions and in-house development, is growing, but still made up less than 2% of overall spending, or $90 million.

The SEMPO study says that the search marketing industry will grow to $11 billion by 2010 in North America.

SEMPO's numbers are significantly lower than those recently put out by Wall Street research analysts. For example, last week Piper Jaffray's Safa Rashtchy said that the paid search market alone in 2005 generated an estimated $10 billion globally in 2005, is expected to grow 41 percent in 2006, to more than $14 billion.

Rashtchy also predicted the paid search market to have a 37-percent CAGR [compound annual growth rate” to more than $33 billion in 2010. While Rashtchy's numbers represent global expenditures, North America still represents the majority of search marketing spend.

Rashtchy is confident enough in his calculations to raise his one-year price target for Google's stock from $445 to $600, which would give Google a market cap of about $175 billion, making it eligible for a position in the top ten of the S&P 100, with approximately the same market capitalization as stalwarts Johnson & Johnson, AIG and Pfizer (though still worth less than Microsoft, at least at current prices.

Think that's crazy? Caris & Co. analyst Mark Stahlman makes Rashtchy seem downright conservative: Stahlman says Google is on its way to $2,000 per share, making it the world's most valuable company. Stahlman said Google may one day reach $100 billion in sales as it expands beyond search and email into financial services and online health care.

Uh-huh. I can see it now: Google Doctor (beta). Look out below if this analyst suggests Google Beanstalk as the next big growth opportunity for the company.

But back to reality, at least from SEMPO's point of view.

The report also noted that Google and Yahoo dominate the paid search market with 95% of search marketers advertising with Google and nearly 60% of advertisers running campaigns on Yahoo.

In the contextual advertising realm, 46% of search marketers are running campaigns with Google AdSense and Yahoo Search Content Match. Despite the relatively small percentage of overall spend, 38% also report using Yahoo's paid inclusion program.

MSN is apparently gaining traction among search marketers, with close to one-third of advertisers running a campaign on its search engine despite the company's relatively recent entrance into the marketplace.

Search Marketing Goals

In a surprising finding, the SEMPO study found that the majority of search marketers (62%) said branding was the primary objective of search marketing campaigns. Nearly as many, however (60%), said that selling products was a key objective.

The contrast in objectives is sharp between small and larger companies. Firms with fewer than 500 employees were more focused on selling products, whereas organizations with more than 500 employees are more interested in driving leads and traffic to their web sites.

Despite these self-reported goals, fewer than 24% track or measure branding impact. That doesn't mean that analytics and measurement aren't important: Fully 80% track increased traffic volume, 74% measure conversion rates, and 69% measure click through rates.

This suggests that advertisers are still enamored of the concrete, demonstrable ROI that can be measured from search advertising, and are less concerned with more sophisticated marketing objectives such as branding or correlating search behavior with offline marketing activities.

Whether you agree with the numbers or not, the SEMPO study is an interesting read. For further analysis and additional data, download the State of the Search Marketing Industry 2005 from the SEMPO website.

A longer version of this story for Search Engine Watch members discusses pricing trends revealed by the survey, including where search marketing budgets are coming from, keyword pricing trends and how search marketers plan to deal with financial challenges. Click here to learn more about becoming a member.

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