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).
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.
Despite the explosive growth in search marketing budgets, less than 30% of search marketers reported that funding for organic search engine optimization came from newly created budgets in 2005. Even fewer reported new budgets for paid inclusion and paid placement programs.
Instead, most organizations are moving money from existing marketing programs or web development budgets. The biggest losers are in these budget-shifting maneuvers are web development efforts, affiliate marketing, email marketing, yellow pages, TV and direct mail.
Respondents also reported keyword inflation during 2005, a trend generally echoed in the Fathom KPI monthly keyword price index.
Despite higher prices for keywords, most advertisers plan to deal with this problem by increasing the efficiency of their campaigns by improving bidding processes and seeking to maximize conversion rates rather than cutting back spending.
Even so, four out of five advertisers claimed they could still afford an increase in keyword pricing in 2006. SEMPO says that it's likely the industry is nearing a pricing plateau as advertisers near their maximum efficacy.
That may be true for the respondents of this survey, but we still have yet to see a meaningful shift into search marketing from large companies that still heavily rely on traditional forms of marketing. When that shift, with its concurrent billions of dollars in revenue takes aim at search advertising, we're likely to see massive inflation in keyword prices, forcing smaller players out on to the long tail of less popular keywords.
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.