Has the search bubble popped, given Yahoo's warning yesterday about declining ad revenue? That warning generated a stock plunge that has hit both Yahoo and Google. No, it's probably not a search bubble. Instead, it's a lesson in the danger of not breaking out search ad revenue from other forms.
Exactly as Robert Scoble notes here, the ad slip at Yahoo is not necessarily a search ad problem. What Robert calls "banner ads" is more specifically display advertising, graphical ads that are not pay-per-click text ads that show up in response to a search. Yahoo has a much bigger display advertising effort than Google. The downturn could be impacting just that side of their ad house.
In fact, the Wall Street Journal article about Yahoo's warning suggests this may be the case:
Yahoo's total revenue last year was $5.3 billion and an unspecified, but significant percentage of that was from so-called branded advertising, which includes graphical display ads as opposed to the small text ads placed beside search results.
Analysts say the two sectors Yahoo singled out generally spend heavily on such display ads. John Aiken, head of equity research at research firm Majestic Research Corp. in New York, said data about Internet activity suggest that search advertising for Yahoo and the broader industry appeared to be growing around expected levels. "Branded [advertising] is going to be a bumpier road for growth than people expected," said Mr. Aiken.
Of course, Google's not necessarily immune. A significant amount of Google's income is from non-search advertising -- contextual ads, some of which are graphical in nature. This is one reason why I'd asked Eric Schmidt at SES last month about breaking out search ad income from other forms. From the transcript of our talk:
Danny: Somewhat related: my understanding is that I still can't go to Google's financials and know how much money is going into content ads versus search – and I care about the search. I mean, to me search is a different intention and contextual. And so when people say, "we're going to measure the health of the search market," I want to know how the health of the search market is from a leader like Google. But I've always felt like when those figures are mixed together, it pollutes the data. For all I know, your contextual network is suddenly tanking, a whole bubble is about to burst out there, but search will be healthy. But the whole search industry might go down with it.
Eric: None of that is going to happen.
Danny: None of that is happening. And I was going to say, alternatively, everything has been doing great.
Eric: Since we're on the record, since we're on the record and it's a public company, I want to make sure that what you just said [that the contextual network is "suddenly tanking"] is not true.
Danny: Right. But that's the opposite to what could be happening. But contextual might be doing wonderfully, and search might be [tanking] …
Eric: They're both doing well. Again, we have a whole bunch of people who are trying to reverse-engineer the economics of Google. And we have historically not wanted to give out the detailed information that you're describing. These are clickthrough rates, CPCs, RPMs, and so forth. There are a number of reasons [not to split these out]. One of course is competitive. But there's a more fundamental reason, which is that anybody who looks at how Google actually runs the ad network makes simplifying assumptions that are not in fact true. And it's important that we, Google, not give out information that can be misused or is essentially false. So we've chosen, to the frustration of many, to not reveal the underlying economics of the ad box. Partly because it's changing so quickly. And all of the estimates that you see are based on smart people making estimates without our assistance. We think for numerous reasons that's the right decision. It's how we run the business.
Perhaps now we'll see some change happen. The failure to do good breakouts, the pollution of other ad revenues mixed in with search, directly causes search to perhaps be seen as in trouble when it might be completely healthy.
In fact, as I told a reporter yesterday, I think search will be just fine given its history. Search was booming during the ad downturn of 1999-2001. It was booming because of its highly measurable, highly converting nature. Born from a downturn, I expect it will continue to ride out any future ones, if not benefit from them.