Online Ads & Search: Looking Back, Looking Forward

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.

A longer version of this story for Search Engine Watch members goes into detail about the specific drivers of growth for online search ads, including demographics, searcher behavior and other factors. The longer article also details eight "things to pay attention to" that JupiterResearch believes will be crucial for successful search marketing campaigns in 2005. Click here to learn more about becoming a member.

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.

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.

Want to discuss or comment on this story? Join the Search Advertising Forecast 2005-2009 discussion in the Search Engine Watch forums.

A longer version of this story for Search Engine Watch members goes into detail about the specific drivers of growth for online search ads, including demographics, searcher behavior and other factors. The longer article also details eight "things to pay attention to" that Jupiter Research believes will be crucial for successful search marketing campaigns in 2005. Click here to learn more about becoming a member.

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