• by Larry Dobrow , February 12, 2004

A report issued Wednesday confirmed the obvious: that paid search advertising emerged as a bona fide marketing phenomenon in 2003, with spending up 123 percent over 2002. But the report also suggested that its continued growth hinges largely on local search, which hasn't yet been embraced by the small-and mid-size advertisers that are considered essential to its evolution.

According to online marketing consultancy eMarketer's "Search Engine Marketing: Trends, Prospects & Opportunities," spending on paid search advertising grew from $927 million in 2002 to $2.07 billion in 2003. In 2002, search represented slightly more than 15 percent of all online advertising spending; in 2003, that figure nearly doubled, to 30 percent.

eMarketer Senior Analyst David Hallerman concedes that the pace of growth will slow within a year or two, but notes that paid search remains very much an evolving entity. "It's still up in the air whether bigger companies will use paid search as part of their branding efforts," he says. "Our CEO was at a conference last week with people from a lot of bigger companies. When somebody asked who was doing paid search, only one person raised his hand. That tells you something right there."

Hallerman believes that marketers that are not actively hawking their wares online, such as packaged goods companies, have not yet determined where (if at all) paid search fits into their branding and Internet marketing efforts. "Most people don't search for beer online," he quips, giving high marks to the travel and financial services industries for their efforts to date. That said, Hallerman believes in the branding potential of paid search: "With the mere act of doing a search, consumers are saying 'I'm interested.' To hit them with an ad at that point makes an awful lot of sense, whatever your ultimate goal is."

Another positive indicator is the receptivity of consumers to paid search efforts. The report cites a Nielsen ReelResearch/Interactive Advertising Bureau study from last year, which found that a majority of consumers care less about where search results are listed than they do about the quality of the search results. "At this point, [consumers] don't mind that a listing may have been paid for," Hallerman affirms. "That could change pretty fast, though.

It wasn't too long ago that there was no dissatisfaction with email marketing." Of course, consumers aren't totally sold on paid search. According to an Intelliseek study noted in the report, only 34 percent trust search engine advertising, placing it below brand sponsorships like the FedEx Orange Bowl (trusted by 39 percent of consumers) but ahead of online banner ads (12 percent) and pop-up ads (6 percent).

While eMarketer projects that paid search will comprise 32.5 percent of online ad spending in 2004 and 34.5 percent in 2005, Hallerman says these estimates are conservative because of uncertainty about the extent to which local and contextual search advertising will thrive. He believes that many marketers are taking a wait-and-see approach, noting that the primary concern for many holdouts is whether the technology will prove entirely effective--whether a search for "real estate" will return a glut of local listings, or whether consumers based in Albuquerque will be served information about huts in Montana. "People want to know that it works before they make the jump," Hallerman adds.

Separately, nobody seems to know if small and mid-sized retailers reared on the Yellow Pages will ever acknowledge the virtues of paid local search. The decision will likely hinge on resource allocation: few small businesses can afford to devote more than a fraction of their limited manpower to marketing, online or off. "What they need are solutions prepackaged for them," Hallerman offers. In addition, as witnessed by the 80 percent renewal rate, these companies seem more than content with their Yellow Pages listings. But paid search is a considerably better option in terms of cost: eMarketer estimates that the average cost of a Yellow Pages lead is $1, while paid search falls somewhere between 29 and 35 cents.

As for the future of local search, Hallerman declines to make predictions, although he notes the Kelsey Group's estimate that it will be a $2.5 billion industry by 2008. "Local search is the wild card," he says. "We're still at the beginning stage. How it will evolve, I don't think anybody really can tell you just yet."