Just An Online Minute... Does Google Slowdown = Softer Search Market?

by Wendy Davis, Mar 27, 2008, 2:30 PM

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Paid search accounted for much of the remarkable growth spurt in online advertising that helped revitalize the flagging industry after the dot-com crash earlier this decade.

But new data from comScore indicates that the paid search boom might have peaked. For the second month in a row, growth in paid clicks at Google has slowed. Last month, there were 515 million clicks on sponsored links at Google, marking a 3% increase from February of 2007, according to comScore. But February had an extra day this leap year; when that day is accounted for, growth was essentially flat, as was also the case in January.

To industry observers, the news is especially disappointing given the track record of double-digit profit increases. Last year, when Google's fourth quarter profits came to $3.79 a share -- "only" 17% more than in the last quarter of 2006 -- it marked the first time since the company went public in 2004 that quarterly growth was less than 25%.

Shortly after comScore released its January data, company CEO Magid Abraham issued a written interpretation that seemed aimed at staving off panic. He wrote that Google last year tweaked its ad platform to show fewer ads, but ones that commanded higher fees. "It is entirely possible, if not likely, that the improved revenue yield will continue to deliver strong revenue growth in the first quarter," he wrote last month. In other words, despite the flat volume of paid clicks, revenue might still increase.

Analysts are struggling to make sense of it all, with opinion varying widely, according to PaidContent. Some are predicting a weak Google first quarter, while others think the company will post a large revenue increase. Ben Schachter at UBS thinks Google will struggle to meet first quarter estimates, while Jeffrey Lindsay at Bernstein thinks Google will still show 48% revenue growth in the first quarter, PaidContent reports.

Meanwhile, Microsoft needs to figure out how much more it's willing to pay for Yahoo, which has so far rejected a $31 per share offer. That bid was driven by Microsoft's belief that it had to join forces with Yahoo to compete with Google. But even if Google is showing signs of softening growth, Microsoft probably still has to find a way to take on the company in online advertising.

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