Google Makes More Cuts; Keyword Prices Decline

GoogleGoogle said Tuesday it will stop selling advertising for newspapers on Feb. 28, but campaigns for ads already bought will run through March 31, according to a post on a company blog.

It's the latest move in a string of cost-cutting measures as keyword prices continue to decline and the search giant prepares to release earnings Thursday. Earlier this month, the Mountain View, Calif. company disclosed that it had laid off engineers and shuttered or combined several applications and services.

Analysts are concerned that even if Google meets estimates, investors could view the news as negative and sell. "Google gained religion on expense control, attacking it with gusto," said Jeffrey Lindsay, senior analyst at Sanford C. Bernstein & Co. "We think they will beat earnings, but with Google, people tend to look at top-line revenue growth, which might be disappointing."

Lindsay expects 23% year-on-year revenue growth. This lowers fourth-quarter net revenue estimates from $4.26 million to $4.17 million, and the fiscal 2008 estimate of $15.8 billion gives. The fiscal year 2009 revenue estimate now sits at $18.1 billion, or 14.3% growth vs. consensus of 14.1%.

All things considered, the advertising model for paid search has held up fairly well. People continue to click on paid search ads, but there has been weakness in keyword pricing. Online advertising agencies and Google AdSense affiliates suggest that the primary causes for decreasing keyword pricing were lower paid search conversion rates that prompt advertisers to bid less for keywords; and cash flow and working capital constraints forcing advertisers to lower the amount spent on advertising.

Brands thought that consumers would click on fewer ads because of the poor economy, but in fact people continue to click on as many ads as they did in a strong economy. Consumers click to compare prices. Since it takes more paid clicks to get a sale on some items, advertisers began bidding less on keywords. "The number of clicks remains strong," Lindsay said. "It's just taking longer to get a sale, so the amount they pay for a click has declined about 5% to 10%."

Search remains the fastest growth segment of Internet advertising. Soleil-Media Metrics analyst Laura Martin estimates that nearly 70% of total Internet advertising will be spent in search during 2009, compared with 30% in 2003. Google dominates search volume in both the United States and offshore, excluding Japan.

Google's earnings report on Thursday after the market closes will set the tone for the rest of content, search, and media businesses that remain dependent on online ads for revenue. The search engine giant does not offer guidance, but analysts surveyed by Thomson Reuters estimate that Google will earn $4.96 per share and $4.12 billion in revenue for the quarter.

Microsoft also reports Thursday. Analysts estimate $0.50 earnings per share (EPS) and $17.12 billion in revenue. Next-quarter estimates stand at $0.48 EPS on $15.2 billion in revenues, and estimates for fiscal June 2009 are $1.96 EPS and $63.76 billion.

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