• by December 14, 2004

Advertisers will spend $4 billion in 2004 by year-end on search marketing programs, and are expected to spend 39 percent more on such programs in 2005, according to the Search Engine Marketing Professional Organization (SEMPO).

SEMPO, a non-profit professional organization that promotes search engine marketing, issued a report today that suggests the robust market for search services will continue. The report, "The State of Search Engine Marketing 2004" covers U.S. and Canadian markets and has a number of illuminating observations.

The $4 billion figure includes payments to search engines and search-related media companies, search engine marketing agencies, as well as in-house expenditures in support of such programs, including "paid placement," "paid inclusion," "organic search engine optimization," and "search engine marketing technology platforms."

The SEMPO report suggests that marketers are using a combination of internal and external search services, performing some functions internally, while outsourcing other functions. The research was conducted for SEMPO by Executive Summary Consulting Inc. and is based on a survey of 288 search engine advertisers and marketing agencies executed via IntelliSurvey Inc. In addition, SEMPO says that in-depth interviews were conducted with 31 industry experts.

The report breaks down advertiser spending for 2004 in several areas: $3.058 billion to search media companies; $618 million on search engine marketing-related (SEM) in-house expenses within advertising agencies; $380 million to search engine marketing agencies; and $30 million in SEM technology licensing fees.

The report also estimated that by year-end marketers would spend (including both in-house and external media, service, and licensing expenses) $3.342 billion on paid placement campaigns; $492 million on organic search engine optimization; $182 million on paid inclusion; and $72 million on SEM-related technology services. One of the significant aspects of the SEMPO report is that it includes the work of companies that perform search engine optimization functions. Companies that provide such services are a growing part of the market.

SEMPO notes a few of the report's highlights:

* The return on investment of SEM paid placement advertising continues to stay ahead of price inflation: advertisers said on average they have seen bid prices rise 26 percent in the last 12 months for keywords they commonly buy but said they could stand on average another 33 percent increase in the price and still make a profitable transaction.

* Only 41 percent of advertisers reported that SEM budgets were newly created funds for this purpose; the rest said SEM budgets were coming in whole or in part from shifts away from traditional or Internet marketing programs. The biggest shift in terms of share of budget was transferred from paid listings on shopping directories, e-mail programs, Web display advertising, and print magazine and newspaper ads.

* Brand awareness was the No. 1 objective advertisers set for search marketing programs.

* Fifty percent of advertiser respondents said that their senior executive staff considered the company's search marketing initiatives a "high priority" (although that figure dropped to 32 percent of companies with staff sizes larger than 500).

* Advertisers expect to spend, on average, 39 percent more on all search marketing programs (organic search engine optimization, paid placement, paid inclusion, and SEM technology) in 2005 compared to 2004; smaller firms projected 32 percent more, while larger firms (larger than 500 employees) projected a 43 percent year-over-year increase. SEM agencies projected a bullish budget, with overall gross revenue increases for 2005 of 79 percent on average.

* Most advertisers plan to manage the majority of their search marketing spending in-house as opposed to via an agency: 52 percent of advertisers said they would manage 100 percent of their 2005 spending on both paid inclusion and organic search engine optimization in-house.

On average, advertisers said they would outsource 28 percent of their spending on paid placement and 29 percent of their organic search engine optimization through agencies. Large advertisers were likely to outsource more of those budgets, but only a minority of their spending for both organic search engine optimization and paid placement.

A copy of the report is available to all SEMPO members and research participants. A summary copy is also publicly available on SEMPO's Web site.