Google's startling problem is dramatically slower growth in paid clicks, which were growing 37% monthly six months ago, and grew only 3% in February after posting no growth in January. It's an abrupt halt to Google's meteoric growth trajectory that, if accurate and sustained, could also reduce earnings growth, since search advertising generated the bulk of company revenues. The broadcast networks, the definitive gatekeepers a decade ago, have been tracking only losses in viewers and profits.
The initial psychological shock that Google could actually be in a growth decline of any kind, for any length of time, is still settling in. Most critical is whether the leveling in Google's search business is a permanent reverse growth trend for the company and the Internet--and for how long?
Unbridled double-digit growth of any fledgling business has to taper sometime, especially when clipped by a recessionary economy. The Internet still has nowhere to go but up, compared to traditional media platforms such as television and newspapers, where advertising dollars and users are actually shifting. Still, the most recent developments curiously have Google and the Big 4 in the same space: wondering where the bottom is in this tumultuous environment.
It's clear where the top was for both. The media and advertising marketplace have adjusted to the new psychological reality of the broadcast networks, although it is not yet reflected in its commodity pricing--but it will be eventually. Google's new quandary is more complicated on many levels: the degree to which the Internet is being adversely affected by a pullback in advertiser and consumer spending, Google's ability to realign its growth expectations and its rapidly increased expending, and the extent to which Google can continue to siphon ad dollars from traditional platforms such as television, radio and newspapers.
Such uncertainty has framed the latest wave of analysts' reduced price targets and earnings forecasts for Google, which provides no financial guidance and has no historical track record for how it fares in economically tough times. Many analysts are willing to give Google some credit for its explanation that the deceleration reflects recent improvements in its qualitative click measurement that will result in fewer, more qualitative clicks.
Still, Wall Street generally expects Google to fall short of average estimates for a 24% rise in first-quarter earnings from $1 billion a year earlier, on a 48% growth in overall revenues. Broader concerns about the impact of a weak economy also have deflated Google's stock price 40% from a November high of $747.24 a share--reducing its overall capitalization by more than $70 billion. On the upside, its recently acquired DoubleClick should boost local, mail, display and video ad revenue growth, which may not be completely measurable by click volume. On the downside, Google has yet to generate additional revenue from YouTube video, Google Maps and mobile advertising.
Bernstein analyst Jeffrey Lindsay rightly points out that comScore data also confirmed significant improvement in other Google key metrics such as unique visitors, page views and search market share, and that rival Hitwise and Search Ignite report even stronger numbers. Google's slowing paid-click growth more likely indicates seasonal patterns than fundamental weakness in Google's paid search model, Lindsay said. And, comScore's numbers are only domestic, and not for Google's faster-growing international business, which comprises 52% of its total revenues.
Most problematic is how much of Google's abating growth is short-term (related to the recession and its voluntary efforts to provide more accurate click reporting) or is long-term (a general slowing in Internet growth). PQ Media projects that paid search spending will grow 121% to $26 billion by 2012. It is one of 18 emerging markets that will see $160.8 billion in spending by 2012--up from 82% this year, according to PQ forecasts.
Such robust projections suggest that development of fledging entities will be sure but uneven (just take a look at your children). New markets and businesses are likely to see slower growth, not necessarily the flat-lined growth or losses that traditional industries are experiencing. A lack of appreciation for slowed next-stage-growth dynamics is what results in such preposterous declarations as the "death" of MySpace, whose metrics may not be soaring, but whose traffic remains twice that of Facebook. The fits and starts of growth in a rapidly changing media and declining economic environment are all relative.
Even more disconcerting is the credibility of the statistics being used to measure and price the value of media space for advertisers. The seemingly more accountable click-through data for search giants and other Internet players is fraught with glitches. These figures still appear to be more solid than the mere audience estimates provided to the broadcast networks--which can become more suspect, even endlessly sliced and diced with advanced technology. As if it wasn't bad enough guessing who is watching and when (whether live or three days later on a DVR), Nielsen recently conceded that it has been understating household coverage for about 20 smaller TV networks since October, which overstated coverage area ratings and potentially inflated advertising buys.
In a developing interactive digital media market where dramatic transition and new business models are now being complicated by deteriorating economics, new expectations and metrics will continue to be tested--along with everyone's patience.