Commentary

Search In The Age Of Recession

When Google announced its earnings this month, the online ad industry breathed a collective sigh of relief, because it seemed that search -- by far the most efficient demand-driven marketing channel -- had proven that it could weather, and perhaps even thrive in, the recessionary climate we've now passed into. The thinking was that while ad spending in general (and display advertising in particular) might be hostage to the larger macroeconomic forces roaring through the economy, search's efficiency and measurability will render it immune from harm.

Call me a skeptic -- but I'm not so sure that we're in the clear. This recession is still young, and extrapolating future performance from one quarter's worth of earnings results is, in my view, rather premature. Whether or not search is "recession proof," it's clear that those advertisers paying Google's bills may yet suffer in a welter of new ways this year. Negative factors for etailers include increased fuel costs (which must be passed along to consumers or absorbed internally), plus the certainty that 2008 will be the year when at least one populous state finally decides that e-commerce needs to be taxed (New York's Governor Paterson recently signed such a bill into law). And before you point to the recent eMarketer report indicating that 33% of U.S. adults are more likely to shop online because of high gas prices, recall that most of them do so because of lower prices and free shipping. The current push to tax e-commerce will nullify these advantages, even as it fills the coffers of the states (whose property tax revenues are hemorrhaging due to the sub prime mortgage crisis). Add inflationary pressures to a recessionary economy and you've got a prescription for a slowdown that can't but put a damper on ad spending across the board.

Don't get me wrong: search marketing has so many obvious advantages over less targeted, more intrusive, and less accountable media that I'm still bullish, even in the face of economic hard times. But anyone who thinks that 2008 is going to be an easy ride is dreaming, especially because more deep-pocketed, ROI-indifferent brand advertisers are crowding into the market to get more out of their ad dollars. Competition for scarce SERP real estate will escalate, even as the overall ad market retracts, and marketers with inefficiencies anywhere in their marketing chains will whither and die, yielding their positions to those who are better fit to survive this Darwinian marketplace.

By the time you read this, the MS-Yahoo deal may well have been settled. I don't pretend to be able to call this game in advance, but if the deal derails, it may well be because of second thoughts on the part of Microsoft; both about Yahoo, and reflective of concerns about the viability of display advertising in general. Display is much more vulnerable to any spending downturn than search. Sure, it's a great channel as long as the media is dirt-cheap, but that's not how it is at the portals, which command mile-high CPCs. My bet is that brand marketers that had no problem laying down half a million dollars for a one-day, home page roadblock position on Yahoo, may be thinking more carefully about how they spend their money. As we've seen in the past, Yahoo's results have been tightly coupled to the continuing willingness of big brands to spend money in this way. Does anybody seriously believe that autos, travel, finance, and other discretionary consumer sectors are going to do well when unemployment is trending upward, debt is at an all-time high, and sacks of rice are being rationed at Wal-Mart?

There will still be many opportunities, to be sure, and there are plenty of smart people (both at the engines and agencies) working overtime to make search profitable for their advertisers. But this is going to be a challenging year, and only those who can execute flawlessly will be rewarded with success.

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