Growth Rate to Slow for Maturing Search Market

Increasing click prices are the main driver of the search industry's growth, which is set to slow in coming years as the market matures, according to research reported yesterday.

Search marketers will pay an average of 26 percent more for clicks in 2004 than last year, and click prices will continue to rise in 2005 before the rate of increase levels off, Jupiter Research said. It found click prices rose from 29 cents last year to 36 cents this year. The New York research firm expects average cost per click for search listings to reach 47 cents by 2009.

Jupiter expects the price inflation to account for the lion's share of growth in paid search. It forecasts search spending to climb from $2.6 billion in 2004 to $5.5 billion in 2009, as the search market's growth rate slows from its recent meteoric expansion.

The search market grew 88 percent in 2002 and 65 percent in 2003. But starting this year, Jupiter thinks growth will taper to 34 percent. By 2009, the market's annual growth rate will decline to 11 percent, Jupiter said. Paid search spending is set to more than double in the next five years.

“There's nothing wrong with search,” said Nate Elliott, an analyst with Jupiter Research. “This market is growing. It's just growing more slowly.”

Elliott said the slowing growth rate is expected as search moves out of its infancy into a more mature industry.

“This isn't a $100 million market anymore,” he said.

Jupiter's report echoes a Nielsen//NetRatings study last month that found search supply trailing demand. It found year-over-year search sessions growing at 30 percent, but prices increasing 40 percent.

Search marketers should prepare for higher click prices, Jupiter warned in a report released two weeks ago. After increasing 26 percent in the past year, click prices will rise another 11 percent next year before price increases fall to less than 5 percent annually in the next four years, the researcher said.

Despite the rising prices, a Jupiter survey found a majority of search marketers fail to track their campaigns back to sales. More than 25 percent reported they did not track even rudimentary metrics like Web traffic. Such tracking is needed to construct a conversion-oriented search campaign for marketers to make the most of their spending.

Google and Overture offer free tools for tracking search campaigns, and third-party search marketing firms offer more advanced planning and tracking. Overture last month released Search Optimizer, a subscription-based tool that lets users automate search campaigns based on response metrics.

The lack of tracking carries over to bidding on search terms. Jupiter found nearly half of marketers either bid to get to the top of the results page or eschewed a bidding strategy altogether. Only 6 percent of marketers said they bid based on the cost of the good sold.

“There are a lot of new marketers in this space,” Elliott said. “Many of them are fairly new to the business. Not all of them are experienced, sophisticated direct marketers.”

Jupiter's search forecast includes only paid placement and paid inclusion. It does not count the contextual listings offered by search companies such as Google and Yahoo's Overture Services unit. A report last year by investment bank Piper Jaffray estimated contextual listings spending would grow from $300 million in 2004 to $1.4 billion in 2008.

Search engines are banking on new products like contextual listings, which show paid listings on non-search Web sites, and local search to spur further inventory growth. Yahoo last week released Yahoo Local, a test version of a local search engine that integrates search, maps and directory information to bring searchers all means of local information. Google has its own local search engine that works similarly.

Jupiter forecasts local search will rise from $508 million in 2004 to $879 million in 2009, lagging the overall growth rate of the online ad market. In that time, local search marketing's share of overall online ad spending will fall from 6 percent to 5.5 percent.

“It's not going to be the savior of paid search,” Elliott said.

Jupiter takes a dim view of near-term possibilities for local search advertising, citing limited consumer use and advertiser interest. For local search to grow quickly, Google and Overture need to lure service-based businesses such as doctors, restaurants and auto repair shops that operate entirely offline, he added.

“These are businesses that rely on phone calls and foot traffic,” he said. “Right now, paid search can't provide that.”

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