Has Search Outgrown Growth?

A reported 6,000 people attended last week’s Search Engine Strategies New York conference. Chances are, few of them traveled downtown to a Merrill Lynch analyst meeting taking place at the same time. They therefore didn’t hear Google chief finance officer George Reyes speak the dreaded words: “lower growth.”

But synchronicity was in the air, and the midtown SES audience had already had their growth expectations managed. A number of presentations at the conference suggested that search was poised for a period of flatter expansion than the stratospheric growth curve it has ridden for the last few years. When moderator Danny Sullivan of Search Engine Watch gathered representatives from the five largest engines for a mass Q&A toward the end of the meeting, many of those Q’s had to do with questions of scarcer ad inventory and marketers’ price sensitivity. And a good number of the A’s involved assurances from the engines that they still had places to grow and people to be seen by.

First, a stat shot. As usual at SES, Monday’s opening sessions included a look at the “Search Landscape”, in which three metrics pros presented overall data on the industry. By their own admission, their numbers varied somewhat because they segment and consolidate search in somewhat different ways. But the numbers presented by James Lamberti, vice president of search solutions for comScore Networks, can serve as a representation of the total message conveyed.

Lamberti reported that search queries in the fourth quarter of 2005 increased 8% over the level of the same quarter a year before. “We’ve been analyzing this market for about three years now, and this was the first quarter I’ve seen without double-digit growth,” he told his audience. U.S. queries stabilized at about 5.4 billion for the quarter, or about 40 queries per month per person. What drove the increase in search volume was really the arrival of new users; an average of 10 million new users logged on to high-speed Web access each month in 2005, and it was those newbies, given a chance to get comfortable with the always-on Internet, who were driving most of the year-over-year search growth in Q4.

But over time, broadband use has the effect of reducing users’ reliance on Web portals and search, Lamberti said, because always-on high-speed access has the effect of getting users into the content they want faster and deeper without the benefit of portals or search. And while 85% of users actually searched during an average month in 2005, conducting an average of 37 searches per month, those searches accounted for less than 3% of the total pages consumed.

“All this data speaks to the maturity of search, and the slowing of growth in the search category is not really surprising,” Lamberti said.

So why the increase in 2005 ad revenues among the search engines? That came primarily from efforts by Google and Yahoo! to increase their search ad inventory by building up coverage within their publishing networks. At the beginning of last year, less than 50% of searches had the opportunity for marketers to advertise; by January 2006, that proportion was approaching 60%.

“That’s a dramatic change,” Lamberti said. “It also explains why we’re getting a lot of new inventory even though the market growth is decelerating. Obviously the engines are ahead of the game here and know they’ve got a limited, finite supply. They have to take advantage of that for the marketing community and for their own financials.”

In the same presentation, Ken Cassar, chief analyst for Nielsen//NetRatings, said a panel study by his group showed that during November 2005, the top 100 search terms used to look for travel accounted for 47% of all search clicks—but that three-quarters of those top terms were actually URLs that users entered into a query box, using a search engine to navigate to “Southwest.com”, for example.

Findings like that and the importance of non-search referrals on content pages led Cassar to hypothesize that search’s importance as a market driver may be somewhat less than its reach indicates. “I’ll go out on a limb and say that while search is phenomenally important, its importance may have been a little bit overblown over the last few years,” he said. “Search is most often used as a navigational tool for the Web, rather than an exploration tool. That doesn’t make search any less important, but it gives us a window into the way consumers think about and use search.”

Those Monday stats served as a low-growth backdrop both for Reyes’ comments to the analysts on Tuesday and for the round-table discussion on Wednesday

“In real numbers, search is going to grow very significantly” said Tim Armstrong, Google’s vice president of ad sales, when asked if the air was leaking out of search as a growth industry. While the “law of large numbers” will dictate that the rate of growth will be shallower, he said, there was “infinite optimization” still to be done in delivering the right ads at the right price to visitors in all languages and countries. “The ceiling has yet to be hit,” he said.

“We see a lot of different sources of growth,” said Tim Cadogan, vice president of search at Yahoo! Search Marketing. Small businesses not yet online or those not yet using search engine marketing (SEM) will prove an important penetration target in the future. On the other hand, many large online advertisers—for example, the big brand advertisers and retailers– are not yet aware of the proportion of their offline sales actually driven by search. “We’re helping people connect those dots and showing the full value generated by search,” Cadogan said. Other growth opportunities lie in mobile SEM, in global expansion and in greater use of SEM by such categories as entertainment and consumer packaged goods.

Some of those new growth areas may cause the search industry to look beyond the widely accepted pay-per-click auction model, according to Gerry Campbell, vice president and general manager of search and navigation for AOL. “There are new opportunities enabled by technology and consumer adoption on the Web,” he said, including establishing the price for searching and downloading video or for online searches that result in a phone call.

“We’ve been able to build significant businesses on the behavior of searching and clicking,” he said. “But there are phone behaviors and watching behaviors that feed out of a search environment, and I think that’s where media companies have a lot of opportunity.”

Google bought a radio advertising platform in January with the purchase of dMarc Broadcasting, tested placing newspaper ads for its advertisers in December and has just closed a beta test auction of print ad space in magazines. Armstrong said those moves make sense because online targeting can be expanded to include other forms of advertising.

“The information that comes out of digital media such as search and contextual targeting is transferable to other media,” he said. “Advertisers wanted to see if we could apply some of the measurability and accountability of search to contextual targeting, and we launched that several years ago.” Those traits could be put to valuable use in serving print and radio ads, where advertisers commonly place only a portion of their products.

“In the offline world, it’s not unusual for advertisers to use only 5% to 10% of their products and services in their advertising messages,” Armstrong said. “The systems that the people on this panel and in the audience are building allow advertisers to use thousands and millions of SKUs to run [search] ads. You can imagine how powerful it would be to correctly target those other media. It smells like the early days of contextual, but in general, it’s clear there’s value there.”

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