It's important to note that the writing of this article occurred on July 17, 2008. I mention this only to insure that you can put it into context and also so that those who read this article in a day or week or month from now aren't confused by my noting of Q2 reports and references to "today".

Any of you who have read some of my past articles or who have visited Beanstalk's services pages will know - I'm not a PPC guy. Quite honestly, it's not in my primary skill set and it's something I would definitely prefer to leave to the experts. Now that said, following Google and it's health (which is tied directly to AdWords and AdSense) is something I'm keenly interested in. To this end, recent changes in Google's paid search display and ranking systems will have huge impacts on advertisers and, more important for the purpose of this article, on Google itself.

A couple weeks ago a friend of mine, Richard Stokes from AdGooroo sent me a PDF entitled, "Search Engine Advertiser Update - Q208" . With this document they outline the changing trends in the paid search marketplace and many of the stats are surprising. If you're a PPC manager they're obviously directly important. For those of us in the organic optimization world they are still both interesting and important. They're interesting for reasons which will become clear below and they're important because anything that affects the economic health of the search engines affects the search landscape both inside and outside of the paid search realm.

Paid Search Market Share

What could be more important to the engines than their percentage of the paid search arena. Does Google really care about being the dominant search engine as far as organic search goes? Let me put this a different way, if Google was standing in front of their shareholders - would they prefer to announce that they held 80% of all worldwide searches and reported revenues of $7.8 billion dollars for the quarter OR would they rather stand up and say they hold 20% of all worldwide searches and reported revenues of $8.7 billion dollars? Organic results drive traffic which in turn results in clicks on paid ads. From a business standpoint that's the only reason that organic search even matters.

So which engine has the healthiest paid search environment? According to AdGooroo, Q2 results show a different world than one might guess (which is why I noted that it is interesting).

Over the past twelve months advertiser growth (or lack thereof) breaks down as follows:

Google: -8.5%
Yahoo!: +9.8%
MSN: -6.7%

Advertiser counts have also changed (i.e. the number of advertisers on the engine). Yahoo! leads in this area as well with a growth of 0.03%. Google dropped by 6.4% and MSN dropped by almost 20% (good thing they have their OS revenue to fall back on).

And A Drop In Ads

To go even further, Google has increased the importance of quality which has resulted in a reduction of nearly 40% in the number of ads that appear on a results page. 6 months ago ~6.5 ads appeared per page whereas now that number is closer to 4. This has the potential to significantly help or significantly hinder Google's revenue.

As Richard Stokes points out and I completely concur, this places Google in an environment where one of two things will happen:

1. Advertisers will realize that their clicks are converting much higher, search marketers will spend more time and resources creating more and more relevant ads and landing pages and advertisers will be willing to bid more as the conversions increase, or

2. The competition for the top spots will be reduced and so too will the average bid prices.

Google's Q2 Report

And what inspired the writing of this article was actually the release of Google's Q2 report earlier today. After reading it I immediately had to contact Richard and let him know that the results confirmed some of the predictions noted in his work. He writes:

"... the auction-based bidding system makes this a double-edged sword. As the number of advertisers declines, so does the competitive pressure for higher bid prices. If advertisers don't step up to the plate and bid more aggressively for placement, then it's possible that search revenues could stagnate."

Google revenues were up only 3% over Q1 of this year and revenue from paid clicks was down by 1%. This is the first time in Google's history post-IPO that I can remember them showing reductions in revenue in one quarter over the previous. It appears that this new paid search model in not quite as effective at pulling in money as the old.

Now, to be fair, the new system of requiring higher quality scores and better ads and landing pages is new - only a few months old at this point and so there are likely still bugs to be worked out, but Wall Street did not react favorably to the announcements today and I suspect that the situation isn't going to look better for Google at the close of day tomorrow (though what do I know about stocks).

What Does This Mean?

So what does this mean? This means that Google has a lot of work to do and those in the paid search space need to pay close attention (even closer than normal) as shareholders don't like to see losses and Google is going to need to make moves to recover and show significant gains by the time their Q3 reports come out.

One might guess that this also means that Yahoo! is gaining ground (which is true) but it's definitely a case of too little too late. Also earlier today (it was a busy day in search) Yahoo! released a letter to its shareholders that on one hand referred to the alliance between Microsoft and Carl Icahn as a destroyer of shareholder value for Yahoo! and then went on to say that they would be willing to sell the company to Microsoft at $33/share (which is what Microsoft has offered previously and which is more than $10 above their current market value).

It seems that one can't look at the stronger relative results in the paid search area that Yahoo! has achieved as a win when they seem to be backsliding on their initial position regarding the sale to Microsoft.

So Where Do We Go From Here?

For one thing, watch closely. Monitor resources such as AdGooroo's research library, and the Clix Marketing blog. Pay close attention as we're going to see a lot of changes to what's going on and these changes are likely going to have effects on both the paid and the organic results as Google strives to provide the better results they're targeting through paid search now but at the same time increase their revenue.

This may involve adjustments to the quality scoring (I can pretty much guarantee that one) and may involve adjusting how paid ads appear on the page with the organic results. All we can really do is watch, wait and adapt.

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