April 18, 2008, 12:00 AM

Google’s 20% ad click increase eases fears about health of e-commerce

While Google executives say the increase in paid ad clicks was much higher than widely circulated estimates from comScore, comScore says a closer look suggests U.S. growth in Google paid search clicks is indeed slowing down.

Google’s financial results announced yesterday eased fears that economic weakness was keeping consumers from clicking on paid search ads, and thus signaling weakness in e-commerce. Analysts believe growth in paid clicks may be slowing, but that it’s because of changes Google is making to improve ad quality, not because of the economy.

Google reported revenue of $5.19 billion in the first quarter, up 42% from Q1 last year, and a 20% increase year-over-year in clicks on ads served by Google. That click number was significant because web measurement firm comScore had reported only a 2% increase year-over-year in clicks by U.S. consumers on Google paid search ads, the biggest component of the search engine’s revenue. That comScore data had led some analysts to speculate that economic woes were affecting online advertising and commerce.

ComScore was quick to defend the accuracy of its estimates, noting that Google’s 20% increase included all ads, not just search ads, and was a global estimate, while comScore’s data was just for the U.S. Google says its revenue is growing more quickly outside of the U.S., with 51% of revenue coming from international in the latest quarter, compared with 47% a year ago. ComScore says growth is indeed softening in U.S. paid search ads.

What both Google and comScore agree on is that any change in the number of paid clicks is not due to the economy. If it were, a comScore spokesman says, there would be a similar decline in ad clicks on competing search engines Yahoo and MSN search pages, and that is not the case.

The likely explanation, he says, is that there are fewer clicks because Google has taken steps to improve the quality of ads on search results pages. Those steps include showing only the most relevant ads. Google CEO Eric Schmidt seemed to back up that theory when he told financial analysts yesterday “we’re showing fewer but much better ads.” Google also has reduced the area of an ad that will result in a click-through to avoid accidental clicks.

That explanation of improved ad quality also fits with data from search engine marketing firm Efficient Frontier that shows the average click-through rate on Google search ads improved by 19.2% in the first quarter over the first three months of 2007, while cost-per-click (excluding the hard-hit financial services sector) went up 11.2% and advertisers’ return on investment improved 24%.

“Google’s ongoing efforts to improve the user experience by reducing unnecessary impressions and clicks appeared to increase efficiency for advertisers by improving click-through rates, thus allowing Google to command a higher price for those clicks,” Efficient Frontier wrote in a report this week on Q1 performance of ads on the three major search engines. The report says Google accounted for 77.2% of search advertising spending among the major search engines in the first quarter, a gain of 3.3 percentage points from the same quarter last year, while Yahoo accounted for 18% of search spending, down from 21.2%, and MSN was flat at 4.9%.

Spending by Efficient Frontier’s retail clients on search ads went up 6% in the first quarter over Q1 2007. Travel advertisers spent 23% more and automotive spending was up 10%. Advertising in the financial services sector, which has been hit by the collapse of the subprime mortgage market, fell by 17%. Efficient Frontier serves mostly larger companies.

Google reported net income in the first quarter of $1.31 billion, up 8.3% from $1.21 billion in the same quarter a year ago. 99% of Google’s revenue comes from advertising, and of that 66% comes from advertising on Google’s own sites, which includes ads placed next to Google search results. Revenue for ads on Google sites was $3.40 billion in the first quarter, up 52% from $2.23 billion a year earlier. Revenue for ads placed on other publisher’s web sites through the Google AdSense program grew at a slower 26% rate from $1.34 billion to $1.69 billion.

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