As we said yesterday, it’s hard to know how to read Google’s AdWords “Automatic Matching” change, which will go into beta on Feb 28th. We think there are three possibilities:
- A forced response to economy-related revenue weakness (i.e., an emergency change to try to boost monetization)
- A positive catalyst that could materially accelerate revenue in Q2 and beyond.
- Business as usual: Just another monetization-improvement tweak.
Based on the economy and some initial advertiser reaction to Automatic Matching, we think the “emergency course correction” theory is certainly plausible. RBC analyst Jordan Rohan, meanwhile, hits the history books to make a compelling case that the “positive catalyst” theory is also plausible:
Previous Algo Changes Boosted Results: Two previously announced algorithm changes were 1) the roll-out of Quality Score in its pricing algorithm in 3Q05, and 2) the top placement optimization tweak in 3Q07, and both had a significant positive impact to results. In 3Q05, y/y US revenue growth accelerated to 83%, from 75% in 2Q05 on the back of the QBS roll-out (despite only a half-quarter impact). Likewise, the 3Q07 top placement algo change boosted US revenue growth to 46% y/y up from 43% in the previous quarter (also with only a half-quarter impact).
This said, Jordan has also done some early channel checking, which appears to support the “revenue softness” concern”:
Preliminary Checks On 1Q08 Mixed: It is too early to predict Google’s 1Q results, as March is a significant contributor in the quarter, but our preliminary conversations with US-based SEMs are mixed. The early read is that Jan tracked slightly below expectations as the volume drop-off post-holidays continued longer than normal, but that trends have picked up in February. The US-based SEMs that we polled are seeing total spend flat-to-slightly-up q/q in 1Q. Comscore data showed a modest acceleration in y/y search query volume to 37% in January from 30% in Dec.
The query growth acceleration from December to January is certainly positive, but it’s important to remember that queries are not revenue units. The revenue units are paid clicks.
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