JP Morgan Internet analyst Imran Khan held a conference call this morning with Kevin Lee, CEO of search engine marketing firm DidIt. Imran’s key takeaways from the call (and our reaction) below:
- Q4 search spending by DidIt’s clients grew about 30%, below Kevin’s expectations for mid-30s growth. The firm saw weakness at the end of December when search volume seemed to abruptly fall off around Dec. 17th (he expected high volumes to continue through Dec. 20th).
SAI Note: DidIt is only one SEM firm, but the report certainly isn’t good news for the industry. (At best, it’s irrelevant). Assuming the query falloff was related to consumer weakness (which seems plausible), it strongly suggests that companies like Google (GOOG) and Yahoo (YHOO) will see a consumer-related spending falloff sooner rather than later. This runs counter to consensus, which argues that search will be “recession proof”.
- Client marketing budgets seem to be remaining strong in face of a possible recession. Lee notes that many of his clients’ campaigns are self-funding with a clear ROI so he does not expect a search advertising pullback. Clients were willing to spend aggressively during 4Q. However, he did express concern with search inventory shrinkage due to fewer consumer searches.
SAI Note: Many people invoke this ROI argument when arguing that search spending is basically recession-proof. We think the logic is flawed. What drives search spending is qualified leads, and as the fall-off in searches at the end of December showed, when searches slow, so does spending (fewer clicks = less revenue). In our opinion it is irrelevant that search engine marketers closely tie spending to ROI: Less consumer spending means fewer searches means fewer clicks means less revenue. Put differently, even if your ROI remains the same, you spend fewer dollars.
- No apparent shift in wallet market share among top 3 search engines. Lee believes that the percentage of budget being allocated to each of the search engines has been relatively constant over the last six months with roughly 20% being allocated to Yahoo!, 7% to Microsoft, and the remainder being attributed to Google.
- Conversion rates remain strong. AOL and Microsoft conversion rates did particularly well for DidIt clients, with syndicated conversion rates trailing.
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