Second Quarter Paid Search Spending Continues to Decline – Expectations for increase in Second Half of 2009

by Craig Macdonald | July 9, 2009

The high tech advertiser sector shrank paid search spending in the second quarter by 9% from the first quarter (Q1’09), based on our recently released report we published. The majority of this reduction was in the Americas region (17% reduction), and on Google (8%). A couple of key observations about this most recent report that are important to advertisers as they do budget planning for the second half of 2009.

This reduction is NOT surprising – in fact – we forecast this in our First Quarter report based on our knowledge of high tech firm spending programs. Most advertisers in high tech cut back on first half spending significantly.
We DO expect spending to rebound in the second half of 2009. Given conversations we have done with various advertisers in the high tech sector, we expect spending to increase by 10% (or more)in the second half of 2009 from the Q2 run rate.
We have seen average CPCs of our customers decrease significantly since 3rd quarter 2008. Why? When the economy hit the wall, many advertisers decided to reallocate their paid search spending away from relatively expensive brand building (generic) terms toward relatively less expensive branded terms – essentially to maximize conversions.
We expect CPCs to increase in second half of 2009 as the increase in budget goes to reinvestment in brand building terms – again relatively expensive – which will drive up CPCs.

We also did a new analysis in this quarter’s report – we started looking at the relative costs per acquisition (CPA) across region and search platform for high tech firms. What we found is that CPAs on Yahoo and Baidu are comparatively low versus Google and MSN. We saw a major reduction in spending on Yahoo between Q1 and Q2 – however this pattern has persisted over the entire first half of the year. Currently high tech firms are spending about 14% of their paid search budgets globally on Yahoo, and 80%+ on Google. This data suggest that there is a comparative advantage to allocating additional spending on Yahoo in order to take advantage of the lower relative CPA.

Actionable Insight. Advertisers, in order to maintain their paid search market share, should be planning to increase spending in second half of 2009 – indications from our customers suggest that budgets will increase by at least 10%. This increase will go to funnel or brand building programs which will drive up CPCs. We also believe that spending on Yahoo is being underoptimized due to the comparatively lower CPA on the network from study in 1st half of 2009.