SEARCH
James Lamberti, SVP of Search and Media at comScore, is a co-author of this post.
Earlier this week, comScore released its January 2008 qSearch paid click report, which showed a 7% sequential decline vs. December ‘07, and a flat annual growth in paid clicks for Google. Moreover, the number of paid clicks per Google search query declined by 8% from December to January, suggesting that consumers are clicking less on search ads, possibly reflecting a weaker buying appetite. The information triggered a flurry of reactions in the media and the financial community that centered on two concerns: 1) a potentially weak first quarter outlook for Google, and 2) an indication that a soft U.S. economy is beginning to drag down the online advertising market.
While we do not claim that these concerns are unwarranted, we believe a careful analysis of our search data does not lend them direct support. More specifically, the evidence suggests that the softness in Google’s paid click metrics is primarily a result of Google’s own quality initiatives that result in a reduction in the number of paid listings and, therefore, the opportunity for paid clicks to occur. In addition, the reduction in the incidence of paid listings existed progressively throughout 2007 and was successfully offset by improved revenue per click. It is entirely possible, if not likely, that the improved revenue yield will continue to deliver strong revenue growth in the first quarter. Separately, there is no evidence of a slowdown in consumers clicking on paid search ads for rest of the US search market, which comprises 40% of all searches.
The most puzzling data element is that Google’s U.S. paid clicks dropped sequentially by 7%, while, at the same time, its total number of search queries grew by 9%. At the same time, Google’s market share of all search queries grew slightly from December, and its annual query growth remains very strong. All indicators point to the company continuing to do very well as far as consumer usage and competitive position. The drop in paid clicks becomes even more puzzling when it is normalized on a per query basis: The number of paid clicks per search query drops by 16% in one month! The corresponding metric for the rest of the market drops by 4%. What accounts for this dramatic difference?
We must remember that a paid click does not happen on a search results page unless there is an ad on that page. Since not all pages have ads on them, it is important to look at an ad coverage index, defined as the percent of all queries that have at least one paid ad. This index dropped by 8% for Google, going from 52% to 48%. In addition, even when a query result page contained at least one paid ad link, the paid click rate, defined as the average number of clicks per such an ad supported query, declined by another 8%, going from .24 to .22. Figure 1 shows the trend in these two metrics over a one year period. The graph illustrates two time periods where both measures declined together: first from January ‘07 to May ‘07, and then from December ‘07 to January ‘08. The remainder of the year was essentially flat.
Evidently, January ‘08 is not the first time this decline has happened. The compounded impact on paid clicks per search query (whether or not ad supported) for the entire year, is a whopping 33% decline in 2007. The decline in the first half of 2007 clearly cannot be traced to a weak economy. And, despite this decline, Google managed to grow its worldwide search revenue by 68% in 2007. (The company does not separately report U.S. search revenues.) The revenue growth was achieved through a 21% increase in revenue per paid click.
Why and how is this happening? It is common knowledge in the industry that Google has been targeting what it deems to be low quality ads. It has introduced a ‘quality score’ that it uses to prioritize placement of ads or to decide to suppress an ad altogether. A suppressed, or ‘non active’ ad, can be reinstated by raising the bid above a quality-based minimum bid. In addition, the real estate available for ads is being reduced, squeezing the supply of available spots to bid on. The reduced supply, as well as the higher minimum bids, contributes to an increase in the price per paid click, which is what helps counteract the slowdown in the absolute number of paid clicks. Therefore, Google’s revenue will not necessarily suffer from this. In fact, Google wins by providing more relevant ads for consumers and a less cluttered ad environment for marketers.
This policy is explained by Google on their website at https://adwords.google.com/select/qbb.html.
But wait! If this improved quality is real, should we not expect an increase in the paid click rates? Not necessarily. If the ads are more relevant, consumers would need fewer clicks to get what they are looking for. Perversely, a high number of clicks means that the ads are not delivering what the user is looking for on the first try, which induces additional clicks on the second or third try. The benefits to marketers are real, but also counterintuitive. If the users get to what they want with fewer clicks, it means those clicks have a higher conversion rate, or deliver higher quality leads. Hence, a lower number of clicks will likely generate more revenues or better leads for the marketer, justifying the higher average cost per click. Naturally, the changes will not benefit everyone. Rightly or wrongly, some marketers win and some lose, venting their frustration in the blogosphere. The users, on the other hand, will mostly win with improved relevancy and user experience, which helps explain Google’s continued overall query growth and share dominance.
What about the impact of the economy? One might argue that the lower number of paid clicks per ad-supported query indicates that consumers are less interested in buying what is being advertised and lends credence to a worsened economic situation. The trouble is that the pattern does not hold for the rest of the search market. As Figure 2 shows, the paid click rate for the other search engines actually increases slightly. There is no obvious reason why the economy would negatively impact Google’s users and not those of Yahoo!, MSN, AOL, Ask and others. Furthermore, we don’t need a weak economy rationale to explain the recent decline -- since a similar decline occurred earlier in 2007 when a weak economy wasn’t an issue.
| Figure 2 | |||
| Sequential Change in Paid Click Rates | |||
| Dec-07 | Jan-08 | % Chg | |
| 0.24 | 0.22 | -8.1% | |
| Other Engines | 0.21 | 0.21 | 0.5% |
In summary, the evidence points to a counterintuitive trend caused by Google’s own program for improving the quality of paid listings.
Comments (17)
The change in Google's quality score behavior is real, very real. The days of very cheap clicks from pages that don't have any other ads on them are over; essentially now you have to bid against the house to put an ad on the page even if no one else is bidding.
Posted by Edward Vielmetti | February 29, 2008 3:36 PM
Posted on February 29, 2008 15:36
Great update Magid. This certainly provides a more complete explanation.
http://www.searchenginuity.com/google-ctr-debacle/
Posted by Clay | February 29, 2008 4:24 PM
Posted on February 29, 2008 16:24
This analysis suggests that the market's interpretation of *your data* was hopelessly flawed and likely the *opposite* of a reasonable conclusion which you suggest is improved Google performance in Q1 2008....right?
Posted by Joseph Hunkins | February 29, 2008 4:51 PM
Posted on February 29, 2008 16:51
It also could have been the REMOVAL of the ENTIRE hyperlinked, colored area in the Sponsor Links - above the organic SERPs.
Now just the TEXT is hyperlinked - as opposed to a large colored entire area at the top of the Google page
The organics are more relevant than the Adwords - so Ad relevancy would have nothing to do with it.
Consumers could just go directly to the organics or to the local listings above the organics - if they felt that the quality of the Adwords and Sponsor links were not on par.
Posted by SearcH EngineS WEB | February 29, 2008 5:45 PM
Posted on February 29, 2008 17:45
Following the release of this blog, we have gotten a question about whether we wrote based on pressure from Google. I wanted to go on record saying that we have not heard one single word from Google about this entire matter.
We felt compelled to make these clarifications because the data was being used to draw incorrect conclusions. We generally do not comment on industry data that we release because we are expected to provide information and not opinions. However, the conclusion that was being drawn about the softening of the online advertising market, while at first glance is supported by a data sound bite like a “drop in paid clicks”, does not hold water once you dig deeper into the more detailed information provided in the paid click data. Left unchallenged, it harms the interests of the overall Internet industry. That is why we took the unusual step of writing this note.
It is important to emphasize that we are not repudiating our own data. Quite the opposite: our data remains unchanged, and, we believe, correct. We are just offering a more thorough analysis to ensure the information is interpreted correctly and that the proper conclusions are being drawn from it.
Posted by Magid Abraham | February 29, 2008 6:19 PM
Posted on February 29, 2008 18:19
Interesting post. It would have been nice to see data on average CPC over time plotted on the same graph.
I tried to show that together here:
http://www.flinky.com/blog/2008/02/comscores-interpretation-of-their.html
The two time periods where things changed over the course of the year match up reasonably well.
Posted by flinky | February 29, 2008 9:06 PM
Posted on February 29, 2008 21:06
I am just wondering. Some blogs like Techcrunch are reporting that the CTR is down due to click area changes. But paid cliks on the AdWords ad in Google search results are tracked through http://www.google.com/aclk...... and AdSense Ads are tracked through http://pagead2.googlesyndication.com/pagead/
So, I am wondering which clicks are in your statistics? Only paid clicks from the Google search results, or clicks in the AdSense content network, too??
Posted by Jojo | March 1, 2008 2:06 PM
Posted on March 1, 2008 14:06
Moving forward, you guys should augment your reports with a brief analysis as you have done here. Your report caused the destruction of significant wealth and it just feels irresponsible for you to publish raw numbers that are so easily mis-interpreted by so many. Part of the blame obviously rests with Google. The fact that they do not provide guidance means that anyone that writes anything that smells authoritative, as your reports do, tends to be taken as the gospel. Anyway, I'm just a shareholder that feels a bit impacted by your original report. I'm in for the long term so I'll be ok, but you guys really should act much more responsibly when releasing numbers that are so easy to mis-interpret.
Posted by Willy Quintinella | March 1, 2008 10:28 PM
Posted on March 1, 2008 22:28
Joseph:
Google is doing well in market share. However, its financial performance ultimately depends on how much prices are going up. At this point, only Google knows that. The data I cited on click pricing was calculated based on their financial reports from last year.
Also we should not forget that we are talking about US data. International search accounts for almost half of Google's revenue, and has been growing at a faster rate than US Search.
Posted by Magid Abraham | March 2, 2008 7:35 AM
Posted on March 2, 2008 07:35
Flinky:
That is very interesting. How did you get the CPC data? We don't have it, other than what I have pulled from publicly reported financials.
I would have loved to include your graph as part of the blog.
Magid Abraham
Posted by magid abraham | March 2, 2008 7:32 PM
Posted on March 2, 2008 19:32
One of the major reasons for the decline in clicks is Google's recent change to limit what they term as "inadvertent clicks."
Previously, visitors could click anywhere in one of Google banners and it was counted. But Goggle said that a lot of people were mistakingly clicking on their banners and now only register a click when a particular link within the banner is clicked.
Revenue dropped by 50% when this took place and it's one reason I am activly looking for an alternative to Google ads on my web site.
Posted by MikeC | March 3, 2008 11:57 AM
Posted on March 3, 2008 11:57
Magid:
I got the data from http://efrontier.com/efficient-frontier/resources/research/docs/SearchEnginePerformanceQ407.pdf
See Figure 4.
EfficientFrontier is an SEM so they have data on their clients. The data must be very noisy since they probably don't have nearly as much data on clicks as you do. Their Figure 3, for example, on CTR looks different than your data on CTR, so setting the data side by side is problematic, but still suggestive I think.
(You can reach me by email at 'flinkyblog AT gmail.com').
Posted by flinky | March 3, 2008 8:20 PM
Posted on March 3, 2008 20:20
Your report doesn't mention the biggest reason for the steep decline in the first quarter of 2007. Google terminated a lot of accounts that were doing arbitrage. It took several months to do that, so that is why there wasn't just a massive drop. To find those sites, they probably needed to review them individually and that is why it took so long.
So they actually killed off part of the market. Initially, I think they did that by jacking up the bid rates and later by terminating accounts.
My guess is that in February-March, the arbitrageurs worked out how to circumvent Google's controls and that is why there was a bump. Then google shut them down and that is why you see the steeper drop.
Willy - are you suggesting that Magid can read the minds of people who are likely to misinterpret daya and destroy Google's stock price?
Posted by NewsBlaze | March 4, 2008 8:59 PM
Posted on March 4, 2008 20:59
I wonder how much of an impact personalization attempts for Google combined with universal search real estate grabs might be impacting overall ad clicks. Good food for thought with the data overall!
Posted by Steve | March 6, 2008 11:21 AM
Posted on March 6, 2008 11:21
Excellent article! There were a lot of people that were left wondering what was responsible for the recent downturn in click throughs both on the PPC side and the EPC side.
-Peter
www.GoogleStockAnalysis.com
Posted by Peter Whipley | March 20, 2008 5:13 PM
Posted on March 20, 2008 17:13
I wrote a post around this topic - http://theanalyticsguru.wordpress.com/2008/04/07/my-comscores-google-moment-and-paid-click-data-discovery/
Here are my 4 reasons:
I think I know what happened - it’s sorta a synthesis of a few different things:
1. Google using Landing Page Quality Scores to devalue properties that don’t adhere to their guidelines (which may often be “fuzzy”).
2. Paid Links that transfer Page Rank, when found on publisher’s pages (those running AdSense) are taken out of the index or dropped to a level where they don’t rank for Organic at all - this is what happened, I believe to Know More Media’s network, which my webmetricsguru.com blog is part of.
3. The softening Economy has played a part, people just aren’t as much in the market to buy things online when they are worried about their jobs or losing their homes - and many homeowners have been affected by the Sub-Prime Mortgage Meltdown - and many of those are not thinking about buying stuff on AdWords or AdSense. Since Google has most of the Paid Market, I believe they have the most to lose than Yahoo, MSN or anyone else.
4. As mentioned in the Comscore press release - there are less pages come up now with ads on them due to changes at the Google backend to filter out what it considers to be riff-raff ads and sites - that has had the net effect, of lowering the number of clicks on paid advertising while at the same time the number of overall searches actually increased
Posted by Marshall Sponder | April 7, 2008 10:08 AM
Posted on April 7, 2008 10:08
What I think most people are missing about this downtrend in Google's PPC revenue is that we have had a situation for a year or more where the bid levels in many industries have reached ridiculous levels, making PPC campaigns non-viable. In other words, in many markets the cost per click is so high that an advertiser cannot get adequate ROI. If all the analysts actually were running a number of PPC campaigns themselves they would see this.
I compare it to the housing market. Prices can't keep going up forever if people can't afford them anymore. So on Google, if an advertiser has to bid $50 per click (actual price in one of the markets I manage) what conversion percentage and sales closing percentage does he need in order to make money? Well it has to be pretty good.
I saw this storm on the horizon for Google for a year or more. They have dispatched teams to help their larger customers get better results, for the first time this year. But I don't see it helping and I see a bit of a continuing fall-off for Google.
Posted by John Eberhard | April 15, 2008 2:20 PM
Posted on April 15, 2008 14:20