Google's paid search growth soft again in February

For the second straight month, a comScore report suggests that Google's revenue engine is slowing down, highlighting again the perils of the company's overwhelming dependence on a single type of online advertising to fuel its business.
The report is available only to comScore clients, but a comScore spokesman said that its findings are accurately rendered in a note authored Wednesday by Citigroup analysts Mark Mahaney and James Samford.

A key takeaway from the Citigroup analysts: In February, clicks on Google's U.S. search ads grew only 3.1 percent year-on-year. Considering that February had 29 days, the growth rate would probably have been flat without the extra day, Mahaney and Samford wrote.

Coupled with a 0.3 percent year-on-year decline in January, also per comScore, a trend is emerging that Google's pay-per-click (PPC) ad business may be losing steam, after powering the search giant to mindblowing levels of revenue and profit growth for years.

While the news is of concern mostly to investors, it is also of interest for companies investing in Google's enterprise software products, like the fee-based version of the Google Apps suite and the Google Search Appliance. This is because the robust growth of Google's PPC ad business is what has allowed the company in recent years to fund its endeavors in enterprise search and hosted collaboration and communication suites. Should the PPC business slow down significantly, it will be interesting to see how that may affect Google's investment in its enterprise software unit, which generates a small percentage of the company's revenue.

Unfortunately for Google, it lacks a complementary revenue stream at the moment, despite years of actively trying to diversify into other forms of online ads, like banner ads, and into offline ads, like magazine, radio and TV advertising. Google still depends almost entirely on the PPC text ads it delivers along with its search results and in third-party partner sites.

Citigroup has been expecting a paid clicks growth of about 20 percent year-on-year for Google in the first quarter. "So if the comScore data is accurate and holds for Q1, and if it is representative of Google’s global trends -- not just U.S. -- then it could imply risk to Q1 estimates," the analysts wrote.

Google executives, aware that the company is long overdue for diversifying its revenue mix, are promising concrete results this year and in 2009 in display advertising, such as banners, now that the DoubleClick acquisition has been finalized.

In November, Yahoo ranked first in the U.S. in display ad impressions with a 19 percent share, followed by News Corp.'s Fox Interactive at 16.3 percent, while Microsoft came in third with 6.7 percent, according to comScore. Google took seventh place with 1 percent.

In midafternoon trading on Thursday, Google shares were down 2.8 percent to US$445.36, about $300 below the 52-week high.

When comScore issued its paid clicks report for January, which also included the fact that Google's paid clicks had suffered a 7 percent sequential decline from December, Google officials tried to put a positive spin on the news. They said the decline was due in large part to the company's initiative to improve the quality of ads' delivery, meaning that with more precise ad targeting, users had to click on fewer ads.

On Thursday, Google declined to comment about comScore's February report.