Gap Widens in Online Advertising

Rivals Struggle to Catch Up to Google As Buyers Favor Search Ads Over Display

By JESSICA E. VASCELLARO
September 4, 2008

Spending on Internet advertising is climbing at a healthy clip -- rising 20% in the U.S. in the second quarter -- and growth forecasts are strong despite the weak economy. But that growth isn't being enjoyed by everyone.

The gap is widening between spending on simple search ads, Google Inc.'s core turf, and spending on flashier display ads, which companies such as Yahoo Inc. and Microsoft Corp. had hoped to use to gain ground on Google.

Faced with a slowing economy, advertisers are sticking to what they view as the safest way to reach online customers directly: the plain text ads that appear on search-result pages. Search-ad spending is on track to reach $10.4 billion this year, double what will be spent on display ads, according to research firm eMarketer.

That divergence of fortunes may be bad news for companies counting on a comeback for display ads, which ruled the Web in its early days. Though Yahoo and others say they have seen demand for these ads as they introduce technologies that better target the ads, they have been slow to regain favor.

CreditCards.com is typical. Jody Farmer, vice president of strategic marketing for the credit-card portal, says he has experimented with buying display ads. But as the economy tightens, the site, which spent $30 million on online marketing last year, is focusing on search ads. "We have to be a little more thoughtful about how we spend our money," he says.

The trend comes as Google rivals Yahoo, Microsoft and Time Warner Inc.'s AOL have invested billions of dollars in building and buying new display-ad technology to deliver more relevant and engaging ads to users on their sites and on the sites of other Web publishers. They hope to win back advertisers who have poured money into search ads.

Mark Scholz, global search manager for Hewlett-Packard Co.'s printer division, says that while his budget is relatively flat, he is spending more on search ads by pooling together funds from product groups eager for the extra lift they are accustomed to from search campaigns. "In the event there are budget cuts, I am one of the last ones they go after," he says.

Google, with more than 70% of the U.S. search-ad market, has much to gain from the trend. But the Mountain View, Calif., company also has made some big bets on the display business. Google is trying to tap brand advertisers to buy display ads on Google-owned properties such as YouTube and on other sites. Tighter display-ad budgets could hamper that expansion, which it fueled with its acquisition of DoubleClick last year for more than $3 billion.

The gap between Google and its rivals could widen as search grows faster than display. Search ads are forecast to represent 42% of overall U.S. online ad spending in 2008, according to eMarketer, up from 40% in 2007. Display is expected to stay flat, at about 21% of overall spending.

Google's rivals caution that there is a wide mix of display-advertising types and that some are performing well in the current environment. Spending on display ads is forecast to reach $5.2 billion this year, up from $4.5 billion in 2007.

Brad Goldberg, Microsoft's general manager of search, said the company has a number of advertising products for which the tough economic environment is a boon, including a new cash-back shopping search service.

Lynda Clarizio, executive vice president of AOL, says the company has the mix of ads that marketers are looking for in a downturn, even though it doesn't have a traditional search business.

A Yahoo spokesman says investments in new display technologies helped the company meet its financial goals in its most recent quarter, despite the tough economic environment. And he notes that Yahoo's U.S. search businesses is growing briskly as well.

There are signs that search may eventually take a hit too. John Aiken, managing director of research firm Majestic Research, says some smaller businesses have begun cutting back the number of keywords they are buying in recent months, although large marketers continue to spend freely. He says Google is "potentially stretching for dollars," noting that it has begun displaying more ads for some keywords.

Nick Fox, director of business product management at Google, says more ads may be showing up for some keywords because, as advertisers spend more on search, Google has more relevant ads to show. "We are not making any short-term trade-offs," Mr. Fox says.