Saturday, January 26, 2008

Google Ad Business Susceptible To Recession

Google, Yahoo and other Internet companies fueled by online ads could well suffer in a recession, analysts say, but they expect the online ad market might hold up better than other media.

Soaring online ad growth has made Google GOOG a business juggernaut, while also adding to the coffers of other Internet companies.

In a recession, spending slows most everywhere, analysts say.

Investors haven't had to be reminded. Google shares have fallen nearly 20% this year and are down nearly 25% since hitting their all-time high in November.

Investors are nervous because Google, Yahoo YHOO and others get a lot of their ad dollars from the financial, real estate and retail sectors, Standard & Poor's (NYSE:MHP) analyst Scott Kessler says.

"Google has been one of the worst performers over the last week because people are concerned," he said. "They don't know how Google is going to fare amid this economic downturn."

Investors will get a better handle on things when Google and Yahoo release fourth-quarter results on Thursday and Tuesday, respectively. Paid search has been a boon for Google. Analysts expect the company to report fourth-quarter revenue of $3.44 billion, minus the traffic acquisition costs it pays partner sites that carry its ads. That would be up 54% from the year-earlier quarter.

Google gets 98% of its revenue from ads tied to its online search service. Paid search is the fastest-growing segment of the multibillion-dollar online ad market. Yahoo also gets most of its revenue from online ads. Yahoo and Microsoft's (NASDAQ:MSFT) MSFT MSN have been ramping up their paid search operations, looking for a bigger slice of that pie.

Paid search ads have become especially popular among smaller businesses because advertisers pay only when a consumer clicks on an ad. In a recession, ads from smaller businesses could become an Achilles' heal for Google, says Barry Parr, an analyst for Jupiter Research. full story