Aug. 09,  ISSUE #047
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NEW YORK (Reuters) - A new Internet advertising forecast shows slower growth for paid search listings in the next 5 years, a projection that raises questions about Web search leader Google's prospects as it goes public.

Advertisers will more than double spending on paid search to $5.5 billion (3 billion pounds) in 2009 from $2.6 billion this year, but the annual growth rate will decelerate to 11 percent in 2009 from 65 percent in 2003, according to a report by Jupiter Research due to be released on Monday.

"This market has grown so phenomenally over the past number of years. Now it's maturing," said JupiterResearch analyst Nate Elliott. "Google clearly thinks that they need to diversify ... they have to know this growth is going to slow."

Google's name and virtually all of its revenue is synonymous with Internet search, delivering targeted ads linked to the keywords used in Web searches. After posting double-digit sales growth in every quarter since 2002, Google grew revenue by 7 percent in the quarter ended in June.

Questions about growth have clouded Google's much anticipated initial public offering, which could reap as much as $3.3 billion and value the entire company at more than $36 billion. No date has been set for the IPO, but bidding could begin as early as this week.

Google's future stock performance will be tied to how rapidly paid search growth decelerates and how other business ventures generate new revenue for the company, said Mark Mahaney, analyst at American Technology Research.

Mahaney also expects a deceleration in paid search from about 100 percent growth this year to 75 percent next year and even further down the line.

"You have to assume that three years from now, Google is more than just a search engine," said Mahaney, who expects the Google IPO would be priced at the lower end of a $108- to $135-per-share range. "Seventy-five percent of your investment is based on your outlook on paid search and 25 percent on your belief that this company can successfully generate other revenue."


Google has been testing additional ventures, including its comparison shopping site Froogle, Gmail electronic mail service and local search advertising as it faces growing competition from Yahoo Inc. and Microsoft Corp.'s MSN.

According to JupiterResearch, local search spending will grow more slowly than total online advertising or paid search, rising to $879 million in 2009 from $502 million this year.

"There's not a really attractive model here for local marketers" from restaurants to dentists, Elliott said. "They still want you to walk through the door."

The rise in search prices per click also will lose steam, growing 26 percent to 36 cents in 2004, then slowing in 2006 to incremental annual growth of 1 cent to 2 cents per click.

At the same time, advertisers have already begun to scrutinise the rising cost of search marketing and demand more precise ways of tracking the effect of their spending.

JupiterResearch, a division of Jupitermedia, has forecast total online ad spending, including search and display ads like banners, will nearly double to $16.1 billion by 2009 as consumers devote more time to the Web and new technologies make it easier to create and track campaigns.

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