Expected Slowdown in PPC Spend Hits Home in Q2

Now that the second quarter is half completed, it is time to see if the torrid spending on paid search that major advertisers executed in the first quarter is continuing.  Spending in first quarter was very strong – up 6% over the previous quarter (Q4 of 2010) and up 26% over the previous year. First quarter spend was powered by huge increases in Europe and Asia.

So far, the short answer to whether spending is continuing at the previous rate is … “no.”   Continued slowness in spending in the Americas is now being met by slowdowns in Europe as well.   Asia continues to grow rapidly.  The following is a regional and global review.

On a global basis – spending on paid search looks like it will be up only 6% from the same quarter last year, and down by about 20% from the first quarter.  Growth year to date is now at 16% annualized – right in our beginning of the year projection range of 15-20%.

Spend on Google is on track to grow 10% over the second quarter of last year, and will be down from Q1 spend levels by a more muted 15% from the first quarter. Growth in paid search on the engine is up by 17% year to date.

Bing-Yahoo spend is down sharply on a global basis from a year ago – more than 30%.  The only good news for the alliance is an uptick in spend in Europe.  However, Bing-Yahoo accounts for less than 5% of spend in the region.

Looking regionally, Asia-Pacific spend continues to be where the growth is.  In the second quarter, growth is trending up more than 50% from the previous year.  Google spend is up 39% from second quarter a year earlier. Baidu spend is also up by 45% from last year.

This is contrasting with the Americas, where spending is heading down by 7% from the second quarter of last year.  And while Europe spend will be up by 21% from last year, this is off of the first quarter where spending was up 45% from the same period in 2010.  And it appears that European spending will be coming down in second half of the year – due to financial issues effecting major economies in the region and the strengthening of the U.S. dollar due to the mounting debt crises in Greece, Spain and Italy.

We are also seeing a large increase in spending on secondary and regional search engines.  Spending on Baidu is up very strong from last year – 65%.  Also, we have seen modest gains on Yandex in Russia – occurring concurrently with its recent IPO here in the U.S.  We do expect additional spending on Yandex, which represents 65% of our customers’ spend in Russia (with the other 35% being invested in Google/Rambler).  The capital raise should push improvements in the platform, which is becoming the defacto standard in this key growth market for many large global paid search advertisers.

The easing in paid search spend growth has also driven an easing in a one year trend we have been tracking – cost per click (CPC) inflation.  CPCs stayed constant between Q1 and Q2 on a global basis – except on Google!  Google CPCs continued to inflate – by 4%, due to ongoing improvements in the way Google is monetizing inventory and continued competition for keyword prices.  We expect this to continue throughout the year – particularly in the Asia-Pacific region.

Our recommendation to our customers remains the same: Budget for 15-20% paid search advertising growth for 2011.  We see no reason to change our forecast and direction at this point.