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Q3 Paid Search Data: Strong Growth Despite Economic Backdrop

The macroeconomic picture was far from rosy during the third quarter of this year with the U.S. unemployment rate remaining above 9%, Standard & Poor's downgrading the U.S. debt (albeit on shaky math), the S&P 500 falling 13.9% and the European Union facing an escalation of their own debt crisis with global ramifications. Even with that backdrop, paid search remained resilient, with data from the RKG client base showing that year over year growth rates accelerated from Q2 to Q3 for both ad spend and revenue.  Below we provide a breakdown of key PPC stats for the third quarter, looking at a basket of clients whose programs have been under our management for at least the last 19 months. Overall Results For each data set we have normalized the results such that Q3 2010 equals 100%. So, a figure of 110% in Q3 2011 would represent a 10% year over year lift.  Let's start with overall results for ad spend and clicks:

Paid search ad spend was up 23% YoY in Q3 following a 20% YoY increase in Q2.  Spend was down slightly from quarter to quarter, reflecting seasonal factors.  Ad clicks rose 16% YoY in Q3 compared to 12% in Q2.

With spend rising faster than clicks, cost per click (CPC) rose 6% YoY in Q3 compared to 8% in Q2.  Sales per click (SPC) has kept pace though, keeping return on ad spend (ROAS) flat YoY and QoQ.

Google Results

Growth on Google has been even stronger with ad spend up 32% YoY in Q3 and clicks up 25%.

Google CPCs were up 6% in Q3, down from a 9% YoY increase in Q2.  With SPC rising 11%,  ROAS rose just under 5% YoY.

From our perspective, a big contributor to Google spend and traffic growth has been the migration of Product Listing Ads (PLAs) from Google's Affiliate Network to AdWords and the shift to a CPC model.  This occurred in the Fall of 2010 and we have seen widespread adoption among our clients.  In Q3, PLAs contributed just under 5% of Google's ad spend total. Bing Results We've documented the woes of the Bing/Yahoo Search Alliance a number of times in the past year and, unfortunately, Q3 did not mark a significant turnaround point for the two partners in search.

Spend on Bing-powered ad listings fell 12% YoY in Q3, compared to 21% in Q2.  Ad Clicks were also down 12% in Q3.  It should be noted that Bing discontinued its Cashback program at the end of July 2010, and while Cashback was likely very costly to Microsoft, it did provide a boost to traffic levels at the time, making 2010 comps through July more difficult to meet.  Bing's year over year numbers have improved since August, but they are still in the negative.

Bing CPCs were flat YoY in both Q2 and Q3 while SPC fell 9% in Q3.

Google vs Bing

While we've read plenty of reports suggesting Bing-powered search is slowly chipping away at Google, we just don't see it on the paid search side.

Over the last six quarters we have seen Google's share of ad spend increase from 76% to 85%, while its ad click share has risen from 73% to 82%.  Google's share was increasing before the Search Alliance, but it jumped when Bing took over Yahoo ad serving.

Similarly, Google's advantage in CPCs commanded rose sharply last year during Q4.  Bing did make some gains in this area in Q3, but it has not returned to its pre-Alliance ratio to Google.

Mobile Results Mobile is increasingly top of mind to marketers and, as it gains more attention, we are finding that our clients' expectations of mobile to prove its value are rising as well.

If we consider tablet devices to be under the "mobile" umbrella, then we see mobile paid search traffic share plateauing between 7-8%.  Excluding tablets, mobile traffic share has declined among our clients, as they have chosen to segment it out and treat it differently than desktop and tablet traffic.

Google has noted that 1 in 3 mobile searches have local intent.  Whether the actual number is a bit higher or lower, there is clearly a very large segment of mobile traffic that has significantly less value to those advertisers that do not have a local presence, and we are seeing those effects in our data.

On the tablet side, traffic growth remains quite strong.  Although Android tablets are establishing a foothold in the space, we still see the iPad generating around 95% of tablet-based ad clicks, so we present here the iPad's share of total paid search traffic.

In the larger battle between the iOS and Android operating systems, we still see Apple with a sizable lead over Google.  This is largely due to the iPad, but our figures for smart phone usage are also more favorable to the iPhone than what you would see elsewhere. Q4 Outlook Looking at weekly data, we are not seeing signs of a slowdown in paid search spending or revenue growth.  Google's innovations over the past year should continue to help them drive quality year over year traffic gains and we expect Bing to introduce changes to its adCenter platform to help them do the same. Bing 2010 comps should also be easier to beat due to the negative impact of the Alliance on Yahoo volume and the ending of the Cashback program last year.  The National Retail Federation is also projecting an above average increase in holiday sales this year, albeit a smaller one than we saw last year. As always, a lot can change in a month or two, but the Q4 outlook for paid search appears strong.  In recent years we have seen a trend of holiday sales being more and more front-loaded, so we'd all be well advised to view those numbers cautiously as they come in, but we'll certainly get a much better idea how Q4 will shake out once they do.
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