Making Sense Of The Google CTR Debacle

Wednesday, February 27, 2008 By Clay | Comments (4)

I’m amazed at the logic (or lack thereof) behind the recent sell-off of Google stock amid Comscore’s report of flat YOY January paid search click-through rates. The press and blogosphere has been buzzing with stories ranging from sensational (Google Disaster: Comscore Reports Awful January Data) to simply inconsistent (Google Shares Fall 8% on Ad Fears). Many stories went as far as using Comscore’s questionable data point as an indicator to Google’s susceptibility to US market conditions. Here’s a review of what happened and my take on why we should be rolling our eyes.

What Happened?

Comscore reported January 2008 click-through rates on paid search ads remained flat in comparison to January 2007. Let me repeat that, CTRs on paid ads on Google.com remained FLAT. Not traffic declined, not revenue per click declined, not net profit declined, and certainly not EBITDA declined. Is this worth raising an eyebrow? Sure. Is this worthy of a knee-jerk reaction that results in a 4.6% decline in the stock and billions of market cap value? Absolutely not.

What Could Be Causing A Deceleration in CTR Growth?

A deceleration in CTR growth may be a signal that Google’s paid advertisements are seen as less relevant to searchers. While there are a host of factors that could cause this, I think two in particular are playing a significant role; Google’s expanded broad match and paid search marketing campaign maturation.

Before jumping into each factor, there’s also a macro element at play; the long-tail of search. Search engine users tend to evolve from using one keyword per search to using two, three, and four keyword phrases. As they get more experienced using search engines they tend to use more keyword phrases (eMarketer muscle). These longer keyword phrases represent more fragmented keyword inventory (we move from ‘flights’ to ‘cheap flights to miami’) and a longer tail of keyword volume. This evolution is playing a role in the two (potential) deceleration factors:

• Google’s Expanded Broad Match: In recent months Google has been very aggressive with their expanded broad match feature.Google will take an advertiser’s ad targeted to the keyword ‘flights’ and display it on searches for ‘trips’ – a practice that’s very difficult for advertisers to control.Google has taken upon themselves to help advertisers reach the long-tail keyword queries they may not have included in their campaigns.While this delivers additional volume it also produces less relevant ads for searchers and lower click-through rates.
• Paid Search Marketing Campaign Maturation: As search engine campaigns mature, managers expand their keyword lists to find more and more search volume (more eMarketer muscle). They tend to venture outside of keywords within their primary keyword market (‘cheap flights’) and move into keyword phrases that reach their target market but may not elicit a direct response/conversion (’luggage’).This activity, particularly for large advertisers who can afford to do it on a large scale, means less relevant ads for searchers and lower CTRs.

Some other theories require a bit more data which isn’t available. I’d love to know if…

• Paid search ads are becoming more and more commercial. With CPC’s rising, are less and less content focused advertisers being pushed out by commercial/commerce focused advertisers who can attribute a direct ROI?
• Organic results, particularly Google’s move to blend images and video into results (universal search) is affecting paid search CTRs. Could the move to blend video into paid ads change this?

In summary, there are a number of factors at play causing the (potential) deceleration. Two in particular involve the long tail of search and how advertisers capitalize on it. And while this is potentially causing a deceleration in CTR’s it’s not necessarily a bad thing for Google’s bottom line. Which leads me to…

Why You Shouldn’t Get Too Excited About Comscore’s Report

Google has many ‘levers’ they can pull to improve quality and increase revenue. While CTR on sponsored links is certainly looked at, it can easily be manipulated and I highly doubt it’s one of their KPIs.

To illustrate a lever, Google has a minimum bid and CTR threshold for an ad to qualify for the premium position (top left above the organic results). Ads that appear in this premium position receive extremely high CTR’s; well above the norm. Now, if Google was concerned about CTR (to the extent where it should be used to evaluate the health of the business and influence financial analyst buy/hold ratings) they could easily lower the threshold and allow more advertisers in that space.

Why doesn’t Google do this? Because CTR isn’t a primary KPI. Revenue (in addition to user experience metrics that encompass ‘quality’) is and with their continuous market share growth they don’t need to worry about CTR. A simple illustration:

If this was your search engine, would you like period A or period B? If A was January 2007 and B was January 2008 (yes, I accounted for the 85% YOY search query growth) would you be as concerned about Google’s health let alone their susceptibility to the market slowdown? I think not. The sell-off has created nothing but a bargain for savvy buyers.

Thoughts?

UPDATE (2/29): Comscore has released their explanation here. Very much in line with my thoughts. Choice quote…

“We generally do not comment on industry data that we release because we are expected to provide information and not opinions. However, the conclusion that was being drawn about the softening of the online advertising market, while at first glance is supported by a data sound bite like a “drop in paid clicks”, does not hold water once you dig deeper into the more detailed information provided in the paid click data. Left unchallenged, it harms the interests of the overall Internet industry. That is why we took the unusual step of writing this note.

It is important to emphasize that we are not repudiating our own data. Quite the opposite: our data remains unchanged, and, we believe, correct. We are just offering a more thorough analysis to ensure the information is interpreted correctly and that the proper conclusions are being drawn from it.”

Related reading:

• Google Watch (2/29), It’s Google, Not The Economy, Stupid
• Clickz (2/29), ComScore Weighs in on Google Click Volume Debacle Sparked by Its Data
• Barrons (2/29), ComScore: Weak Paid Clicks Reflect Google Policy Shifts
• Techcrunch (2/29), Google CTR Down Due To Click Area Changes
  
• Silicon Alley Insider, Google Disaster: Comscore Reports Awful January. Choice quote, “Yes, Comscore could be wrong, and, yes, it’s only one data point. But hard to imagine how the bulls are going to spin this one.” And the link to Google Bulls Try to Spin Comscore Disaster, Fail doesn’t seem to be working.
• New York Times, A Highflier Loses Altitude as Google’s Clicks Go Flat. A well balanced piece.
• NYT/Reuters, Google Shares Fall 8% on Ad Fears. Choice quotes, “UBS analyst Benjamin Schachter cut his 12-month target on Google from $650 to $590 — a new low among bullish Wall Street analysts”. Followed by, “Schachter maintained his long-term buy rating on Google. The UBS analyst also noted that comScore had recently revised the way it measures visits to Web sites, which made comparisons to previous trends difficult.” Huh?
• Seeking Alpha / Techcrunch, Did The Market Overreact To Google’s Paid Click Decline. The best read of the bunch. The correlation analysis from JPMorgan is particularly interesting.
• Fred Wilson, Thinking About GOOG This Morning. Always a pragmatic approach.
• Hitwise Intelligence, Google: Does Search Data Indicate a Recession? An alternative data perspective.

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