Say It Aint So

The same day the Government is investigating the Kreme in Krispee Kreme, we find out that the keyword pricing tree doesn't grow to the sky. I've been saying this was coming for a while. The biz of selling a commodity with no barriers to entry and cyclical would have to be valued accordingly.

It also is a fact Google's revenues have been slowing down percentage wise for a while now. I guess analysts didn't see that.

From Business2.com Beyond Google and Yahoo!.

NEW YORK - Online search stocks have defied gravity, with many investors apparently thinking that the Internet ad market would boom ad infinitum and that there would never be ugly pricing pressures to curtail growth.

On Thursday, these investors got a wake up call.

The Interactive Advertising Bureau and PricewaterhouseCoopers on Wednesday lowered their online ad sales figures for the third quarter of 2004 and indicated that fourth-quarter sales growth slowed more than expected.

That spooked investors as it raised fears that a slowdown may continue in the first half of 2005. RBC analyst Jordan Rohan downgraded search market leaders Google (GOOG) and Yahoo! (YHOO) on Thursday morning, citing unexpected weakness in paid-search pricing in the first quarter. Google and Yahoo! both sank about 5 percent on the news.

Advertising is cyclical.

"The world hasn't ended. There is seasonality in online advertising. That's not surprising," said John Tinker, an analyst with ThinkEquity Partners.

That brings us to concerns about the first quarter and beyond. David Garrity, an analyst with Caris & Co., concedes that keyword pricing in the first quarter is probably going to soften a bit as some advertisers balk at what they deem high rates.

I think it's a combination of high rates and realization that this isn't the best way to get traffic to your site.

But he argues that this weakness won't last for long. In an age where more and more TV viewers are using TiVo (TIVO) and digital video recorders to zoom past commercials, the Internet has emerged as a more viable way to target consumers. So the online search companies have leverage.

But for how long? Search companies are becoming the target of trademark suits and the "clicks" are in question now.

"Traditional means of advertising aren't working and there's no other game in town. Where the consumer goes the advertiser must follow so this pushback is merely a temporary phenomenon," Garrity said.

No other game in town? I disagree, the most efficient, targeted advertising model is coming that will have search engines pressing their noses against the glass trying to get in.