Speaking Sensis

Do you remember playing Chinese whispers when you were a little tacker?

A group of kids line up. You whisper a word – let’s say ‘egg’ – to the first one. One by one, each child whispers the word down the line until – miraculously – it comes out the other end…

As ‘football’!

Well, it seems the online advertising industry’s got its own little game of Chinese whispers going at the moment.

The ‘egg’ takes the form of research reports from organisations like the Internet Advertising Bureau and Frost & Sullivan. These reports have confirmed that online advertising’s search and directories segment has now surpassed $800m annual revenue(1).

The ‘football’ refers to the outlandish interpretations of this data being presented by a growing coterie of commentators.

Last week, Paul McIntyre reported in the Sydney Morning Herald that Google may surpass $1bn revenue this year(2) . This was followed up by Julian Lee in Saturday’s SMH , who said(3):

“Yet last year Google received an estimated $800m in revenue from Australian advertisers…”

Recognise that $800m number?

Meanwhile, Crikey took the Chinese whispers to an entirely new level by claiming that(4) :

“…Google’s Australian advertising revenue may have reached $1 billion a year…”

Now, the purpose of this article is not to speculate on Google’s revenue. I’ll leave that to others.

It’s to comment on a common misconception that the $800m odd search and directories revenue is all coming from search engine marketing (SEM). It’s a misconception that’s underpins not only some of the numbers in these articles, but several other observations made about the industry in the past.

So, let’s test that theory.

SEM is an $800m per year business.

Well… not really. You see, the sector to which the $800m is attributed to is called online search and directories. To state the obvious (but increasingly ignored), there’s a chunk of revenue from directories like Yellow Pages® Online in this number. In 2008, Frost & Sullivan (the only researcher to break out search and directories revenue) forecast that the annual revenue from online directories would be approximately $264m out of a total for the sector of $869.7m(5) .

For the record, Frost’s forecasts for the total were a bit on the high side (not surprising given the slowing economy) but they were pretty close to the reality subsequently reported by the IAB.

Okay, so SEM is a $600m per year business

Hmm. Sorry. Not right there either.

The search and directories sector also contains something that Frost calls ‘contextual search’. This is a form of advertising that includes products like Google AdSense. Frost estimated contextual search would be worth approximately $163m in 2008 (6).

The issue here is that while contextual advertising is sold by search engine companies on a cost per click basis (just like SEM), it’s not search engine marketing.

These aren’t ads that people ‘search’. They’re placed on web sites – waiting to jump out at any passing surfer. As such, they’re actually general or display advertising, not search.

And they should be represented that way in industry data. Calling contextual advertising ‘search’ is like saying that peanut butter is actually Vegemite because it comes in a jar and it’s made by Kraft.

These calculations suggest that SEM isn’t an $800m per year business in Australia, as it’s sometimes assumed. In fact, these calculations suggest it’s only a tad over half of that…

SEM is a $440m per year business.

There’s no doubt that SEM is a phenomenal business. It’s grown from nada to nine figures in little more than a decade.

But we need to be mindful of how destructive over-exuberance can be. After all, the entire dot.com boom, and the billions of dollars it ultimately cost investors, was built almost entirely on people getting over-zealous about the industry’s potential.

By all means, get excited about the growth of online advertising. You should.

But, please try to keep things in perspective.

Oh… and let’s try to get the numbers right.

UPDATE

A follow up article today from Julian Lee seems to recognise the fact that not all search and directories is SEM.

(1) PriceWaterhouseCoopers. IAB Online Advertising Expenditure Report, Quarter ended March 2009 and Frost & Sullivan. Australian Search Advertising Market, 2008 – 2012.

(2) Paul McIntyre, Sydney Morning Herald. “Google on target to crack $1bn in revenue”. Thursday 21 May 2009. http://www.smh.com.au/news/technology/biztech/google-on-target-to-crack-1b-in-revenue/2009/05/20/1242498841271.html

(3) Julian Lee, Sydney Morning Herald. “Mystery over local Google’s missing millions”. Saturday 23 May 2009. Page 3

(4) Crikey.com.au, “Google advertising revenue trump’s Australia’s traditional media”, Friday 22 May 2009.

(5) Frost & Sullivan. Australian Search Advertising Market, 2008 – 2012, page 10.

(6) ibid.