Given the day-to-day changes in the world's economic fortunes, it's surprising that analysts are willing to make any forecasts at all, but among those who do, the news isn't sunny.
In the Internet sector, nobody is backing away from predictions that online sales and advertising will fare relatively well. But larger economic factors are inescapable, according to some new reports.
"We are lowering our estimates on Google, Yahoo, Amazon, VistaPrint, eHealth, Blue Nile, and Gmarket to reflect: (1) a weaker macro outlook exacerbated by the bank crisis; (2) the rapid rise in the dollar over the past two months; and (3) the impact of the (0.5 percent) rate cut on interest income," said Cowen analysts Jim Friedland and Kevin Kopelman.
Specifically, the analysts said, search-advertising spending will likely be flat, and the graphical "display" ads that advertisers often use to tout their brand names might shrink.
"We continue to believe that paid search-ad budgets will remain intact, based on our previously published analysis on the historical experience of direct-mail budgets during recessions. However, we think the growth of paid-search budgets--and therefore Google's revenues--will be lower than expected, as smaller overall ad budgets will limit the ability of advertisers to meaningfully increase search spend. We also believe that display advertising could experience negative growth (we are projecting mid-single-digit growth in 2009), which would weigh heavily on Yahoo," the analysts said.
Display ads hit harder
Canaccord Adams analyst Colin Gillis also sounded foreboding.
"While we expect solid September quarter results from companies such as Google, IAC Interactive, and even Yahoo, all eyes are on 2009," Gillis said. "Display-advertising business models are under siege, as revenue visibility is increasingly unpredictable...Display remains the domain of brand advertisers--and with its softer metrics is more readily seen as a source of spend that can be reduced."
The "softer metrics" comment refers to how tightly advertisers can connect the appearance of an ad with performance measurements of user activity such as Web site visits, registration, or product purchase.
Search ads, which are narrowly targeted based on the keywords typed into the search engine, and for which advertisers pay only when a user clicks on the ad, provide better performance measurements; many display ads merely establish or reinforce a brand without directly contributing to a user action.
So which companies are most vulnerable?
Google, Baidu, Local.com, Answers.com, and InterActiveCorp are all heavily focused on performance-based ads, Gillis said. Yahoo's ad business, meanwhile, is about 40 percent performance-based, he said.
Google also has the luxury of being able to squeeze commissions called traffic acquisition costs, or TACs, paid to partners that carry Google-supplied ads. "Google has plenty of room to squeeze TAC rates, given its market share and positioning. It is unlikely network publishers switch to other providers--and this provides the company with an additional lever that can be used to clamp down on expenses, in addition to headcount reductions (or hiring reductions) that would offset weakness," he said.
Shifts in U.S. search share
Yahoo reversed recent trends by retrieving a little U.S. search market share from Google, with its share of queries increasing from 19.6 percent in August to 20 percent in September, according to ComScore statistics supplied by UBS analyst Benjamin Schacter. Google dropped from 63 percent to 62.2 percent, he said.
However, that doesn't mean that Yahoo should feel triumphant. For the month, Google's U.S. search market share was still at its second-best, while Yahoo's share was at its second-worst, Schachter said.