The State of Search Engine Marketing 2005 Survey

The State of Search Engine Marketing 2005 Survey of Advertisers and Agencies Search Engine Marketing Professional Organization (SEMPO) December, 2005 Initial Results for SEMPO Member

Research Project Objectives PROJECT OVERVIEW Radar Research, LLC oversaw the following research initiatives as part of this project: § Understand the size of the industry in order to help promote its growth § Understand where marketer spending is going, among different recipients (search engine media companies, SEM agencies, in-house) and towards what types of SEM programs (paid placement, paid inclusion, organic SEO, SEM technology) § Identify key industry trends § Identify key industry issues SEMPO should address 2

DEFINITIONS: Respondents Were Given the Following Definitions at the Start of the Survey PROJECT OVERVIEW § Search Engine Marketing (SEM): the entire set of techniques and strategies used to direct more visitors from search engines to marketing web sites, including all of the tactics and strategies defined below. § Paid Placement: Text ads targeted to keyword search results on search engines, through programs such as Google Ad. Words and Yahoo Search "Precision Match, " also sometimes referred to as "Paid Placement, " "Pay-per-Click" (PPC) advertising and Cost-per-Click (CPC) advertising. § Contextually Targeted Text Ads: Text ads targeted to the subject of writings on web pages, such as news articles and weblogs, using programs such as Google's "Ad. Sense" and Yahoo Search’s "Content Match" programs. § Paid Inclusion: The practice of paying a fee (fee structures may vary) to search engines and similar types of sites (e. g. , directories, shopping comparison sites) so that a given web site or web pages may be included in the service's directory, although not necessarily in exchange for a particular position in search listings, such as Yahoo Search’s "Site Match" program, formerly known as Inktomi) § Organic Search Engine Optimization: The practice of using a range of techniques, including augmenting HTML code, web page copy editing, site navigation, linking campaigns and more, in order to improve how well a site or page gets listed in search engines for particular search topics. § Search Engine Marketing (SEM) Service Provider: Agencies or individuals who assist companies with the various search engine marketing practices described above. § Search Engine Marketing Technology Provider: Makers of a software application specialized to assist in the execution of search engine marketing programs, with features such as "bid management, " "campaign management, " "portfolio management" and "dynamic optimization. " § Web Analytics: Using a reporting platform for measuring and analyzing the results of any/all of your online marketing campaigns, including search engine marketing. 3

Research Methodology PROJECT OVERVIEW Radar Research oversaw the following research initiatives as part of this project: § Extensive analysis of secondary research, reporting and commentary § Development of SEM forecast model § Detailed online survey completed by 553 search engine advertisers and SEM agencies, conducted via Intelli. Survey, Inc. 4

Key Research Highlights: 2005 § SEM was a $5. 75 billion industry in North America in 2005, and will grow to $11. 1 billion in 2010 § Brand awareness is advertisers' top objective for SEM programs, particularly large firms § Organic SEO is the most popular form of SEM, with 4 out of 5 advertisers using this method, with paid placement a close second at 76% § ROI is in line with inflation: Four out of five advertisers say they could afford to pay a mild increase in the price of paid placement, while ¾ of advertisers and all agencies report moderate price hikes this year. § SEM is poaching budget from other marketing channels for the vast majority of advertisers – especially from affiliate marketing and web site development. § Senior executives consider SEM a high business priority with almost half of advertiser respondents (47%) saying that senior management at their companies were "very involved" in SEM programs, especially among companies with fewer than 500 employees § Most advertisers plan to manage the majority of their SEM spending in-house in 2006. SEM agencies will see a significant decline in business as a result. 5

Key Research Conclusions § Advertisers and agencies are approaching their pricing limits. While most advertisers felt keyword pricing has risen in the past year, four out of five advertisers claimed they could still afford an increase in keyword pricing in 2006. Less than a quarter claimed they were currently at maximum efficiency. Yet even among advertisers who report the capacity to increase their ad expenditure, the vast majority can only absorb increases of less than 30%. § Most advertisers are relying on both paid and organic search strategies. Although most of the SEM budget is allocated to paid search media, strategic SEO is a high priority. To the extent that the search engines can support the legitimate efforts of marketers to get their sites found when relevant to searchers, there is both an opportunity to capture more revenue and better service those business customers. § SEM agencies will have to prove their worth to advertisers. Two-thirds of advertisers report they intend to manage 100% of their SEM initiatives in-house. While this indicates that advertisers are viewing their SEM holistically, it also implies this is a stop-gap measure as the SEM agency marketplace undergoes consolidation and contraction. Agencies must show demonstrable ROI to clients. 6

Who responded to this survey?

Most Respondents Are U. S. Companies Location of Surveyed Companies "What country is your company located in? " § In total 553 respondents completed the survey § North American firms (U. S. and Canada) made up almost three-quarters of all respondents § Respondents from other countries included Argentina, Australia, Belgium, Canada, Costa Rica, France, Germany, Hong Kong, India, Italy, Netherlands, Norway, South Africa, Spain, Sweden 8

Most Advertiser Respondents Have Hands-on SEM Roles § Most advertiser respondents are directly responsible for SEM programs § 12% of advertiser respondents are senior managers with little or no hands-on SEM experience but familiarity with and oversight of the programs Personal Role At Company Regarding Search Engine Marketing Programs "What is your personal role within your company as regards search engine marketing programs? " Advertisers n=161 9

Vast Majority of Advertiser Respondents Influence Budget Decisions on SEM Programs § Over a third of advertiser respondents have ultimate budget authority for SEM programs, especially at agencies § Well more than half significantly influence budget decisions on SEM, even if someone else has final sign-off responsibility Level of Involvement on Budget Decisions "What is your level of involvement on budget decisions as pertains to spending on search engine marketing programs? " Advertisers n=161 10

What is the size of the SEM industry?

2005 U. S. & Canadian SEM Industry Size Estimate, by Tactic 12

SEM growth will be driven by both its global reach and improved local services Maximum adv efficiency Growth of SEM revenue N. American market maturity Global growth Growth of niche and local SEM Inventory Limits Greater emphasis on branding value Second wave of SMB using SEM Time Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, December 2005. Global Results. Copyright © 2005 13

SEM Expenditures to Reach $11. 1 B in 2010 § Growth will be driven by: – Increased emphasis on branding value of search – Second wave of small-to-mid size businesses using search – Growth of niche and local search – Increase in broadband users – Rising cost per click (billions) Search Engine Marketing Projections, North America 2005 -2010 Source: Radar Research Forecast, North America, 12/05 14

Google, Overture Most Popular Search Media Companies Most Popular Paid Placement Search Engine Networks Among Advertisers "Which of the following Paid Placement search engine networks do you run campaigns on? " [Multiple responses applicable] § Google Ad. Words is the most popular search advertising program, used by 95% of respondents § 59% reported using Yahoo’s general "Precision Match" paid placement program § An equal number of respondents (46%)said they used each leader's contextual advertising programs (Google Ad. Sense and Yahoo’s Content Match) § MIVA (formerly Find. What) was the next most-popular search ad program, followed by Ask. Jeeves, Business. com, Looksmart, and Kanoondle Advertisers n=123 15

Advertisers

Brand, Sales, Leads and Traffic Are Top Objects of Paid Placement Programs Among Advertisers § Among advertisers, enhancing brand awareness is the top objective of Paid Placement campaigns (albeit by a narrow margin) § Selling products follows closely as an objective for Paid Placement, especially among smaller firms § Larger firms are more interested in driving leads and traffic via Paid Placement than smaller firms Purpose of Search Engine Marketing Use "What is your company using search engine marketing to accomplish? " [Multiple responses applicable] Advertisers n=161 17

Site Traffic, Conversion Rate, Click-Thru and ROI are Top Performance Metrics for SEM Programs ALL RESPONDENTS > GENERAL § More than 50% of respondents tracked the following success metrics for the SEM campaigns: site traffic, post-click conversion, click-thru rate, ROI, cost-per-click, cost-per-action (e. g. , sale), and total number of conversions § Agencies were more likely to track all metrics by about a margin of 10% in the case of all metrics Metrics Tracked To Gauge the Success of SEM Programs "What metrics do you track / measure / generally pay attention to gauge the success of Search Engine Marketing programs? " Total n=553 18

Senior Executives Appreciate the Value of SEM RESEARCH HIGHLIGHTS § Almost half of all advertiser respondents said that senior management at their companies were "very involved" in SEM programs and considered them "a high priority, " especially among companies with fewer than 500 employees § Another 37% said senior execs were "moderately aware and interested" in SEM programs; almost half of larger firms agreed with this statement Extent of Senior Management’s Interest in SEM Practices "To what extent is your senior management interested in and aware of Search Engine Marketing practices your company engages in? " Advertisers n=168 19

Organic SEO Most Popular of SEM Programs With Advertiser Respondents Engagement in SEM Programs "Do you currently engage in …? " § Eight out of 10 advertiser respondents engage in organic search engine optimization § Three quarters engage in paid placement § Less than half engage in paid inclusion 20

Pricing Trends

Majority of Respondents Shift Budget Away From Other Marketing Programs for Paid SEM Programs § Only 27% of respondents said their funding for paid placement and paid inclusion programs came from newly created budgets, a significant drop from 2004, indicating a growing maturity among advertisers § Most respondents said they were shifting in whole or in part budgets from other marketing programs to fund these new initiatives Source of Budget for Paid Placement and Paid Inclusion Programs "Where is the budget coming from for your Paid Placement and Paid Inclusion programs? " Advertisers n=161 22

Majority of Respondents Shift Budget Away From Other Marketing Programs for Organic SEO RESEARCH HIGHLIGHTS § Only 30% of respondents said their funding for organic search engine optimization programs came from newly created budgets, again dropping from last year § Most respondents said they were shifting in whole or in part budgets from other marketing programs and/or web development budgets to fund these new initiatives Source of Budget for Organic Search Optimization Programs "Where is the budget coming from for your Organic Search Optimization programs? " Advertisers n=161 23

SEM Is Poaching Budget From Established Marketing Program RESEARCH HIGHLIGHTS Shift of Marketing / IT Funds to Search Marketing Programs "From which marketing/IT programs are you shifting budget away and moving it to your search marketing programs? " §The biggest shares of budgets for SEM programs are being shifted away from web development, affiliate marketing, email marketing, yellow pages, TV and direct mail. Advertisers n=28 24

Paid Placement Prices Have Risen Moderately § Advertisers and agencies are experiencing similar trends in overall pricing § Over three-quarters of advertiser respondents felt that prices for their common keywords rose in the past 12 months; 100% of agencies thought prices went up § Nearly a quarter of advertisers do not know whether they are paying more for paid placement in 2005 versus the previous year Changes in Paid Placement Prices Compared to Last Year "Have you observed prices for Paid Placement ads change in the last year for the keywords you routinely bid on? " Advertisers n=123; Agencies n=229 25

Faced With Escalating Keyword Prices, Advertisers Would Increase Program Efficiency § Paid placement advertisers would address price rises by improving the efficiency of their programs before cutting back on spending § Improving site conversion efficiency and improving the overall efficiency of bidding programs would be first steps in maintaining paid placement programs intact § Larger firms more likely to assign branding value to their search programs than smaller firms Reaction to 2 -Year Steady Increase in Paid Placement Costs "How would you likely react to hypothetical scenario where the cost of Paid Placement steadily increased for the next two years? " Advertiser: n=123 26

Most Advertiser Respondents Could Still Tolerate Further Price Rises, at Moderate Levels § Four out of five respondents said they could tolerate further rises in paid placement prices § 21% report they cannot afford to pay more for leads/conversions because they are currently at maximum efficiency. § Even among advertisers who report the capacity to increase ad expenditure, the vast majority can afford 30% or less. § Despite increasing ad spend and year-to-year growth in the value of search engine marketing, we are likely nearing a pricing plateau as advertisers near their maximum efficacy. Ability to Afford Further Price Escalation in Paid Placement Ads "Given the current efficiency you experience with Paid Placement programs, and the quality of the leads that this tactic generates, how much more could you afford to pay for the leads / conversions this channel provides before you could not justify the expense? " 27

Role of agencies

Majority of 2006 Paid Placement Spending Will Be Managed In-House, Not Outsourced to Agencies § Two-third of advertiser respondents said they plan manage all of their 2006 paid placement spending in-house; larger firms were more likely to outsource more of their campaign budgets § Only 13% of advertisers plan to outsource more than half of their paid placement expenditures in 2006. Management of Planned 2005 Paid Placement Spending "How much of your planned spending next year (2006) for Paid Placement programs are you likely to manage with in-house resources versus through an external search engine marketing service provider? " Advertisers n=122 29

Majority of 2006 Organic SEO Spending Will Be Managed In-House, Not Outsourced to Agencies § Like paid placement, nearly two-thirds of advertiser respondents said they plan to manage all of their 2006 organic SEO spending in-house; larger firms were more likely to outsource more of their campaign budgets § Only 11% of advertisers plan to outsource the majority of their organic SEO spending in 2006 Management of Planned 2006 Organic Search Engine Optimization Spending "How much of your planned spending next year (2006) for Organic Search Engine Optimization programs are you likely to manage with in-house resources versus through an external search engine marketing service provider? " Advertisers n=129 30

Majority of 2005 Paid Inclusion Spending Will Be Managed In-House, Not Outsourced to Agencies § Like paid placement and organic SEO, two-thirds of advertisers said they plan to manage all of their 2006 paid inclusion spending in-house; larger firms were more likely to outsource more of their campaign budgets § The consistency in the data suggests an opportunity for agencies, if they can prove their value-add to clients. Agencies must prove that they can provide superior service in contrast to an advertiser bringing SEM in-house. Management of Planned 2006 Paid Inclusion Spending “How much of your planned spending next year (2006) for Paid Inclusion programs are you likely to manage with in-house resources versus through an external search engine marketing service provider? ” Advertisers n=65 31

The click fraud problem

Advertisers and agencies are becoming increasingly concerned about click fraud RESEARCH HIGHLIGHTS § Nearly 2 out of 5 advertisers and nearly half of agencies have tracked fraud; 16% of advertisers say it's serious, nearly triple from 2004 § Yet a quarter do not believe it's a problem § A third of advertisers and a third of agencies are concerned but not tracking fraud Click Fraud vs. Paid Placement "In your experience, how much of a problem is "click fraud" with regard to Paid Placement? " Advertisers n=122; Agencies n=282 33

Over 2 out every 5 advertisers and half of all agencies have been a victim of click fraud RESEARCH HIGHLIGHTS § Over 40% of advertisers claim they’ve been a victim of click fraud and more than half of agencies. § Nearly 1/3 of advertisers do not know if they’ve been a victim of click fraud Prevalence of Click Fraud "Have you been a victim of click fraud? ” Advertisers n=122; Agencies n=282 34

Competitive click fraud is less of a problem than publishers, networks and affiliates attempting to artificially inflate their clicks RESEARCH HIGHLIGHTS § More than three-quarters of advertisers claim their click fraud was due to publishers, networks or affiliates attempting to increase their revenue through non-authentic clicks § However, more than half also claim they have been a victim of competitive click fraud as well Type of Click Fraud "What type of click fraud did you experience? ” Advertisers n=51; Agencies n=145 35

Majority of advertisers and agencies have received an incremental credit for click fraud RESEARCH HIGHLIGHTS § Nearly 80% of advertisers who have been a victim of click fraud have received an incremental credit from an engine § Agencies are far more proactive than advertisers in initiating credit requests from search engines § Engines tend to initiate credit for advertiser Compensation for Click Fraud Initiation for make-good "Have you ever received an incremental credit from a paid search provider for click fraud? ” "Was it based on your request or was the credit engine initiated ? ” Advertisers n=51; Agencies n=145 36

Advertisers report mixed results for their satisfaction level with their agencies ADVERTISERS > PAID PLACEMENT Opinion on SEM Service Providers "How happy have you been in the past year with the services delivered by the primary SEM service provider you engage for Paid Placement programs? " § Just one thirds (33%) of respondents said they were happy ("moderately" or "very") with their SEM agencies for paid placement campaigns, down from 62% last year § A quarter of respondents are unhappy (“moderately” or “very”) § Over 2/5 of advertisers report “mixed results” when asked for their satisfaction level Advertisers n=43 37

The rise of local search

High Interest in Locally Targeted Search ALL RESPONDENTS > GENERAL § Nearly a quarter of respondents (mostly agencies) have tried locally targeted search ads and think "it works great" § Almost a third had tried them and thought "it works okay" § Only 13% had tried them and were "not impressed" § More respondents had tested local search than not, particularly agencies Level of Experience or Interest in Locally Targeted Search Keyword Text Ads "What is your level of experience or interest in the following search marketing tactics: Locally Targeted Search Keyword Text Ads" 39

Not surprisingly, Google and Yahoo! Search dominate local search Most Popular Local Search Engine Networks Among Advertisers “Where have you bought inventory for local search marketing? " [Multiple responses applicable] § Google Ad. Words Local Targeting is the most popular local search advertising program, used by 79% of advertiser respondents, 83% of agencies § 53% of advertisers reported using Yahoo! Search’s Local Match paid placement program § Agencies are more likely to spend with the established search players for local targeting, while advertisers are more willing to spend with yellow page providers for local targeting Advertisers n=34; Agencies n=209 40

About the Research Partners § About the Search Engine Marketing Professional Organization (SEMPO) SEMPO is a non-profit professional association working to increase awareness and promote the value of search engine marketing worldwide. The organization represents the common interests of more than 315 companies and consultants worldwide and provides them with a voice in the marketplace. For more information, or to join the organization, please visit www. SEMPO. org § About Radar Research, LLC Radar Research is a Los Angeles-based research and consulting firm aimed at the nexus of media, technology, culture and commerce. It was founded by two former Jupiter. Research analysts, Marissa Gluck and Aram Sinnreich. Radar conducts research on behalf of both corporate clients and non-profit organizations, such as Double. Click, Sony Pictures Entertainment, Nielsen//Netratings, the Online Publishers Association and The Norman Lear Center. For more information, please visit www. radarresearch. com § About Intelli. Survey, Inc. Intelli. Survey helps organizations, including leading research firms and in-house researchers, make better business decisions by gathering intelligence from their customers, members, and prospects. For more information, please visit www. Intelli. Survey. com 41