Google Bulls Take Note: Yahoo Comments Suggest Market-Wide Ad Weakness (GOOG, YHOO)

Includes: GOOG, YHOO
by: Henry Blodget

Yes, Yahoo (NASDAQ:YHOO) has Yahoo-specific problems, one of which is competition. Some comments on the conference call, however, provide further evidence that the slowdown in advertising revenue is not just Yahoo-specific.

When asked for the second time about whether the weakness was confined to autos and financial services--and whether the weakness was continuing -- Sue Decker said this:

We did say that we had seen some weakness in September in those two categories. Those sectors were meant as examples. They are having some industry-specific issues in both cases. We have seen a couple of -- several of the various sectors showing some of that, but we think those are specific to those sectors, and we do think those will continue into Q4.

Translation: We are seeing weakness in more than the auto and financial sectors. The weakness is continuing.

The quick response from Google (NASDAQ:GOOG) bulls is that PPC advertising is different, that advertisers view PPC as a "cost of sales" instead of "marketing spend," and, therefore, that a slowdown in general advertising won't affect Google. I continue to believe that this argument is wrong.

If advertising spending slows, it will slow because of weakness in consumer demand (which leads to lower revenue and, therefore, less money to spend on advertising). Although it is true that you have to spend money to make money, advertising is usually one of the first expenses to get cut in a slowdown. PPC advertising may be the last form of advertising to get cut, but it will still get cut.

Why? Because if consumers go from spending $1.00 on financial services to $0.90 on financial services, the ROI for any advertiser trying to attract that spending will drop. As ROIs drop, weaker advertisers will reduce spending, which, in the case of search, will eventually filter into either keyword pricing (fewer advertisers competiting for the same keywords) or fewer paid clicks (fewer consumers seeking financial services). The impact will not necessarily be disastrous, and it will not necessarily be as severe as it is for less-ROI-driven advertising, but there will be an impact.

Thus, I reiterate my prediction: Some of the weakness affecting Yahoo appears to be market-related, and if it is market-related, it will eventually affect Google.

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