Is there something wrong with Google's search ads?

Silicon Valley company reports first-quarter earnings Thursday. Wall Street waits to see if disappointing data on search ad clicks translates into disappointing profits.

Jim Kerstetter Staff writer, CNET News
Jim Kerstetter has been writing about the high-tech industry since the 1990s. He has been a senior editor at PC Week and a Silicon Valley correspondent at BusinessWeek. He is now senior executive editor at CNET News. He moved back to Boston because he missed the Red Sox. E-mail Jim.
Jim Kerstetter
3 min read
What will Google's Schmidt have to say about the first quarter? We'll find out Thursday. Dan Farber/CNET News.com

Google's first-quarter earnings report, scheduled for Thursday afternoon, just got a lot more interesting.

Late Tuesday night, those Internet traffic trackers at ComScore put out some lousy news: growth in paid-search clicks in the United States is slowing down.

In fairness to Google, it did better than its competitors, according to a JPMorgan report issued Wednesday morning. (ComScore's paid-click numbers are not typically issued directly to public. We hear about them when Wall Street analysts issue their own reports on the data.)

Paid-search clicks at Google were up 2.7 percent in March, compared to the same month a year ago. That means that growth for the full quarter was just 1.8 percent year over year, a rapid drop from 25 percent year-over-year growth in the fourth quarter. (Henry Blodget at Silicon Alley Insider has a good take on the worst-case scenario for Google's first quarter.)

But competitors did worse. Yahoo paid clicks declined 3.1 percent year over year in March (all percentages are year-over-year comparisons), though for the quarter, paid clicks at Yahoo grew 5.4 percent, also marking a drop-off from the fourth quarter's 9.8 percent growth.

At Microsoft's MSN, the news was flat-out bad. Paid clicks in March dropped 15.1 percent. For the quarter, paid clicks declined 12.3 percent. At AOL, March paid clicks dropped 2.3 percent. For the quarter, paid clicks declined 5.8 percent--a noticeable turnaround from the 29.3 percent drop in the fourth quarter.

In total, the market wasn't healthy. In March, it declined 1.5 percent. For the quarter, it managed 0.3 percent growth, versus a 15.8 percent increase in the fourth quarter.

What remains to be seen, of course, is whether the ComScore results have any correlation to Google's financial results. Similarly disappointing news earlier this year led to a significant drop in Google's share price. In fact, since November, Google shares have dropped about 40 percent since hitting $747.24.

So far, there's certainly no panicking because of the ComScore numbers. Google was up about 2 percent to $456.20 in midday trading Wednesday.

Analysts and Google pundits are split on what the ComScore numbers mean. Google maintains that its deceleration has more to do with its efforts to improve the quality of its ad leads (which should drive up average selling prices) than a broader economic slowdown. But disappointing numbers at all the major search sites may indicate that there's a broader economic explanation than Google's improved quality control. Is the paid-search advertising business as immune to a sour community as Google executives like to believe? We'll find out tomorrow.

Google, of course, is one of those big tech companies people closely follow in order to get a read on the health of the high-tech industry. We watch Google's results more closely than any other Internet company for good reason: because of its dominant search market share, Google is a good indicator of the health of Internet advertising. A slowdown at Google can be a sign of big trouble ahead for smaller companies.

On Tuesday afternoon, Intel executives signaled confidence in the coming year. IBM, another one of those tech bellwethers, reports its first-quarter earnings after the stock market closes this afternoon.

So by the end of this week, we'll have a better sense of whether it's time for tech companies to batten down the hatches.