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As search advertising slows, talk of new horizons

Search players will reap new rewards in areas of technological innovation, such as local search, analysts say.

Has search-related advertising hit a ceiling?

Considering recent comments from the chief financial officers of Google and Yahoo, it's at least at chandelier height along with the search giants' eye-popping growth of recent years. But that's been no secret.

Google CFO George Reyes said Tuesday morning during an investor's conference that the search company's overall growth is slowing, and it's now largely "organic," according to CNBC. The comments sent Google's stock down more than 13 percent before rebounding slightly.

In mid-January, Yahoo CFO Sue Decker said during the company's fourth-quarter conference call that it is not competing with search rivals for growth. Instead, it's looking to "build new revenue opportunities."

What does this mean for the marquee business of Internet advertising that turned Google into a multibillion-dollar company and refilled Yahoo's coffers after the dot-com bust?

Financial analysts say two things. The first is that the search players will continue to operate a healthy business in search advertising and reap new rewards in areas of technological innovation, such as local search. The second is that there's an obvious positive: Both companies are looking to new businesses for new cash gains.

"We believe...Google will aggressively pursue other revenue streams," said Safa Rashtchy, senior research analyst at Piper Jaffray. "We don't believe there is any new or faster slowdown in Google's growth than what we have already modeled."

In a January report, Citigroup estimated revenue from U.S. search-related advertising will grow from $3.85 billion in 2004 to $9 billion by 2007, a 32 percent compounded growth rate. That rate of expansion is far from the triple-digit growth rates of recent years for Google and Yahoo. No wonder the two companies are tempering expectations, some financial analysts say.

According to Rashtchy of Piper Jaffray, Google's comments that growth rates are slowing "should be obvious given the rule of large numbers."

The overall picture for search is positive. Total U.S. Internet advertising revenue will grow from $9.6 billion in 2004 to $18.5 billion in 2007. Search advertising will comprise 48 percent of those revenues in 2007, up from 40 percent in 2004, according to Citigroup. In fact, its expansion is happening at a higher rate than display and rich-media advertising.

Where search advertising still has room to grow is, oddly enough, on the international and local fronts. Yahoo, Google and others are racing to improve opportunities for local ads on cell phones and handheld devices, while expanding rapidly into countries abroad. Yahoo and Google are also looking to brand advertising for growth.

Even Reyes was more positive than not during his comments.

"At the end of the day, growth will slow. Will it be precipitous? I doubt it...I think we have a lot of growth ahead of us; the question is at what rate."