Friday, March 04, 2005

Is there anybody out there?

Piper Jaffray equity analyst's weekly internet stock news email 'The Silk Road' (named after the ancient trade route that Marco Polo took advantage of) casts a skeptical eye on the market for search terms and search-related services.

The Search Measurement Trap.

We note that it is not too difficult to be misled by search pricing if one only measures a sample of keywords, no matter how big the sample is. With 12-15 million keywords now in use and expanding, there is really no statistically relevant metric that can show the actual pricing. The best approach is to contact advertisers, who are telling us pricing remains very strong. This was in the very same pitfall that many observers fell into last year, when there was concern on pricing slowdown. We also note that measuring pricing itself, even if it was possible to do it by sampling, is becoming nearly irrelevant: the important metric is revenue per search, not pricing. The main factor driving search revenue growth is in fact not pricing but increased advertiser spending (and new advertisers) and increased search volume. Search volume is in fact the most important factor to watch and we see no slowdown in that. In short, we see significantly increasing adoption of search, combined with continued price advantage of search and the increased search volume. These factors, we believe, will produce strong results in Q1.