As Goes the Housing Market, So Goes Advertising

Well, okay, that's a stretch, but the link between the prognosis for the housing market and the economy seems strong (as goes housing, so goes the economy), and when the economy stumbles, advertising is often the first expense to get cut.

In 2000, I shudder to recall, advertising-driven companies (on and offline) were the first to crater, and they were followed shortly thereafter by all manner of other industries, like dominoes.  Some will undoubtedly argue that, even if there is a recession, Google and Yahoo will be fine, because search and other forms of pay-per-event advertising have a crystal clear ROI.  These bulls will point to the success of GoTo (Overture/Yahoo Search) during the last recession as evidence: While the rest of the online world as we knew it was ending, GoTo grew like a weed. 

And to some extent, this is true.  Search should weather an economic storm better than other forms of advertising, because even penny-pinched advertisers will know where each search dollar is going.  But weathering the storm is different than being "fine", and some Google and Yahoo customers will cut back (if only because their customers are cutting back).  Also, when GoTo was powering through the last recession, search was a cute little $100 million business.  It is now approaching a $10 billion business, and, as such, is far more exposed to the vicissitudes of the economy at large. 

So as the housing market continues to weaken, do not make the mistake of thinking that this is an isolated micro-event that is irrelevant to the big boys of online advertising.  It isn't, and like the rest of us, Google and Yahoo will probably feel the pain.

Comments

[KING TROLL]

FIRST!!!!!

Damn Henry only 1 article per week now. I just found a new blog from a Marketwatch writer. He updates all the time. Im loyal to your board, but cmon bro need more updates. Quit with the fucking slacking dude!

[Niki Scevak]

Henry, your argument isn't that out of whack. But the problems wont be on the advertiser side, but rather the consumer side.

If the housing market does soften and consumer borrowing backed by their home equity slows, then they will supposedly transact less often, or more precisely, the growth in transactions will slow. That would effect the economics of the conversion event, which cascade down into the cost per click bids.

At some point Google and Yahoo's search revenue will mimic consumer spending. But with e-commerce still in the single digits, online usage still growing and Google being so well diversified overseas in less-developed markets, it's a long shot to say that will be anytime soon.

[KING TROLL]

Just did a google search on this Nikki dork. Interesting website there. I will be adding it to my daily readings. You should thank Henry for a new user bro.

http://brontemedia.com/

[Dennis Chan]

Henry,

Wow, your analysis is excellent. Your blog is a first read for me everyday. I wish you can write more often.

Keep up the good work!

[Victor]

Your title is pretty misleading. Housing was taking off while the economy tanked, and continued to do so. The correlations you're implying are tenuous at best. I do agree that if the housing sector founders then the US economy is in trouble, but I don't see the same collapse in advertising that was precipitated by the last recession. This time advertising is cost of sales. Not punch-the-monkey marketing.
Companies don't cut back on cost-of-sales for obvious reasons.

[billy]

yeah well one sector that would suffer is the home equity loan category. Its only one category, but im sure it is a fairly big one for the goog (granted weakness in one keyword will not really affect their earnings - but im sure there are a number of categories economy dependant.)

Google advertising may be cost of sales for some companies. But not for all companies, and not for some of the big companies buying their trademark name as a keyword.

[fCh]

Nice analogy, whatever its strength may be. Let's go in an adjacent direction for a moment:

If advertising were no longer enough to support Google's growth, could it ever charge for its growing number of services?

[Steve D]

another company complaining about ROI going down - from B&N conference call transcript:

All right, and then, on the keyword Search, so is — because costs continue to go up, ROIs are going down on that, is that becoming a less attractive vehicle for you to acquire customers?

Yeah.

Great, is the cost that is going up on buying those viewers?

I think it’s pretty much across the board. I mean you read that everywhere, that it’s not just in our industry but everywhere this is becoming extremely competitive. And I think obviously there will be a shakeout down the road, because people can’t continue to pay such an effective cost of advertising, in terms of looking at an ROI. But for the moment, it seems to be somewhat irrational. So, again, our policy has always been not to play in that arena. So yes, you’ll see us doing some. But we are always going to be evaluating it, and spending our dollars the best way we can to generate a return.

http://retail.seekingalpha.com/article/10938