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Report: Google's Ad Growth Stalls

Investors were jittery enough over slowing growth in Google's ad business last quarter, but no growth at all?

A recent market analysis from online metrics firm comScore reported that Google saw 532 million domestic paid clicks on ads it placed in January, down 0.3 percent from the same month last year.

Worse still, stagnant year-to-year growth in January came after Google posted 13 percent annual growth in December, and 25 percent growth in the fourth quarter, establishing an alarming trend of slowing growth.

[cob:Related_Articles]Shares of Google fell $43.61 (8.6 percent) in the past two days on the news to close at $464.19 on Tuesday.

Yesterday's close was $100 below the mark where the stock was trading on Jan 31., the day Google announced its below-consensus fourth-quarter earnings, triggering an after-hours sell-off and ushering in speculation that the macroeconomic storm clouds could finally be gathering above the company's Mountain View, Calif. headquarters.

Through a spokesman, Google declined to comment on the report.

In the same year-to-year comparison, comScore found that Yahoo's paid clicks increased 15 percent, while Microsoft's declined 9 percent.

Many Google-watchers understand that comScore's report simply presents one data point based on a limited sample size. J.P. Morgan's Imran Khan found that during the last two quarters, Google's revenue growth has outpaced comScore's estimates of the company's paid clicks, so the latest finding by no means guarantees that revenue will stagnate.

Still, analysts' bullish projections on Google assume that paid-click revenue will continue to grow. Citigroup has a target price for Google of $650, predicated in part on the expectation that year-to-year paid clicks will increase 20 percent in the first quarter.

"If the comScore data is accurate and holds for Q1, it could imply risk to Q1 estimates," Citigroup analyst Mark Mahaney wrote.

According the comScore report, year-to-year searches increased nearly 40 percent in January. Meanwhile, its coverage ratio, or the percentage of Web searches that produce sponsored results, saw a mid-teens decline. Clickthrough rate saw a similar mid-teens decline.

comScore determines total paid clicks by multiplying total searches by the coverage ratio, and multiplying that product by the clickthrough rate.

The declining coverage ratio could be a result of Google's efforts to improve the quality of the leads it generates for advertisers by weeding out less-relevant placements, Citigroup noted.

But since a declining coverage ratio means that proportionally fewer searches yield sponsored results, the clickthrough rate should improve -- not fall.

In their research note, the Citigroup analysts also suggest that "a macroeconomic dampening" could be driving down the number of queries searchers make for commercial products -- the ones that yield sponsored results and drive the coverage ratio.

Analysts at Bear Steans echoed that sentiment. While the comScore report is only one analysis that only considered domestic searches, "it is a concerning data point and somewhat reflects what we have heard from [search engine marketers] -- that they were not seeing a high volume of clicks from consumers possibly dues to the economic slowdown," they wrote.

Google CEO Eric Schmidt dismissed analysts' questions about an economic slowdown on last month's earnings call, referring to talk of a looming recession as "rumors."

The comScore report comes also as Google is tinkering with its advertising programs to improve lead generation and expand into new formats -- efforts likely to become more commonplace as Google seeks to stave off any economic weakness and extend the steep growth trajectory it established during its short history.

Last week, it launched AdSense for video.

This week, Google is scheduled to begin a trial program placing video ads on search results pages.

Additionally, Google is set to today begin testing a new program called Automatic Matching, that will use marketers' surplus ad budgets to bid on keywords that do not appear on their lists.

As Google explained it in a letter to an advertiser selected for the program, if a merchant sells Adidas shoes, "Automatic Matching would automatically crawl your landing page and target your campaigns to queries such as: 'shoes,' 'adidas,' 'athletic,' etc., and less obvious ones such as 'slippers' that our system has determined will benefit you and likely lead to a conversion on your site."

In the letter, which first came to light on Dan Thies's SEO Fast Start blog, Google pledges the program "will try to never exceed your budget." Thies criticized the program as a crass attempt by Google to soak advertisers for every bit of their budgets.

A Google spokeswoman told InternetNews.com that Automatic Matching is a very limited beta trial, and that merchants selected to participate will have the chance to opt out.