March 27, 2008 1:32 PM PDT

Why are we clicking less on Google search ads?

Posted by Elinor Mills

The latest paid-click data for search engines shows that Americans are clicking on paid search ads less than we did last year--not an encouraging trend for the state of online advertising.

For Google alone, which represents about 60 percent of the U.S. search market and is a bellwether for Internet companies, this deceleration in paid-click growth has been going on since at least October. Year-over-year monthly growth rates in paid clicks have fallen from 37 percent in October to 27 percent in November, 12 percent in December, 0 percent in January, and now 3 percent in February, according to ComScore figures published by Silicon Alley Insider. (ComScore does not disclose the paid-click data to the public, only to Wall Street analysts.)

Google representatives declined to comment on the paid-click data so we don't know exactly what is going on.

But there are several theories as to why paid-click growth is down. ComScore has noted that Google's quality initiatives designed to improve the relevancy of ads played a part.

But analysts say that can't be all that's going on, and at least one expert says the paid-click trend is backed up by other sources.

Clay Moran of Stanford Group says his informal survey of search engine marketing firms shows that about one-quarter of them are worried that a general recession could impact online ad spending.

"Typically in mid-December we get nearly almost positive feedback" from search engine marketers, he says. "But over the past few months there has been a more mixed response in our channel checks. They are concerned about an economic slowdown affecting Internet advertising."

That information, coupled with the paid-click data from ComScore, has prompted Stanford Group to cut its forecasts for Google several times. In January, before Google's fourth-quarter results missed Wall Street estimates, Stanford was forecasting earnings growth of 34 percent this year and had a price target of $735 per share. Now, the earnings are forecast to grow only 25 percent this year and the price target is $500.

"Internet search growth has slowed down materially, possibly dramatically, due in part to changes Google made to the quality of their ads, but also due to the overall macro-economic environment," Moran says.

While Google's core business is slowing, its new revenue initiatives, including display, mobile, and YouTube advertising, haven't ramped up, he said. "These are the areas we're looking at to see if Google will regain some of its momentum."

We already know that financial-services companies, the biggest buyers of paid-search and online ads, have cut back their online ad spending as a result of the housing crunch.

If we connect the dots the picture gets clearer. Just like in past recessions, people are tightening their belts and trying to spend less, which means those ads on Google are less enticing and there are likely fewer ads as retailers themselves pull back on spending.

Now the questions are how far the growth rate will dip and how long the contraction will last. All the ComScore data in the world can't help analysts predict that.