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Spending on search engine marketing (SEM) in North America is expected to hit $26 billion by 2013, as the industry continues to grow and SEM and search engine optimization (SEO) become deeply embedded in marketers’ advertising strategies, according to the 2008 annual survey and forecast from the Search Engine Marketing Professionals Organization (SEMPO).

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The new 2008 report estimates industry spending in 2008 at $13.5 billion, and forecasts spending to reach $14.7 billion in 2009, $16.7 billion in 2010 and $19.8 billion in 2011. These projections have been revised downward from the 2007 report to reflect the current state of the economy.

SEMPO previously predicted the industry would grow from $15.7 billion in 2008 to $18.8 billion in 2009. Despite the downward corrections, the report predicts an upswing in spending as the economy recovers in 2011 and as marketers become more interested in new search-targeting technologies, such as “search retargeting.”

“The State of Search Engine Marketing 2008” study, conducted by Radar Research, also reveals that SEM is currently poaching budget money from other, mostly traditional media, but that this cannibalization appears to be leveling off as new budget dollars get allocated to SEM.

The report provides key details about the search engine marketing industry size, where spending is being directed and key industry trends, as well as a spending analysis for 2008 by tactic and spending forecast for 2008 to 2013.

Key findings are detailed below.

Industry Spend: $13B and Growing

The 2008 report forecasts that North American spending on SEM for 2008 will total more than $13.4 billion.

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  • The bulk of spending (88%, or $11.9 billion) will be spent on paid placement.
  • 91% of advertisers say they engage in organic search engine optimization (SEO), which will account for approximately 11% of overall spending, or over $1.4 billion.

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  • The market for SEM technologies, including leasing, agency solutions and in-house development, will account for 1.1% of overall spending, or $141 million.

Factors that are less predictable that may affect the growth of the SEM industry include the overall effect of the recession and the impact of potential consolidation among the major players Yahoo, Microsoft, Time Warner and Google, SEMPO said.

Google Reigns as Market Leader

The gap between the unquestionably dominant Google and other search engines continues to widen. Today, nearly every engine marketer (98%) is advertising with Google AdWords, while the number of campaigns on Yahoo and MSN search engines are declining:

  • In 2006, more than 4 out of every 5 advertisers (86%) ran campaigns on Yahoo Sponsored Search, but that number dropped to 70% in 2007 and in 2008 fell to 68%.
  • MSN remains in third place, behind Google and Yahoo, with 54% of respondents running campaigns on Live Search by MSN, consistent with 2007.

Branding & Direct Sales Top Objectives

Consistent with previous years’ findings, respondents report their primary objectives for paid SEM spending are increased brand awareness (63%) and direct sales (61%). More than half of respondents (56%) are also trying to generate leads they will close (as opposed to the 14% who are trying to generate leads for sales a dealer or distributor will close), and 44% report they are trying to drive traffic to an ad-supported site.

Despite the emphasis on branding as a top objective, advertisers are using standard web performance metics to gauge success, while just 21% use more sophisticated measurement methods to track or measure branding impact. The overwhelming majority (75%) track increased traffic volume, 73% measure conversion rates, and 70% track click-through rates.

SEMPO notes that for the most part, advertisers are still extremely focused on immediate, demonstrable ROI rather than longer-term metrics such as branding, site stickiness, or correlating search behavior to other advertising programs such as TV advertising.

SEM Poaching Budget from Traditional Media

The study also reveals that SEM efforts are poaching budget from other media, especially offline marketing channels. Though this has been the case for the last two years, it represents a pronounced shift from 2005 when budget was moved from online media such as web development and affiliate marketing.

There is also a shift in terms of what budgets are cannibalized in favor of SEM. More than one-quarter of advertisers report they are shifting budget away from print magazines, and another 21% say budget is being shifted from direct mail. Rounding out the trend toward cannibalizing print, 19% of
advertisers report they are shifting budget from their print newspaper advertising.

SEMPO also predicts that advertisers will be far more cautious about their spending in 2009 than in previous years. In 2007, two-thirds of advertisers said they would increase their spending on paid placement campaigns in 2008. Now, just over half of advertisers plan to increase their spending in 2009. Additionally, almost a third expect to spend the same as last year, a jump from 18% who reported they planned on spending the same in 2007. Yet despite the increased cautiousness, only 14% of advertisers claim they plan on spending less in 2009 than they did in 2008.

Satisfaction with SEM Agencies Up

Though uncertain economic times might logically breed increasing dissatisfaction with agency performance, the study found that this is not the case. More than half of respondents (54%) report they were either “very” or “moderately” happy with their SEM agencies for paid placement campaigns, an increase from 2007 (when? 42% percent were happy with their agencies) and from 2006 (33%).

Behavioral Targeting Most Attractive

Marketers are most attracted to SEM targeting based on behavior, with three-quarters of advertisers willing to bid more for clicks targeted to in-market consumers.

Additionally, search retargeting based on behavior is still in its infancy but interest is growing.

About the survey: SEMPO contracted with Radar Research, Inc and Intellisurvey to conduct an industry-wide survey among advertisers during December 2008 and January 2009. In total 890 respondents completed the survey. North American firms (US and Canada) made up three-quarters of all respondents. Respondents from other countries included Argentina, Australia, China, France, Germany, Hong Kong, India, Israel, Italy, Netherlands, Norway, South Africa, Spain, Sweden. SEMPO notes that stabilizing year-over-year figures indicate that the search engine marketing market is reaching relative maturity.

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