Google, Yahoo results show more room for ad growth

By Michael Kahn and Eric Auchard

SAN FRANCISCO - The two top Internet search engine companies proved last week there is still plenty of room for advertising growth, though Google's dominance marks a major advantage over Yahoo, according to analysts.

The health of the Internet advertising market shone in the results that Google and Yahoo released and allayed fears the high-flying companies would get stuck in neutral. Shares in both companies rose on the news.

"The results this week show there is room in the market for both a Yahoo and a Google," Denise Garcia, an analyst with WR Hambrecht+Co. in New York said on Friday.

But Garcia said Google is positioned to continue to capture the majority of growth in the Internet search market, which represents the largest share of the Internet advertising market, at 41 per cent.

Yahoo's results met Wall Street expectations on strong demand for online graphical ads and a 15 per cent to 20 per cent rise in traffic to its Web search system, which company executives said showed that it had held rival Google at bay.

And while Google returned to form by once again blowing past analysts' forecasts with a 79 per cent jump in revenue as it took a greater share of the overall search market, analysts said demand is strong enough to support several major players.

Google has grown two to three times faster than the estimated 30 per cent increase estimated by the trade group Internet Advertising Bureau in the overall market in 2005.

The health of the Internet advertising market should spread to smaller Internet advertising stocks, Garcia said in a report.

AQuantive Inc., Digitas Inc., Marchex Inc. and ValueClick Inc. are expected to report their quarterly results this week and into May.

"We expect these companies to experience similar top-line growth as they are fueled by the same industry dynamics," she wrote.

The torrid growth has spurred eBay to consider a partnership with Microsoft or Yahoo, as Google takes direct aim at the Web auction company's business with an online classified service.

The Wall Street Journal reported that eBay, a major buyer of Web search keyword advertising, is talking to Yahoo and Microsoft, as well as Google, about forming an alliance that could create a windfall for the winning partner.

Quoting unnamed sources, the Friday story said eBay has been in talks with all three since last year about a deal whereby eBay could increase advertising spending with a chosen partner, provide that partner with data on eBay customers, and feature advertising from the partner alongside eBay auction listings.

"I see this more as eBay trying to bolster their negotiating position when they have to go back to the table with Google," Jan Klein, a professor of technology management at Stevens Institute of Technology in Hoboken, New Jersey said. Klein is a former telecoms analyst at Morgan Stanley.

"The history of alliances and joint ventures is that they just don't last," he said.

EBay declined to comment on whether it was engaged in talks on a potential advertising pact with either Microsoft, Yahoo or Google.

Spokesman Hani Durzy said that eBay is in constant conversation with all three about aspects of their business, as eBay is major buyer of keyword advertising from the three Web search providers.

Google also declined to comment on the report.

"EBay is a valued partner and we look forward to a long, successful relationship," Google spokesman Steve Langdon said.