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2005 Tangle: Google, Yahoo! Brace for Round 2

The online advertising business -- which gave investors no shortage of twists and turns in 2004 -- looks on track for more growth and more surprises in 2005.

Sitting squarely in the middle of the search-engine advertising business and responsible for much of the growth in Internet advertising, Google (GOOG - Get Report) and Yahoo! (YHOO - Get Report) will continue to fight for market share and users' attention.

Microsoft (MSFT - Get Report), with its own investment in search technology, will continue to have people guessing about what impact it will have on the search business, and when.

And advertisers -- who have grown to appreciate the accountability and measurability of an advertising medium that requires them to pay only for people who respond to their ads, rather than the people who have been exposed to them -- are clamoring for more.

All investors have to do is figure out which of the many variables in search -- locally targeted advertising, Google's pace of innovation, and shopping-related search, for example -- will have the biggest effect on the market, and when.

While analysts acknowledge that the explosive growth of search over the past few years can't go on forever, the pace seems far from slowing down, given recent indicators. Earlier this month, the Search Engine Marketing Professional Organization trade group released research concluding that advertisers plan to spend 39% more on overall search marketing in 2005 than they will end up spending in 2004.

In one sign that advertisers aren't shutting their wallets, the SEMPO survey concludes that advertisers have seen a 26% year-over-year rise in the average amount they pay each time a user clicks on their ad -- but say they can spend 33% more per click and still end up with a profitable transaction.

"It's a big market now that will continue to grow significantly," says Ryan Jacob, portfolio manager of the (JAMFX) fund. And that isn't its only significance for online companies, he says: Paid search "really legitimized Internet advertising in the minds of large companies."
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