Paid Search Paying Off at Google, Yahoo!

The Net search companies are growing even faster than their fans had hoped.
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The paid search business is going full blast.

That's the message investors have taken out of this month's quarterly earnings reports from Internet giants





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Google's third-quarter report, issued

after the market closed Thursday, was eagerly anticipated by the company's many fans. Even so, Google's progress in expanding its business opened some already admiring eyes. The stock added to its red-hot run, rising $7 in postclose trading on top of a similar gain during regular hours.

For its third quarter ended Sept. 30, the Mountain View, Calif., search engine company earned $52 million, or 19 cents a share. That's up from the year-ago $20 million, or 8 cents a share. On an adjusted basis, excluding certain one-time costs and stock-based compensation, earnings were $193 million, or 70 cents a share -- comfortably ahead of the 56-cent analyst estimate.

Revenue more than doubled, hitting $806 million, up from the year-ago $394 million. Excluding so-called traffic acquisition costs, or the fees Google pays its Web partners, latest-quarter revenue was $503 million. That was well ahead of the $454 million Thomson First Call analyst consensus estimate. Sequential revenue growth was 19%, where analysts had expected to see mere 7% sequential growth.

"We believe that this market is very large" and is in its infancy, Google co-founder Larry Page said on the company's Thursday conference call.

Giving some sense of the widespread demand for search advertising, Page noted that the company's top 50 advertisers accounted for only 13% of gross revenue.

While declining to speculate on the size of the overall advertising market, CEO Eric Schmidt indicated it could be "much, much larger than where it is today," and said he saw no signs of any short-term limits.

Shares in Google zoomed ever-higher in after-hours trading Thursday. The stock, which closed at $149.38, up $8.89, jumped another $12.18 after earnings were released, pushing it more than $9 past the stock's prior high-water mark.

Though some investors might be inclined to see Google's gains as coming at Yahoo!'s expense, the numbers Yahoo! posted earlier this month seem to contradict that notion.

Yahoo! said net advertising revenue, again exclusive of traffic acquisition costs, rose 10% sequentially from the second quarter, which in turn was up 9.2% from the first quarter. The trend indicated continuing solid growth in online advertising, the closely watched core of Yahoo!'s business.

The company indicated that search advertising and traditional branded advertising suffered seasonal weakness in the latest quarter. But Yahoo! also said it did a higher volume in search than previously anticipated.

Meanwhile, the companies continue to go head-to-head in other ways. On Tuesday, Google announced a multiyear deal with

Time Warner's


AOL Europe, as part of which the America Online unit will run Google's search-engine advertising on its service -- in addition to the nonpaid search engine results that AOL Europe already obtains from Google. Yahoo!'s Overture Services had previously been the paid search supplier for AOL Europe.

While replacing Overture would appear to signal growth at Yahoo's expense, Yahoo! sought to indicate otherwise. "Overture engages in distribution partnerships that make strategic and financial sense for our business," Yahoo! said in a statement Tuesday. "In the case of AOL Europe, these criteria could not be met."

Highlighting competition on another front, Google earlier this month released Google Search, a product that lets Windows users search not only the Internet, but also the material stored on their own computer, including material in


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Word, Excel and PowerPoint files.

With Microsoft working to develop its own search business to make an incursion on Google's turf, it appears that Google is attempting to make inroads on Microsoft's desktop dominance.

Actually, from Google's comments on the call, one is hard-pressed to see too many limits for areas in which Google would like to move. While Schmidt said the company had "no particular intention" of creating a travel-focused search engine, Page hinted that the company would introduce a number of different products that would appeal to advertisers and users -- a trend that would lead in part to more branded advertising.