Google and MSN released their quarterly earnings reports last week, the results of which fell short of expectations and disappointed many investors.  Although Google’s revenues, totaling $3.8 billion, showed growth over the previous quarter, its expenses were greater than expected and its earned interest was lower than expected.  After the release, Google’s stock price per share fell by about 7%, according to the NYT.

Eric Schmidt offered the statement, ‘We don’t believe we are inoculated from global economics, but we do believe if there is a worsening, we do better than anyone else in the ad industry.” 

However, there has been some scrutiny from investors and analysts pointing to the fact that for the first time Google acknowledged general economic hardships as a challenge.  Concerned investors also point to the Google included its chief economist, Hal Varian, on its earnings conference call, a rare occurrence. 

But what’s more interesting are some points Varian raised on that call.  He confirmed that total search volume on terms in the financial, real estate, and luxury goods industries decreased.  Yet, he noted that the costs per click in these categories were increasing; presumably, faced with lower industry-wide sales potential these industries are becoming more competitive in PPC.  This would seem to imply that spending by these industries in other traditional advertising media (TV, print ads, and classifieds) should be declining pretty significantly if more of their budgets are going towards search.

Varian also noted that ads for home consumer goods like appliances have remained strong, because in hard times people are increasingly turning to e-commerce sites for discounted prices.

One interesting piece of news from Microsoft attempting to explain its own lower-than expected profit increases was the fact that its largest weakness this quarter was its business from adCenter.  Colleen Healy, a Microsoft investor relations rep, blamed the decrease in revenue from advertising partly on general tightening of advertising budgets.  But this is not exactly in line with Google’s reports of increasing AdWords CPCs among suffering industries, so it follows that another factor in Microsoft’s adCenter losses is Google’s advertising growth.

Indeed, Hitwise recently announced that Google’s share of total search traffic has increased while Yahoo’s and MSN’s have fallen.  So despite Google’s lower-than-expected earnings this quarter, it will continue to perform better in advertising than its competitors in the space.  And although search is not impervious to the changes in the economic environment, it is still one of the best bets for marketers and will likely continue to see modest growth for some time still.

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