By Seth Weintraub
September 9, 2010

There is no shortage of opinions on the new Google Instant search upgrade that Google unveiled yesterday.

Most analysts think the new service is a net positive that will drive growth in advertising revenues and search market share.  Below I’ve snipped key information from each company’s statements:

Goldman Sachs:

Google estimates that a search typically takes 9 seconds to enter, 0.8 seconds to transmit to and from data centers, and 0.3 seconds to process; a user then spends 15 seconds choosing a link. For consumers, Instant can save the average user 2-5 seconds per search via dynamic search results, enhanced predictive technology, and scroll-to-search functionality that changes results pages as users choose search suggestions. We assume some users may find the results initially overwhelming, but most should rapidly acclimatize. Slow connection speeds or expensive connections, especially on mobile devices, may be a longer-lived challenge.

For Google, we believe that Instant may increase search activity, promote loyalty to Google search and (because of more use of auto-complete) shift traffic away from “tail” and toward “head” terms. Consolidating query volume around more common, and thus higher bid price, paid leads could ultimately boost average price per click, though we see any such benefit as part and parcel of Google’s continual monetization initiatives rather than as a major disruptive shock to revenue.

JP Morgan:

We think this new product will have little to no impact on monetization rates. We see this product as an improvement to user functionality and think that its impact on advertisers will be limited. All of the ads typically associated with the suggested search appear as normal as the query is being entered. No changes have been made to serving or ranking. Although the constant updates to the results page may result in more ads served as a person types a query, this should only impact CTRs not the number of clicks as a user will not likely click on an ad until the appropriate results appear.

Management expects the impact on costs to be in line with their existing search cost growth curve. Engineers adjusted the product to have as minimal an impact on servers and data centers as possible. Management expects the impact to be in line with the existing search cost growth curve.

Bottom line: We are pleased to see a new easy to understand and use search product and expect positive returns in search volume growth. We think this investment is necessary to retain current users, drive further user growth, and could result in greater ad revenue through the generation of increased search volume or receiving better targeted results faster.

William Blair and Company:

We anticipate that Google Instant will drive increased search query volume, as users are able to find what they are looking for more quickly (and perhaps some results that they had not thought to look for). We also note that the results may tend to favor more popular (and more expensive) search terms over search terms in the tail. We therefore believe that innovations like Google Instant will help to bolster the growth rate for Google’s core desktop search business.

Susquehana Financial Group:

We expect targeting and conversion will improve with this roll-out, which should ultimately raise CPCs. As Google Instant changes the search experience, it should get users expected answers more quickly and more accurately; instead of searching 4- 5 times to find the relevant results, the user may narrow the query in the search box in real-time. Thus, ad targeting should also be improved. For example, a search for “running shoes” yields ads for ZBsports, zappos, and KellysRunningWarehouse with basic running shoes available in one click. Google Instant recommended a search for “running shoes with toes,” the intended end-query, and then presents ads for Amazon and with the specific type of running shoes desired (the cool ones with toes for “barefoot” running) available in one click. Thus, click-through rates and conversion rates should improve (also a plus for pricing). However, there may be changes in Search Engine Optimization; while Google stated that rankings will not change, we would expect that users will spend less time browsing natural search results (particularly below the fold and on the second page), and thus “gratuitous” branding is likely to become less frequent. This is likely to mean natural search becomes less valuable; thus advertisers may shift spending from SEO to paid search as Google Instant shifts user behavior. Positive Factor

Google Instant may help raise the competitive bar for Bing and other competitors, which could help maintain or even strengthen its 400+ bps market share lead. Google currently has a 415 bps lead vs. its next competitor in the U.S. (Yahoo!) and a 540 bps lead vs. its competitors worldwide (Yahoo! and Bing). Considering most users use Google as a primary engine with some frequency, Google Instant could alter the way consumers search. Google Instant is likely to make users accustomed to focusing on the query box – where users will now scan to find and narrow their search query – rather than the left column or the page of web results; this could make it more difficult or less satisfying to use alternative convenience-based search engines. Thus this innovation in user experience could improve Google’s market share lead, and at a minimum, will force competitors to play catch-up. Positive Factor

Bank of America Merrill Lynch

Instant on smartphones could be more helpful.  While Google has officially introduced Instant Search, the company is still developing the service for mobile, which could save a lot of typing on cumbersome mobile keyboards. We believe that this could be more valuable than on the PC if the connection speed to the mobile device is uninterrupted and fast. Limited implications for ad revenues Difficult to estimate a revenue impact as search rankings are expected to be unchanged.

However, paid search ads will also update in real time as the query is being typed, and any advertising result displayed for 3 seconds will count as an impression (reported impressions will increase while click through rates will fall). According to Efficient Frontier, Google prefers showing branded over generic keywords so we expect the impression volume for brands to increase, which could result in incremental demand for top-page placement and slightly higher CPC bidding, a net positive for Google.

Stifel Nicolaus

1. Competitors will have a difficult time replicating this technology in a timely manner, potentially leading to gains in query share compared to Yahoo!, Bing, and others. Query volume should increase for Google as the ease of use (finding what you were seeking) has increased dramatically.
2. There will be ramifications to the online advertising ecosystem, though the ranking of paid results is not impacted by this change. We believe it could favor the top results even more, leading to higher CPCs as a greater percentage of total clicks from the top paid results. That said, we plan to monitor this over the coming months. Early to be prognosticating, to be sure.
3. Business models that rely on search engine optimization to drive unpaid clicks from Google will likely lose share unless those publishers are among the top few natural search results. This could be tough for comparison shopping sites and certain lead-generation focused content sites. We will see. Overall, we believe this could be a game changer and could be a meaningful positive catalyst for Google’s revenues. Valuation: Our $560 target price is based on a blended approach.

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