The local search-advertising marketplace may be headed for a shakeout where less-sophisticated affiliates and resellers of search advertising could see their business models collapse and their advertisers flee.

According to a study by Borrell Associates, the search advertising marketplace rose to $11.5 billion last year and is slated for continued growth as other media channels decline. Five times as many people use search engines on a regular basis
than they use the yellow pages to find a local business, and advertisers – especially the small and medium-size businesses
are rushing to search advertising. This is causing businesses to re-evaluate relationships with the Yellow Pages, newspapers, radio and direct mail, according to Borrell.

Over the next five years, their ad spending on these type of advertising media alone are forecast to fall 19%, representing average annual declines of $3.4 billion. But spending on paid search by local advertisers is forecast to rise 39%, representing average annual increases of $242 million.

But SEM has been oversold and mismanaged by resellers, leaving many local businesses, said Borrell. Churn rates are embarrassing for these resellers. Most of them lose half their customers within a year’s time. Some lose as much as 90 percent.

And yet, opportunities abound. Approximately two-fifths of all small businesses still don’t have a Web site, and the forecast growth in search-engine marketing by this sector is expected to be 39% over the next four years.

Google issued a rebuke to haters yesterday and laughed all the way to the bank as it reported better-than-expected financial results for the fist quarter. The company reported an operating income of $1.55 billion and $5.19 billion in revenue for the first quarter.

“We are obviously very pleased,” CEO Eric Schmidt gloated, during yesterday’s conference call with Wall Street analysts. But some insiders continue to say that Google has a rough road ahead in the ad biz sphere.

Schmidt said Google’s targeted ad business was responsible for the growth, saying international sales accounted for most of the company’s revenue – a first for Google.

Investors, who were prepared for a slowdown, rallied. In after-market trading, Google’s shares grew 17% to $525.96. (It’s currently trading at about $540).

In the earnings call, Schmidt also referenced the ad test with Yahoo, saying “It’s nice working with Yahoo and we like them very much.” Aaaw! Yahoo is set to report its earning on Tuesday and they will likely meet Wall Street’s expectations, industry watchers say.

Yahoo has said it expects to post revenue of between $1.28 billion and $1.38 billion. (Revenue for the fourth quarter last year was $1.83 billion). So, it is expecting a downturn, unlike Google, which posted $4.83 billion in its fourth quarter, significantly less than the $5.19 billion it’s touting now. But as Schmidt says, most of that growth was overseas, not domestic.

Industry watchers are still on edge about Google’s ad business – especially since recent comScore reports have indicated that Google’s paid clicks – their bread and butter – have declined precipitously. Google blames the decline on in-house initiatives to reduce bad clicks.

Google also said that the DoubleClick acquisition didn’t impact the company in the first quarter, but was likely to help grow its display advertising business.

The company pulled a rabbit out of its hat this time – it should be interesting to see how/whether the Yahoo-Google ad partnership pans out, and of course, if Microhoo teams up to take it down.

Some see rosy days ahead for Google and the industry overall:

“Google’s continued growth shows how digital advertising continues to prosper and offer efficiencies that attract advertisers and increased spend despite worries about the economy,” said Duncan Perry, director of corporate strategy at Steak Media. “Of particular interest is the growth in mobile searches mentioned by Sergey Brin on the earning calls with Wall Street; this is an area we feel is finally taking off for consumers and will continue to grow throughout 2008 and into 2009. We expect the integration of DoubleClick to lead to new tracking and targeting innovations this quarter and the next; it will also be interesting to see if a free ‘lite’ version of Doubleclick’s platform emerges in a similar vein to Google Analytics.”

Will Google face a backlash from advertisers because of its plummeting click-through rates? Here’s the thing: because of a recent price change, advertisers are now paying more for less.

In March, Google changed its AdWords algorithm, which means that some advertising are paying much higher rates … yet their conversion rates have hit the skids.

“If it were just a rate increase, I would have tolerated it. But my ad rates have doubled and I’ve got no business,” an anonymous tipster told Wired.com.

Google, for its part, says that its drop in paid clicks is … intentional. The Web titan justifies the higher ad rates, saying that serving fewer, but more relevant ads more than makes up for the lower conversion rates.

But advertisers ain’t having it, Wired reports.

“I am seeing large-scale advertisers whose general cost per clicks is trending up … and they’re seeing impressions go down,” Jeremy Chatfield, an analyst at Web marketing firm Merjis, told Wired.com.

Zoiks! According to a new study released by Attributor, Google and DoubleClick control a whopping 69% of the interactive advertising market. Google, which recently acquired online ad service DoubleClick, controlled 34% of the market in January and DoubleClick snagged about 35% of the share.

Yahoo gathered about 12%, Microsoft snatched 10% and AOL plodded along with 5% of the market.

DoubleClick and Google will compliment each other in terms of the types of consumers they hit. DoubleClick has a 48% share of sites with more than 1 million monthly unique users (three times more than second-place Yahoo); Google has a 71% share of sites with less than 100,000 monthly unique users (eight times more than second-place Microsoft).

Attributor gathered its data by analyzing ad-server calls across 68 million domains captured from their January crawling programs. Their findings were added to Compete’s January unique user data.

This week’s news from ESPN and Forbes has created a lot of buzz in the interactive advertising industry about the future of ad networks. On the one hand, we have a sports media giant rejecting ad networks as being detrimental to the integrity of their brand and on the other; we have a leading business publisher announcing the launch of a network of 400 financial blogs.

The question on the tip of many tongues: are ad networks growing or fading? This isn’t the question the industry should be posing. The real question is about the value of different types of networks and whether that value will grow or decline.

I discussed back in January that 2008 will be the year online publishers will leverage the opportunity created by increased audience fragmentation and boutique independent publishing. Target audiences are becoming more elusive and advertisers are looking for new ways to reach them with relevant content in the right context.

Enter premium vertical advertising networks.

The networks ESPN is rejecting, i.e. the remnant, performance ad networks, serve a purpose for many publishers. They monetize unsold inventory where your ad sales team cannot – often because the inventory is comprised mostly of pages like forums, e-mail and non-premium content that advertisers will not pay premium rates to be alongside. Direct response, Google or behavioral targeting can often more effectively monetize these pages. Google is the largest contextual remnant ad network on the planet.

Vertical ad networks created by trusted brands and knowledgeable entrepreneurs efficiently deliver premium inventory from smaller, high-quality sites to advertisers. This helps the advertisers reach their target audience – and they know the quality of the content and placement is high (something a remnant network CANNOT provide). It also lets large publishers increase the audience they can deliver to advertisers in the face of fragmentation (where online users spend 64% of their time online OFF the top 20 sites according to comScore). Finally, this allows quality, smaller publishers to realize significantly higher rates than possible with any remnant ad network.

Companies like Forbes, Martha Stewart, NBC, IDG and more are expanding their reach with quality, exclusive vertical ad networks. Companies like Gay Ad Network, Good Health Advertising, Yardbarker and Gamers Media are creating new media companies based on their knowledge of the advertisers and publishers serving very distinctive audiences.

ESPN’s decision is an interesting one, but they are clear category leaders in their space who may be selling virtually all their inventory at premium rates and who have become experts at monetizing all types of inventory on their site.

Will every major publisher accomplish this? Unlikely – so remnant performance networks have their place leveraging technology to monetize remnant inventory for direct response advertisers. Vertical ad networks are next generation media vehicles bringing brand advertisers to the premium independent publishers that are attracting the audiences they target. Different types of ad networks for different objectives — and solving very different problems.