Gord Hotchkiss, chair of search marketing association SEMPO, is bullish about the industry’s prospects, saying 2007 will be a “watershed year” for localised advertising and that various other revenue channels will drive growth.

But in an exclusive interview, he also points to challenges facing the sector, including the lack of transparency over click fraud and an upcoming “showdown” between consumers and advertisers over search data.

In a nutshell, what are your thoughts on the growth prospects for paid search?

There’s tremendous growth left, but it depends on how you define paid search. If you define it as any monetisation done by the search engines, we haven’t even scratched the surface.

Local search, mobile search, contextual search and behaviourally targeted search will all drive huge revenues over the next decade and beyond.

Looking further, we’re talking about the complete flipping of the marketing paradigm, with consumer initiated marketing gaining the lion’s share of budgets. Search will be the foundation of that.

Also, we have to accept the fact that search still hasn’t taken hold in the pragmatist main market. The search activity we have seen to date has been totally driven by early adopters. We haven’t seen anything yet!

What do you think has driven keyword prices downwards over the last year – increased recognition of click fraud, or a wider focus on ROI from advertisers?

Click fraud has been a factor, but it’s a symptom of a more pervasive cause. Search is caught at the cusp of the chasm.

Early adopters have become very savvy about how to use search, and bid prices in these categories have reached their natural limits. Search is still trying to make inroads in many verticals, and with many traditional advertisers.

To date, we haven’t seen an influx in new revenue from these sources, but it’s coming. My feeling is that 2006 was the year of maturation of the early adopters, so a flattening and even a decrease of bid prices was predictable.

I think we’re on a plateau before another big up-tick, but the up-tick will also be driven by new revenue channels, in addition to paid search as we know it.

How much further do you see the deflation continuing?

I don’t see a lot more deflation. I think in the most aggressive verticals, bid prices have found their natural level.

The wild card will be the discounting that might happen as the scope of click fraud is determined. There may be a little more downward pressure in the more aggressive verticals, but this will be more than offset by new revenue coming into emerging verticals.

Are the major search engines on top of the click fraud problem?

No. But they’re working hard. There’s a lot more happening internally than we see from the outside.

We have to realise that this is the single biggest point of vulnerability for the engines right now, so they have to be very tight-lipped about it. But we’re far beyond the ‘ignore it and it will go away’ phase.

Engines are very aware of the click fraud issue and are working to eradicate it, while at the same time trying to avoid any hard numbers that would negatively impact their revenue stream or set off a wave of legal challenges.

What else would you like to see them, and the wider industry, doing?

I think this has to be an industry initiative, with a trusted third party as an objective source to determine scope.

Engines cannot be completely transparent about click fraud findings. There are too many factors aligned against this stance. And even if they were, advertisers wouldn’t believe them.

This is not a ‘clean your own house’ issue. So it has to move outside the engines with a third party with enough respect to act as the objective arbitrator.

You recently asked the industry to get involved in a study on click fraud. Why do you think this will help?

For exactly the reasons stated above. Fair Isaac has the reputation and credibility to be the respected third party arbitrator.

The fact that they’re undertaking the study is great news. Fair Isaac has built tremendous credibility in the financial fraud sector.

The immediate benefit of the study, however, is to determine the scope of click fraud. There have been no estimates based on an actual analysis of aggregated on-site activity. The numbers being quoted are just averages from a number of advertisers who were asked which percentage of their paid search activity they believe to be fraudulent. There’s a built in bias in the approach.

The other advantage of the Fair Isaac study is to determine the variability of click fraud from one vertical to the next. It’s not an across the board issue, but there have been no attempts to quantify the scope across various categories.

What’s your take on the click fraud court cases that have been springing up against the major portals?

This is a predictable development. When you have a ‘my word against yours’ situation as is the case with click fraud, legal recourse is usually the next step.

It’s actually regrettable that we didn’t have a trusted arbitrator in place before it got to that. Now that click fraud is in the courts, it substantially increases the obstacles in place for a quick and mutually agreeable settlement.

Following the huge interest from marketers in the AOL search data incident, do you think that’s highlighted a genuine need for more research into users’ search habits, with controls?

There’s always a need for more research into users’ search habits, because they truly are indicative of online behaviour. But using historical click data as the source for this research raises a thorny issue.

If it’s released in aggregate, that’s fine, but when a leak, or more accurately, a flood happens as in the AOL case, that’s a breach of trust and we’re going to become increasingly sensitive to privacy issues.

This click stream data that resides with the engines (and they all have it) is a big testing ground for privacy issues, and the AOL incident just heightened the public’s awareness that these portals know an amazing amount about your online habits.

We tend to forget that there is always someone watching where you go when you’re online.

Do you feel more data should be available to the industry, not just the search engines?

That’s a loaded question. Obviously this data is tremendously valuable to marketers, but as I’ve said, most consumers aren’t aware the depth of data that’s being collected on them.

As the engines and other media properties build platforms that allow for increased targeting, whether behavioural or demographic, there will be a backlash against this previously benign practice of gathering data in return for an app or toolbar.

Up to now, the use of this data has been limited, but everyone is gearing up to provide more access to advertisers.

There’s a showdown coming between advertisers and consumers, and it will revolve around this data. To be honest, I’m not sure which side is right.

What opportunities are out there now for marketers in the area of social search?
Social search is still defining itself and hasn’t become a big enough slice of the search market to gain a lot of attention from marketers as of yet.

Marketers, as a rule, follow critical mass, and social search is still an interesting premise, not a viable marketing opportunity. More to the point, there are a lot of interesting premises to follow, and marketers just don’t have the time to follow them all. The premise has to reach the tipping point, gain critical mass and then marketers tend to follow en masse.

To show you how far away on the horizon social search is, mainstream marketers have yet to discover plain old search. It will be an interesting experiment for the bleeding edge marketers for the next few years, but that will be the extent.

What’s your take on how successful local search will be?

This is an example at the other end of the spectrum from social search. Local search is ready to take off.

There’s a convergence of effort and functionality right now around local that will start to gain critical mass quickly. The biggest stumbling block is the lack of quality online presence with local search advertisers.

Right now, it’s the national chains that are dipping their toes in local search. But we’re close to the tipping point. Local search makes far too much sense for the consumer for it to remain as a marginal marketing strategy for long. Look for 2007 to be a watershed year for local.

What’s your take on the challenges and opportunities of the mobile space for search marketers?

This is another emerging premise that has great potential. Mobile will be the future of connectivity, as access, input, output and processing power all take leaps forward over the next few years.

What Moore’s law did for the desktop through the 90’s, it will do for mobile through the rest of this decade and into the next. It ties into local, but goes far beyond it. For me, this is the most exciting technology on the horizon right now,  and offers the opportunity to bridge the gap between online and offline shopping in an extremely compelling way.

Integrate ubiquitous high-speed access, GPS functionality and more functional input/output and you have a huge opportunity. We could do an entire interview just on the potential of mobile!