Dissecting the "Obvious"

The Insider points to a Barron's story about the effect on Google of the sub-prime mortgage bubble popping. I feel like I'm beating a dead horse feeding a full horse here, but here are some quotes from the Barron's article--the meat of the article was an interview with a hedge fund manager, who we should not presume to be objective--and my thoughts.

It's hard to argue with his logic.

Oh, pshaw.

For loyal advertisers still open for business, it only makes sense for them to slash their ad budgets as their revenues slide because of industry woes.

That's the old "if you can't defend it, call it obvious" trick. Why does it make sense to slash ad budgets when revenues slide because of industry woes? If the woes were customer woes, perhaps. If the woes were operational woes, perhaps. But "industry" woes? Isn't that when you want to increase ad expenditures and grab market share?

On top of that, the going rates in key-word auctions are plunging because there are fewer eager bidders. Thus, the prices Google fetches for paid search are probably declining, especially as fewer Internet leads turn into actual transactions, the hedge-fund manager says.

Mortgage related keyword prices are not plunging, according to SEM specialists Reprise. Conversion rates on leads are not plunging, according to lead management specialists Kaleidico.

According to the fund manager's back-of-the envelope estimates, it could be costing some major lenders who spend millions on paid-search more than $10,000 for every lead that results in a closed loan -- an expensive marketing program. "The math doesn't work," he insists.

Where the heck did he get those numbers? I talked about this already: average cost to close a loan coming from internet marketing was $1,958 in 2006 (according to Fannie Mae.) The cost for online lead gen is, I estimate, more like half that. So this hedge fund guy is saying that close rates for people who have filled out a form with lots of personal information have been cut by 90% over the course of a few months.

Now, while this may have been true for a week or so in the midst of all the panicky coverage of the sub-prime "meltdown", I refuse to believe this is the new reality. Things change, but they don't change that quickly that fast when it comes to consumer behavior.

If he isn't pulling these numbers out of a hat then he's talking to originators who buy keywords for branding, not for ROI-driven customer acquisition. Those lenders pay indiscrimate prices and don't know how to drive from click to close. They were paying $10,000 for a customer a year ago and are paying close to the same now. Those companies will stop buying keywords and start buying leads, leaving the lead gen to the professionals.

Even if the ad cost per loan application is lower, the end-customer pool is drying up. The customers generated by Web ads are people who won't be able to afford homes under tighter credit and won't be able to refinance after having tossed their house keys back to the banks.

A font of misdirection! The customers generated by web ads often are sub-prime because those are the leads the originators wanted to buy. Purchase leads, the majority of leads generated went begging. So, if mortgage originators decide that if there is no more sub-prime business they're just going to take their call center and go home, then web ads will follow. If, on the other hand, they suck it up and start pitching purchase mortgages again, then web ads are still an excellent business to be in.

There are a lot of moving pieces here, but it pays to start with reality when trying to see what the future holds.