The world is heading into a global recession. Will search companies like Google and Yahoo! come out as winners or losers?

Yahoo! announced that it would lay off 10 percent of its workforce this week. Is the search engine industry feeling the recession already?

There might be optimists out there that continue to believe that a global economic downturn can be avoided, but we do not belong to them.

When confidence in the market evaporates and people fear for their jobs, they will cut spending. Weakening sales will push more companies into the abyss, leading to more unemployment, less spending and so on and so forth. In short: There are tough times ahead.

Not all companies suffer during downturns. People still need basic goods like food. Department stores offering cheap clothing may thrive during a recession. The question is: Where are search companies like Google and Yahoo! positioned in this spectrum?

People will probably look to the Net for cheap entertainment

As regards the user base, a recession may lead to more traffic. Unless they get so poor that they have to drop their internet service provider, people may spend more time on the Net searching for news and entertainment. It won’t cost them more anyway.

Cinemas, amusements parks and stores selling DVDs and CDs will suffer much more.

As the business sector lay of employees the Internet traffic generated by companies may go down, but the same people may continue to surf the web elsewhere, so it is hard to guess how much this will affect the search engine companies.

Email and chat traffic will probably not go down, again because there are no added costs for using these services.

Enterprise search will suffer

There is one area where search companies like Exalead and Microsoft’s Fast will notice the downturn: As companies start saving, they are less likely to invest in new enterprise search solutions.

There is one exception from this rule: Some web companies and online stores will probably like to upgrade their site search in order to keep more customers happy. As competitions increases, these are the kind of factors that decides who win and who lose.

Advertising

You may argue that discussing web traffic is not the point, as the real search engine customer is not the web surfer, but the advertiser.

Fair enough, the advertisers are the ones that pay most of the bills of Google, Yahoo!, Ask and Microsoft Live. Still, the amount of web traffic determines the attractiveness of the ad offerings of these companies. In short: the more eyeballs, the more ad spending.

And if you are able to deliver relevant customers to the advertisers — i.e. potential customers looking for exactly the kind of services or goods the advertisers are offering — the chances are that you will be able to keep many of your advertisers.

Google has, for instance, invested millions of dollars into research making text ads more targeted and relevant to searchers. This is exactly the kind of investments that pay of during a crisis.

We would guess that companies short of cash will spend more on online pay per click ads than on huge billboards and TV spots. Pay per click ads are cheaper, and it is easier to control the effects of the expenditure.

The banner ad is the loser

There is one area where these companies may feel the credit crunch more acutely, and that is in banner ads and more dynamic, graphic, Flash advertising, exactly the kind of ads you will find on Yahoo!, AOL and MSN. These are sites that rely more on content delivery than search result pages.

The delivery of graphic ads like these are not as targeted towards the interest of the reader as are text ads accompanying search results or emails. The click through rate and the rate of return is therefore normally lower.

Such ads are often used for the branding effect, but that effect is much harder to measure, making them harder to defend when companies start seeing a lot of red numbers.

That is bad news for Yahoo!, a company that is just as much a content deliverer as a search provider, but good news for Google, a company that still has its main focus on search results.

Bad time for start-ups

The search and Web 2.0 companies that will suffer the most under the oncoming “Internet Winter”, as some has called it, are probably smaller companies and start-ups, companies that are not yet generating a sustainable stream of revenue.

The reason for this is the lack of venture capital. Banks starved of cash will also be more reluctant to help smaller companies stay afloat during a recession.

Mahalo has cut some 10 percent of its staff. Mahalo, who is a kind of human powered search engine, is now outsourcing much of its editorial department to freelancers instead of in-house staff.

In a blog post Jason Calacanis, the CEO of Mahalo, writes:

Although we’ve got a significant amount of cash on hand, and the business is ahead of schedule in terms of traffic (4m uniques a month, double where we thought we would be at this point), we’re fairly certain that the advertising climate for the next two years will be severely depressed. To ignore this obvious fact would be irresponsible.

He writes that market conditions are much worse than he thought they would be.

Another human search tool, Wikia, is getting rid of a third of its staff. Wagging the Long-Tailed Dog: Search Behavior & The Economy