By Yi-Wyn Yen

Turns out Google is mortal. The Internet search giant ended a month’s worth of disappointing earnings from Silicon Valley tech companies by missing Wall Street’s forecasts too.

Google (GOOG) blamed a slowdown in its fourth-quarter growth on its difficulty selling ads on social networking sites. The company delivers online ads for about 20 social networking sites, including MySpace (NWS). “I don’t think we have the killer best way to advertise social networking,” said Sergey Brin during a conference call with analysts Thursday. “Some of the things we were working on in Q4 didn’t pan out. There were some disappointments there.”

Google is the latest tech company struggling to stay ahead of consumer spending and behavior during an economic slowdown. EBay (EBAY), Apple (AAPL), and Yahoo (YHOO) reported projections that underwhelmed Wall Street in the past week. Google does not give sales or profit guidance, but its fourth-quarter numbers gave reason to make tech investors a bit nervous. Google has already wiped out nearly $73 billion off its November market cap, when shares hit a high of $747. By mid-day Friday, the stock was trading at $521.

The Mountain-View, Calif.-based company made $4.43 a share for the fourth quarter, which was a penny short of analysts’ consensus. Google raked in a $1.2 billion profit for the quarter, up 17% from a year ago. Sales, minus the money the company shares with its ad partners, came in at $3.39 billion, up 52 percent from the previous period a year ago. The Street had anticipated $3.45 billion and Google’s shares dropped more than 7 percent in after-hours trading to $516.20.

Not that all of this came as a big surprise. “Our expectations were a bit muted going into the quarter,” said Christa Quarles of Thomas Weisel. “But, this is still a company that grew 52 percent a quarter.”

Along with the discovery that fans of social networking sites have a low propensity to click on ads, Google was challenged by a decline in advertising spending in financial and travel businesses. Chief Financial Officer George Reyes said the slowdown was “seasonal” due to the holiday period last quarter.

Meanwhile, the growth rate of paid clicks for AdSense, which displays ads on sites outside of the Google homepage, has slowed. Paid clicks increased 30 percent compared to a 45 percent growth rate from the same period a year ago. AdSense, which made up 34 percent of total revenue, raked in $1.64 billion.

Google’s performance is a telling sign of how consumers use the Internet, and thereby gives some indication of how the Internet industry is faring. Analysts, naturally, tried to bait Google chief Eric Schmidt into giving some guidance for 2008. Schmidt, who acted like an air traffic controller by directing which of the five other Google execs answered questions on the hour-long call, didn’t budge.

When one analyst asked about potential outlook during a “weaker economy,” Schmidt quipped, “We’re not going to talk about the current quarter. We’re talking about the past quarter. We haven’t seen any negative impacts with rumors of future recessions.”

Real or not, Google has proven that it’s not immune to an economic downturn. While Jonathan Rosenberg, who runs Google’s product management team, painted a cheery picture of bargain-hunting consumers clicking on ads during a recession, some feel that’s not enough.

Google is banking a lot of the extra revenue to come from DoubleClick, the ad serving company it bought for $3.1 billion last year. Google can’t close the deal until the European Commission approves the merger. A ruling is expected by April 2. Said Schmidt, “We’re hopeful that it’ll clear.”

By Michal Lev-Ram

Somewhere in the Googleplex, Sergey Brin, Larry Page and Eric Schmidt are celebrating right about now.

That’s because the Internet search giant Thursday scored its first big win in the mobile business: The minimum $4.6 billion bid has been met in the Federal Communications Commission’s auction of the so-called C block of the 700 MHZ wireless spectrum, and that means that the eventual winner of those airwaves will have to make their new network open to all mobile devices, a provision Google (GOOG) lobbied hard for last year. The FCC should be happy too — so far more than $13 billion in bids for the five blocks of spectrum have come in, exceeding the agency’s goal of taking in $10 billion.

The FCC had previously said that if its reserve price wasn’t met it would begin a new auction without Google’s open access requirement. The bidding race had stalled earlier this week, and until Thursday it wasn’t clear whether Google would get its way.  But Thursday morning, in the auction’s 17th round, a $4.7 billion bid rolled in.

What we still don’t know — and might not know for a while — is who will end up winning the C block, as the FCC is not identifying the bidders until the auction of the separate blocks of spectrum is completed. Google has said it would make a play for the C block airwaves, which are currently used for analog TV, but the company may have participated in the auction just to make sure the reserve price would be met. According to analysts, it’s likely AT&T (T) and Verizon Wireless (VZ) have their eyes on the C block as well, and at least one of them has been bidding, either against each other or Google.

“We think from this point on, Google can either exit the auction (i.e. stop bidding assuming it’s not the highest bidder currently) to hand it over to another bidder, or Google can  vie to win (but would unlikely be ’stuck’ with the spectrum),” Bear Stearns analyst Robert Peck wrote in a note Thursday.

Why does Google care so much about this slice of spectrum? Because its wireless success depends on widespread use of its services on cell phones, and having a more open network would give it greater freedom to spread its mobile goods. Google currently faces resistance from U.S. carriers, who have traditionally had a tight grip on the type of devices and services allowed on their networks. Google’s new Android platform — a new mobile operating system open to all developers — has yet to prove its viability,  and having a more open, nationwide network in the United States could make it easier for Google — and other companies — to get more of its offerings on more devices.

By Michael V. Copeland

PALM DESERT, Calif. — If you have ever been to Sundance, or any film festival for that matter, you are always looking for the film that is getting “buzz,” that inexplicable chatter that attaches itself to a potential breakout movie. If there is a startup and product with “buzz” at the DEMO confab this year, it is LiveScribe.

LiveScribe is a one year-old company based in Oakland, Calif., founded by Jim Marggraff, a five-time entrepreneur and inventor who brought the children’s educational tools LeapPad and the Fly Pentop computer to the world. He’s raised $23 million in venture capital from VantagePoint Venture Partners and others. Marggraff calls the kind of technology he’s spent years working on paper-based computing, and he’s showing off a pen/computer that takes it to the next, and very useful level.

Dubbed a “smartpen,” Livescribe’s fountain-pen-sized device is essentially a mini-computer with the same processor as many mobile phones, a small OLED screen, flash memory, and an infrared camera all wrapped around an actual ballpoint pen. Once you start writing on special paper, the camera begins to capture and digitize your pen-strokes. It can be text or a graphic. A built-in microphone can also record the sounds associated with the strokes.

So, for example, as I was interviewing Marggraff, I was taking notes with the pen and recording the conversation. The words I wrote were synched to the audio. After uploading the session to a computer by docking the pen in a cradle, I could tap on any word on the page and the associated conversation started spilling out of the computer’s speakers. You might also make a sketch of something, a bird for you birding nuts, hit record, yammer on about what the bird was doing and where you were when you saw it etc. Go back later, tap on that drawing of the bird, and the breathless speech you gave starts replaying. Cool stuff.

The key is the paper, which is covered with microdots, spaced about 0.3 millimeters apart. While you are writing or drawing, the high-speed infrared camera captures and records the path of the tip of the pen as it passes by all these microdots, sort of like two-dimensional GPS. The path is recreated as your handwriting or a drawing. Since each page in an individual notebook has a unique set of dots, the smartpen assigns the content unique addresses and knows that the drawing of a bird is associated with this particular recording or some other data.

The uses for this kind of computing are seemingly vast, and LiveScribe has an open platform to let developers dream up a multitude of applications and offer them from the LiveScribe site. Transcription and translation services are already in the works. The obvious users and initial market Marggraff is targeting are note-taking college students, lawyers, journalists and creative types always jotting something down during meetings or presentations. The only downside is you need to have a supply of that special paper on hand. That would be a deal-killer for me, if Marggraff were planning on charging an exorbitant amount for it, but he says the paper will be sold at the same cost as any other notebook, and you will be able to even print out your own micro-dot sheets for free (with approved printers) very soon. The pens themselves, which go on sale in March — first online at LiveScribe’s site and then at some larger retailers — will sell for $200 for a 2GB version and $150 for a 1GB model.

Marggraff expects to make his money off the hardware and a revenue share with the applications and services that he anticipates will run on top of the LiveScribe platform. “This is a new kind of computing,” he says. “My goal in a decade is to have 1 billion smart pens out there.”

Out in the hall outside the LiveScribe demonstration, I overheard Joseph Hawilo, who runs a pharmaceutical company in Detroit, talking like he was sale No. 1. “I am a bad note-taker, and I think it’s rude to use my laptop during meetings,” Hawilo says. “With this I can jot down key words and record the rest. I definitely am getting one.”

See, that’s buzz baby.

By Josh Quittner

Er, what recession? Online retail giant Amazon beat the Street Wednesday reporting $207 million in net profit for the fourth quarter. That’s a 112 percent increase over the $98 million the company hauled in during last year’s holiday season. Amazon (AMZN) also reported revenue of $5.67 billion beating estimates that were generally in the $5.4 billion range.

The company reported record sales, record operating profits and its fastest annual growth rate since 2000. That news wasn’t altogether surprising. Last month, the company also reported the busiest day ever at Amazon and even bested eBay (EBAY), for the first time, claiming a record number of visits to its site in December. Nor was it surprising that the stock took a pounding after hours: Yet again, Amazon’s gross margins were closer to 6% than the 10% analysts wanted to see.

What is surprising — if you haven’t been paying attention, that is — is that, on a day when the Fed cut prime by another 50 basis points, Amazon is genuinely upbeat about the future. The Grand Plan is working. Indeed, Amazon anticipates 31% to 38% sales growth in the current quarter — the meltdown in the economy notwithstanding.

So what gives?

Amazon is a hit with consumers for the same reason it sometimes disappoints investors. Jeff Bezos famously refuses to manage quarter to quarter. His time horizon is more decade to decade. He wants to build a business that lasts, and the only way you do that is by thrilling your customers. He’s sung the same song since Day One of his long march: “Our focus has always been to be extremely competitive and to give customers the best prices and be very sharp at that,” he told analysts yet again yesterday.

“Focusing on the customer experience” is a mantra Amazonians chant endlessly, to an almost annoying degree. When reporters on Wednesday asked CFO Tom Szkutak questions about the world’s dire economic outlook and how that will affect consumer spending in the months ahead, he characteristically answered: “We’re focused on what’s best for the customer and improving the customer experience.” And: “We’re all about making sure we offer a great value proposition for customers.” And so on and on and on. It was effective: The press conference lasted 15 minutes because it was clear that nothing new would be divulged here.

It’s not that Szkutak was dodging the questions, exactly. The thing is, questions about the future don’t really compute to these guys. Amazon’s long-term game has always been about three things: Selection, price, and convenience. And when Bezos was laying down big bets (over the howls of Wall Street) in the late 1990s, building hugely expensive distribution centers around the country (and then the world) it was to ensure that the most logical, cost-effective logistics system would be in place when the customers finally arrived in number. That’s hell on margins for a while. But it brings in customers. And that — if it works long term — creates what Bezos Wednesday described as a “flywheel effect:” More customers means more sales and more sales means that Amazon gets to enjoy greater pricing power over its suppliers. Lower sales means more customers and the cycle begins anew.

Said Bezos: “Lowering prices is easy. Being able to afford lower prices is what’s difficult. We’ve been working on that for many many years now — and expect to be working on that for our entire corporate existence.” Today’s numbers show that Amazon’s customers, at least, have figured that out.

By Michael V. Copeland

PALM DESERT, Calif. — Video conferencing, along with 3D monitors and flying cars, is one of those things we’ve been promised for years, but have yet to get our mass-market hands on. At the high-end, Polycom (PLCM), Cisco (CSCO) and other specialty manufacturers offer dedicated video conferencing gear that looks great, but is monstrously expensive, often costing tens of thousands of dollars, if not hundreds of thousands, once the dedicated networking and data equipment is bought and installed. At the low-end are free or mostly free services, like Apple’s (AAPL) iChat, Skype (EBAY) Video, and various flavors of video chat riding on top of instant messaging. The problem with these is not the price, it’s the quality. The video is jerky, the audio doesn’t synch, and sessions either don’t connect at all (this happens to me with iChat all the time) or drop out just when you are about to display a new tattoo or a new grandchild.

At the DEMO startup conference on Tuesday, Hackensack, N.J-based Vidyo offered something in the middle. A high quality video-conferencing system that you can install and get running for $7,000. At the core is a $6,000 Vidyo router that you put in your server rack and connect to a broadband Internet connection. The system adapts to the highest quality the gear at each end point can handle, ranging from high-definition cameras to cheap web cams. So you might have HD in a conference room, and VGA from a home office, for example.Each site, or port as the company refers to it, that you connect to the router costs an additional $1,000 a year. So if you have two offices you need one extra port, but since it’s just a software connection you can add as many ports as you need. All that is required is a broadband connection. The $1,000 subscription is really a pricey seat fee. And it will add up if you decide to connect your dozen regional sales offices. The ports are fluid; they can range from one site to another, one home office to another, say, as needed all via a web-based system.

At a minimum of $7,000, this is clearly aimed at taking on higher-end video systems for corporate users. And Vidyo is a great alternative for small and medium-sized businesses that have been hankering for good quality video conferencing but couldn’t afford it. My guess, however, is that the pricing comes down fast. How long will it take for that Vidyo router (or something reverse engineered in Asia) to get to $1,500 bucks? And with no additional service fees for additional ports? Fast.The reason is Vidyo is also competing with free offerings, which while offering poor quality now, are rapidly approaching “good enough.” Once free, or almost-free services hit that point where they are “good enough” for most things, $7,000 looks like a whole lot of money to pay, never mind hundreds of thousands of dollars. Video-conferencing has long been held out as a $1 billion market poised to explode to a multi-billion-dollar market. It won’t happen until high quality video gets cheap. Vidyo is a big step toward busting the market wide-open, it’s still not cheap enough, but it’s getting close.

By Yi-Wyn Yen

Yahoo chief Jerry Yang faced the Wall Street rowdies on the company’s fourth-quarter earnings call Tuesday, and it wasn’t pretty.

The Internet powerhouse reported a 23 percent drop in profit for the fourth quarter from a year ago and offered a weak forecast for 2008. One thousand jobs will be eliminated by mid-February. And the stock tanked 11% during after-hour trading.

Although the company delivered strong revenues of $1.8 billion in the fourth quarter — an 8% rise, none of the analysts offered congratulations to Yang. Instead, eight impatient men grilled the CEO during the hour-long call about Yahoo’s ongoing turnaround strategy.

Yang told the Street that 2008 is the year the Sunnyvale, Calif.-based company would make a key transformation. But shareholders have heard this story before. The same was said about Panama, its long-delayed ad system for search, which launched last year. Now, Yang says, Yahoo (YHOO) will make “profound, fundamental changes” to its graphical display ad network, its core business. Company execs hinted that its market share for online advertising will grow with better display-ad features by the second half of the year.

“You’re talking about increased investment, which means we should not really expect incremental operating margins to improve any time soon,” said Morgan Stanley analyst David Joseph during the call. “So you’re expecting investors to have some patience. What gives you the high conviction that we should be expecting display advertising to show improving growth towards the latter half of the year when there’s a lot of uncertainties?”

Yang shot back that the No. 2 search engine was “not in the business of prognosticating the economy.” Analysts fear that display advertising — big brands’ preferred way to spend online ad dollars — is the most vulnerable during a recession. While Yahoo relies on display advertising for much of its ad revenue, the majority of rival Google’s sales — an expected $16.7 billion for 2007 — is made in paid search. Google (GOOG) will report its fourth quarter earnings Thursday after the closing bell.

“We saw pretty good display growth in the second half of 2007, about 20 percent year over year,” Yang said. “Obviously we think that’s going to continue….We do believe the investments we’re making now in the display network and platform will enable some key things that differentiate ourselves in the market.”

Yahoo execs did their best to put a positive spin on turning the site into the starting point for web users, offering a premium ad network for advertisers, and plans for a “workforce realignment.” Nevertheless, the numbers were discouraging. Yahoo estimates it will make between $5.35 billion to $5.95 billion in sales this year. The Street estimated $5.9 billion.

The company projects it will have less cash on hand this year as AT&T (T) is expected to share less revenue for providing joint Internet service. Yahoo’s operating income last year was $1.93 billion compared to $1.73 billion to $1.98 billion expected this year.

“Their expectations were embarrassingly low,” says Jeffrey Lindsay of Bernstein. “They need to restructure and monetize. For the minute, we don’t have strong confidence that they’re going to achieve that goal…This management team isn’t doing enough to monetize its really valuable assets.”

Yahoo was vague about its plans to lay off 1,000 workers from its 14,300-employee workforce. Yang said the staff reductions were not across the board and that people could apply for open positions. Chief Financial Officer Blake Jorgensen said the company would take a charge of up to $25 million for the first quarter in connection with the job cuts.

By Michael V. Copeland

PALM DESERT, Calif. — I’m down in Palm Desert, a long iron from Palm Springs, for DEMO, the twice-a-year startup beauty pageant (or horror show depending on how your six-minute presentation goes). DEMO, as the name suggests, is all about introducing mind-blowing new technologies and services. Not that every company succeeds in causing this hardened tech audience to elicit a collective “wow,” but already there have been a handful who’ve succeeded.

Online translation service SpeakLike is one. The New York-based service uses an instant messaging approach to offer live translation services while you chat. So imagine you have a colleague or a friend in Madrid. You both are logged into the service, in the same way that you might connect to Skype. Using the SpeakLike window you type a message in English, which is translated instantaneously into Spanish for your friend. His response, written in Spanish, is then translated into English. Each side of the chat views the conversation in the language they are most comfortable with using.

So far so good, but the “wow” factor came when SpeakLike CEO Sanford Cohen introduced a Chinese speaker to the mix. He had a three-way chat going simultaneously in Chinese (characters, not Pinyin), English and Spanish. The key to it working well, is that SpeakLike does its translation via not only machines, the sort of thing that Google Translate and other web-based services do, but adds a layer of real human translators to the mix which smooths out the often clunky and too literal results from machine translators. Think of it as a general session of the United Nations happening in your Web browser for 10 cents a message.

The company is getting ready to launch an invitation-only beta for the service offering translation (during limited hours) in English, Spanish and Chinese. It will add other languages and longer hours as it ramps up, both with venture capital funding and its network of translators. Ultimately Cohen envisions a global network of freelance translators, students or at-home parents with an extra hour here and there, to offer 24/7 translation in a multitude of languages and areas of expertise, say, health care or engineering.

The utility of the service is clear, says Dan Ahn, managing director with Woodside Fund a Silicon Valley venture capital firm. “Say you have an engineering team in India, a manufacturing team in China and your marketing in Europe and the U.S.,” Ahn says. “If everyone needs to discuss a problem, the way it happens now is you find the person with the best English, which is usually not that good, and everyone goes through these long, often inaccurate, conference calls. This gets rid of that, and lets the key people who need to communicate instant message directly via whatever language they speak.”

As SpeakLike gets rolling, the machine translation should also get better and better, says Cohen. “It’s mostly human translation for now,” he says. “But the algorithms will learn, and machine translation will account for much more of the work.”

By Michal Lev-Ram

The government’s high profile spectrum auction, which has attracted the likes of Google (GOOG), Verizon Wireless (VZ) and AT&T (T), is still far from over. Although a bid on one of its most coveted bundle of licenses, the so-called C block, neared $3 billion yesterday, no new bids were placed in the ninth round of bidding, which took place Tuesday morning. The opening bid for round ten on this slice of spectrum has been set at $3.4 billion, while the minimum reserve price set by the FCC is $4.6 billion .

There are five segments of 700 MHz spectrum — now used for analog television — up for grabs but the C block, a nationwide network well suited for broadband services, has attracted the most attention. That’s partly because of an FCC mandate Google lobbied hard for that requires the network must be kept open to any mobile devices. But if the FCC’s minimum asking price for this portion of the spectrum is not met, it’s likely the agency will try to auction it off without the “open access” requirement.

Google said last year it will meet the $4.6 billion reserve price for the C block. AT&T and Verizon were also expected to bid, but as this is a “blind” auction the identity of the participants will be kept secret until the auction is over.

So far, only one bid has come in for another portion of the spectrum, the D block, to be used for a nationwide public safety network. At $472 million, it’s far below the minimum asking price of $1.6 billion. A startup called Frontline Wireless initially had its eyes set on the D block, but had to drop out of the race earlier this month, reportedly due to lack of financing.

The FCC hopes to raise at least $10 billion from the spectrum auction. Looks like that might take a while.

By Yi-Wyn Yen

Yahoo chief Jerry Yang will face a highly anticipated call with Wall Street on Tuesday when the company reports its fourth quarter earnings after the closing bell.

Analysts say they are expecting Yahoo (YHOO) to announce a significant round of layoffs after published reports last week suggested that the Internet giant could cut up to 2,000 jobs of its 14,000 workforce this quarter. While Yahoo will neither confirm or deny the rumors, tech analysts will surely cast a negative outlook on the company if it fails to address cutbacks.

“We won’t know the financial implications until the layoffs get announced,” says Steve Weinstein, an analyst with Pacific Crest Securities. “But if it doesn’t, the expectation will grow exceedingly. This is a stock that was at $40 [two years ago]. You’re seeing investor frustration. Yahoo has to find ways to regain momentum.”

Wall Street is clearly losing patience with Yahoo. In July, Yang promised investors a 100-day review, but little has changed since then. Yahoo continues to fall behind Google (GOOG) in search. For the first 11 months last year, the distant No. 2 search engine lost four percentage points almost entirely to Google, according to comScore. Google owns 70%t of the global search market compared to Yahoo’s 14%.

Yahoo is making progress in graphical display ads, its core business, but it’s not clear if that will be enough to satisfy shareholders. Analysts estimate that big-brand advertising, which shows up on Yahoo’s homepage and on other key services like Yahoo Mail and MyYahoo, its personalized homepage, will increase revenue 16% in the fourth quarter. Yahoo’s integration of online ad network Blue Lithium and major partnership deals with WebMD (WBMD) and social networking site Bebo will help stimulate growth this year, but fears of an economic slowdown could shrink display ad dollars.

“Either management turns the company around or it’s forced into M&A,” UBS analyst Ben Schachter wrote in a note last week.

The longer Yahoo’s stock price under performs, the more the fire sale rumors from private equity vultures and big media sharks like Microsoft (MSFT), News Corp. (NWS), and Comcast (CMCSA) will persist. Yahoo shares have depreciated 22 percent since Yang returned to the top spot nearly six months ago. Last Tuesday the stock hit a 52-week low of $18.72 after reports claimed Yahoo would be making cutbacks.

For now, Yang has to deal with more immediate problem to solve — boosting employee morale while appeasing shareholders. Yahoo in a statement last Tuesday said it would “eliminate some areas of the business that don’t support the company’s priorities” and “reduce emphasis in others.”

“There’s a right way to do layoffs. Do them all at once, and do it quickly,” says Jeffrey Pfeffer, a professor of organizational behavior at the Stanford Graduate School of Business. “The big issue with these damn rumors is that no one knows anything, and everyone feels threatened by layoffs. It’s really disruptive to employees.”

By Paul Sloan

Global markets are in a state of panic. Credit markets are all but closed. And recession fears are everywhere. But at the conference I attended in Hollywood this week, called DomainFest, you’d have little clue that the financial world was melting down.

The domain world - the people that buy and sell names and make money from pay-per-click ads on their websites - is booming. Downturn? Bring it on.

DomainFest is put on by Oversee.net, a private LA-based company that’s been around since 2000 and has been profitable since day one. Its businesses: managing its own domain portfolio of 700,000 names; running domain name auctions; and using technology to match ads from Google (GOOG) and elsewhere to other people’s domains.

Just last week, Oversee snagged a $150 million investment from Oak Hill Capital, the Silicon Valley private equity firm started by Robert M. Bass of Bass brothers fame. It’s the first time Oversee, with 2007 revenues of more than $200 million, has taken any outside money, and the bet shows huge confidence in the oft-misunderstood domain name industry.

Domain names continue to sell for eye-popping prices. No blockbusters sold at the conference’s live auctions, but all told people plunked down $3.2 million for names. Bookmarks.com fetched $300,000. Photograph.com went for $195,000. Yemen.com: $100,000. And Porn.net sold for $400,000, which seems like a bargain considering that last year Porn.com sold for $9.5 million - in cash.

But the excitement about domain name prices isn’t what’s bringing investors like Oak Hill into the business. It’s the ability a good name has to draw high quality traffic for advertisers. Domain names, often talked about as the real estate of the Web, offer an incredible profit opportunity as more of the world - and more ad money -moves online.

The way most of these sites make money is through what’s known as direct navigation. That’s the term for when someone bypasses the search engine box and instead types a query directly into the address bar. (Shameless plug: An overview of this is in a piece I wrote in 2005, called Masters of Their Domains.)

Someone types in, say, Dreamvacations.com, which is run by Oversee.net. A page pops with a number of categories, such as “all inclusive,” “cruise vacation” and “Disney vacation.” A vacation hunter clicking through is met with a number of sponsored results - relevant ads for each topic. Click on one of those and the advertisers pays a fee – part goes to the ad provider (generally Google) and part goes to Oversee and the domain owner.

A top name - one for, say, a product like digital cameras or vacation packages - attracts the sort of shoppers advertisers want: People essentially raising their hand and saying here’s exactly what I want to buy. As a result, argues Lawrence Ng, the 29-year-old co-founder and CEO of Oversee, “The return on investment for advertisers can be as good as or better than it is for search.”

And because such advertising, known as pay-per-click, is so measurable, much of it should remain strong during a downturn. Oak Hill, in fact, did a study that found that direct advertising has held up far better during bad times than less measurable forms of advertising (think big brand building TV ads and magazine spreads). And pay-per-click ads on websites are the Internet equivalent of direct advertising. “All the data to date shows this is really valuable traffic,” says Robert Morse, a partner at Oak Hill Capital Partners.

Does that mean we should all run out and buy domain names and pack ‘em with ads? Not so fast. Kevin Heisler, the executive editor of Search Engine Watch, has studied the domain world and concludes that when you look at the millions of domain names out there trying to make money from pay-per-click ads, the return on investment from straightforward paid search is better. The top tier domain names are the exception, he says, not the rule. And that explains why some domain names easily fetch six and seven figure sums, even in a down market.