Search engine marketing is heading for the commercial big time with analysts predicting that the sector will generate €1.4bn of spending in Europe in 2005, a 65 per cent year-on-year increase.

The longer term prospects for commercial search marketing, which includes paid listings, contextual search, site optimisation and paid inclusions, are even brighter, according to Forrester Research.

By 2010, European marketers will spend almost €3bn, up from €856m in 2004, on search marketing, the analyst firm predicts.

Up to now, mainly large companies have implemented search marketing, but small to medium sized enterprises are now also set to include search marketing as part of their marketing mix.

Hellen Omwando, consumer markets analyst at Forrester, said: "Growing numbers of online shoppers, online advertising budgets, and pay-for-performance search marketing models will attract both large and small firms.

"But while search spending will more than triple, its share in online advertising will decline by 2007, as consumer mistrust of paid listings takes effect, rich media ads gain prominence, and prices of keywords rise."

Forrester also noteds that the maturity of search marketing in Europe varies markedly by country.

In the UK, the largest online advertising market in Europe, search marketing is expected to grow to over €1bn in 2010, up from €763m at the end of 2005. Marketers in travel, finance, auto and retail are expected to account for the lion's share of the spend.

France, with a predicted 19 per cent of search marketing spend in Europe by the end of 2005 and 31 per cent by 2010, is described by Forrester as "the most surprising growth market as it has historically been a laggard in anything digital".

According to the research, Germany was Europe's second largest search marketing spender in 2004 at €165m. However, spending is expected to slow down and will reach €399m in 2010.

By the end of 2005, Forrester expects The Netherlands to spend 40 per cent of online advertising on search marketing.

While search marketing's share in online advertising will increase for another two years, Forrester believes it will start decreasing in 2007.

This is attributed to growth on a larger basis becoming harder to achieve as the share of search spending declines due to, for example, growing consumer backlash against paid listings.

Growth of rich media ads, enabled by increased residential broadband access (67 per cent by 2010), is predicted to pull ad spending away from other forms of offline and online advertising, including search marketing as we know it today.

"While it is unlikely that prices in Europe will reach the same levels as in the US, where the same keyword might command five times the price than in Europe, increases will be significant enough to make it difficult for some marketers to justify the ROI of high prices; they will not be able to compete for popular keywords," said Omwando.

The Forrester report predicts that online marketing will move beyond commercial search marketing to a blend of display ads and sponsored keyword listings, as currently practiced by NYTimes.com.

"Search engines will respond with search types and business models that combine the best of display ads and search, for example personalised search marketing linked to email conversations and content page viewing histories, comparison search engines and vertical search, and video-based search for branding purposes," the study stated.

"The result is hyper-partnering between search engines, media sites and retail sites to create networks of hybrid search marketing models."