Sunday, March 16, 2008

Google Rules the Ad World... For Now

Silicon Valley Insider Henry Blodget produced an interesting evaluation of the 2007 ad revenues for 17 media companies. It demonstrates just how commanding Google has become in the ad business; not just the online ad business but the entire ad business.

According to Henry, online ad revenues increased $4B in 2007 compared to an increase in offline advertising of just $1B (among the major media companies he surveyed). Of note was that $2.7B of the online growth came from Google, which means that Google saw more than twice the ad growth of all of the offline media companies in the evaluation. That's a pretty impressive fact, considering his list of offline companies included Viacom, Time Warner, News Corp, New York Times, Gannett, Time, CBS, and Clear Channel.

These figures certainly confirm the marketing headlines we've seen lately about how dollars continue to shift from traditional media into online media. It is also no surprise to see Google domineering the online space; in fact, if there's a surprise about Google it is that they didn't command an even larger share of the online pie. As of December 2007, Google was receiving 58% of search volume but the ad revenue evaluation shows they are getting just 49% of ad revenue.

Some bloggers are noting that Google may continue it's amazing growth with the launch of the iPhone killer, the free phone operating system called Android. Personally, I'm not so convinced. For Google to continue to justify its $428 share price and 33 P/E ratio, it's going to need to find new ways to monetize search volume and site traffic.

I know better than to count Google out, but I do see some potential problems. First of all, there was a recent report that clicks on ads on Google were no longer growing, which may be due to any combination of reasons including Google's efforts to improve ad quality, the economy, or folks ignoring those ads and concentrating on organic search results.

Secondly, a large chunk of Google's revenue comes from their ad network, Adsense, which includes some high-quality sites but also seems to be increasingly filled with spam sites. This partnership with spammers could really bite Google in the ass if they don't act quickly. Advertisers won't pay to have their brands associated with spam, consumers will learn to ignore Google ads if they're associated with poor quality sites, and with concern growing among PPC (Pay Per Click) advertisers about click fraud, more attention will be paid in 2008 to the validity and quality of click traffic from Google's AdSense contextual program.

Lastly, while it's dangerous to doubt the geniuses at Google, they're claiming much of their revenue growth this year will come from monetizing YouTube. There's no doubt YouTube is a traffic monster, but there are legitimate questions if Web surfers will accept Google's plan to run ads in the corners of videos. This may work, or YouTube may find the famously fickle Internet audience turning to other video sites with less (or less obvious) advertising.

I'm not predicting doom and gloom for Google, but with so much money flowing out of TV and print advertising and into online advertising, advertisers are going to be demanding ever more original ways to grab attention, convey emotion, and communicate important brand attributes. Text ads such as those offered by Google have been the engine of online revenue growth for years, but with the bids on these ads topping out, money will be shifting to other forms of online advertising. Perhaps this money will go to YouTube or other Google ad vehicles, or perhaps the cash will go elsewhere.

What do you think? Will Google continue to grow and dominate the online ad business, or will social networks, virtual worlds, or some as-yet-unknown Internet trend unseat Google in the next few years?

No comments: