Online Ads Are Google’s Strength
The thing that made Google Inc. famous isn’t what’s making it rich.
Google became a household name by delivering Internet search results, and many observers thought it was making a lot of money by licensing that technology to others.
But as it revealed this week in registration papers for its hotly anticipated initial public stock offering, 95% of Google’s nearly $1 billion in sales last year came from advertising.
In many ways, Google is becoming the advertising agency for the Internet. Nearly one-fifth of all online advertising dollars spent last year flowed through the Mountain View, Calif., firm.
Among the biggest beneficiaries of Google’s system for matching ads with search terms are Time Warner Inc.’s America Online and Internet search engine Ask Jeeves Inc. Of the $214 million AOL took in from advertising during the first quarter, 35% came from its partnership with Google. And 69% of Ask Jeeves’ $39 million in first-quarter revenue was brought in by advertisers Google landed.
Google is “leading the fight to bring advertising dollars onto the Web,” said Ask Jeeves Chief Executive Steve Berkowitz.
To put Google’s growth in perspective, the firm brought in more advertising money in the first quarter of this year than DoubleClick Inc., a pure-play Internet advertising agency, brought in during all of 2003.
What’s more, Google’s stated revenue downplays the amount of money the company wrangles from advertisers. Google said its 2003 advertising sales were $917 million. But according to a footnote in its prospectus, the company took in an additional $504 million that it then paid out to partner sites like AOL and Ask Jeeves.
That means Google handled $1.4 billion of online ads, or 19% of the $7.3 billion that the Interactive Advertising Bureau says was spent in the United States for online ads last year.
When Sergey Brin and Larry Page dropped out of a Stanford University doctorate program to start Google in September 1998, they were unsure how the search technology they were developing would make money. The Internet was already crowded with free search engines.
Then along came Overture Services Inc., a Pasadena start-up that pioneered a new model of Internet advertising. Instead of placing traditional banner ads on websites, Overture allowed advertisers to buy placement next to the results of specific Internet searches.
For example, when a Web surfer searched for “bicycles,” advertisers who bid on that keyword would have their ads displayed beside the results. The advertiser with the highest bid would have its ad displayed first. Each time a person clicked on the “sponsored link,” the advertiser would pay Overture.
“It’s a perfect direct-response tool,” said David Hallerman, senior analyst for EMarketer, a New York research firm. “It’s like Yellow Pages on steroids.”
Google looked at the idea and saw its future.
Google has expanded this technology to a broad network of partners. About 15% of its overall revenue comes from placing sponsored search ads on the websites of AOL, Ask Jeeves, EarthLink Inc., Walt Disney Co. and others, according to Google’s filing with the Securities and Exchange Commission. Analysts estimate that Google keeps nearly half of every advertising dollar it generates through this arrangement.
Many of those companies signed up for Google’s service because they didn’t want to lose Web surfers to the most popular search site on the Net, analysts said. Google’s success prompted a patent infringement suit from Overture, now a division of Yahoo Inc., in April 2002. The case is still pending.
Although Google helps other websites make money, some partners may become skittish about relying so heavily on a competitor, analysts said.
After Overture grew to account for a substantial portion of Yahoo’s sales, Yahoo bought it for $1.8 billion. Analysts said some Google partners might be considering acquisitions of smaller sponsored-search providers, such as FindWhat.com Inc. They also could develop their own technology.
“I don’t know how long AOL will stand for Google being such a large part of its revenue,” said Denise Garcia, principal analyst with Gartner Inc.
Google acknowledged that risk in its IPO filing. Yet it said such revenue would constitute an even larger percentage of its overall sales in the future.
AOL spokesman Jim Whitney said the firm preferred using Google’s search engine: “We’ve found that partnering is the model that works best for us.”
Berkowitz of Ask Jeeves acknowledged that relying on Google so heavily made him nervous. But advertisers prefer to place targeted ads on many websites at once by contacting Google, he said, and that convenience will lure them online.
“The real win is to bring more dollars from the offline market to the online market,” he said.
