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Google hoping history repeats itself with display ads

Company dominates search and search advertising markets, but hopes it can learn a new trick by applying its auction-based format for text ad sales to display ads.

With a new display ad exchange developed by its DoubleClick subsidiary, Google is hoping to give its one-trick pony another act.

Google has turned into one of the Internet's largest and most influential companies on the popularity of its search engine and the profitable text ads it sells alongside those search results. This business generates the vast majority of its revenue and profits and gives Google the resources to tackle a variety of other projects from Google Apps to Chrome OS to Google Books.

But like just about anything, that business can only grow so fast. Google will need another profitable, growing business to maintain its spot atop the Internet world, hence the motivation for its $3.1 billion purchase of DoubleClick a year ago and the launch of the DoubleClick Ad Exchange Friday.

The DoubleClick Ad Exchange is sort of like a stock exchange, where buyers and sellers meet to haggle over prices for display ads, such as banner ads or video ads. Companies that sign up to participate in the exchange can search for open spaces in which to place their ads and bid on that space just like Google's text-ad auction system for search keywords. It will also plug into Google's existing infrastructure for AdWords--ads sold on Google search results pages--as well as AdSense--ads hosted by Google but displayed on third-party Web sites, giving those customers another option for their marketing campaigns.

The DoubleClick Ad Exchange is based on the marriage of DoubleClick's ad exchange and Google's text-ad auction process. Screenshot by Tom Krazit/CNET

Internet display advertising--banner ads, video ads, and the like--has a been a bit frustrating for advertisers and publishers to date. Advertisers spent $10.5 billion on search ads last year, up 20 percent from 2007, according to the Interactive Advertising Bureau. They spent $7.6 billion on display ads in 2008, up just 8 percent from the previous year.

Unlike simple text ads, display ads are more complex and time-consuming to develop, and haven't yet produced the same level of returns for advertisers that text ads have garnered. At the same time, the amount of advertising inventory on the Internet has exploded with the growth of news and entertainment on the Web, leaving tons of space for advertisers to flock their wares and the requisite supply and demand issues for publishers.

Yet even in the depths of a horrific advertising recession, few companies are willing to give up on Internet display ads altogether. They offer the chance to present a much more sophisticated brand image than a "Cool shoes found here!" text ad on Google or other search engines, and when not obnoxious can be creative and even entertaining.

Google is hoping that its auction-based format can entice more ad buyers into the display market by matching them more appropriately with publishers looking to offload their ad inventory. "We believe that a better system built on better technology can help grow the display advertising pie and benefit everyone," Google said in a blog post announcing the DoubleClick Ad Exchange.

As has been the case for years, Yahoo is squarely in Google's sights with this launch. Yahoo owns the display ad market at the moment following its purchase of Right Media in 2007, and with its decision to exit the search business plans to rely increasingly on display ads to fund its Web site in the coming years.

"While Right Media is the largest ad exchange and platform solution, we fully expect the display market to be fragmented and for there to be other exchanges. We welcome these exchanges, and look forward to working with them and integrating with them for our partners," Yahoo's Frank Weishaupt, vice president of North American marketplaces, said in a statement on Google's launch.

Google's edge could be the marriage of the AdWords and AdSense networks with the Display Ad Exchange. Under its deal with Microsoft Yahoo retains the right to sell search ads on search result pages powered by Bing, meaning it can also offer advertisers a combination of outlets for their messages. But advertisers looking for a search ad partner tend to think Google first, and that's not going to change unless Bing makes serious market share gains against Google over the coming year.

Some are skeptical that Google is going to make a large dent in this market right away. BernsteinResearch's Jeff Lindsey put out a research note spotted by Paid Content predicting that the exchange doubles DoubleClick's revenue to around $500 million next year, but that's still a pittance compared to Google's $21.8 billion in 2008 annual revenue.

But it's a chance for Google to see if the auction model developed for text ads will work in the more complicated display ad market, and could provide a foundation for future growth.