With the search engine's move last week to sell display advertising across the Web, Google firmly established itself as a major online advertising network and a solicitor to deep-pocketed brand advertisers. That's a meaningful shift as the Mountain View, Calif., company heads for a.
More striking is that Google will broaden its lucrative business model for direct-response ads into the brand-advertising realm, where the money gets even richer. Google's "pay-for-performance" system is built on selling keyword ads to the highest bidder and letting marketers pay only when Web surfers click on tiny text links. That runs in stark contrast to display advertising such as billboardlike banners and tall, vertical "skyscrapers," which publishers sell per thousand, without the promise of a click. (The latter is called cost per impression, or CPM advertising, and is akin to television or print ads.)
Google will broaden its lucrative business model for direct-response ads into the brand-advertising realm.
Under Google's new plan, its publishing partners would get paid for display ads only when users click, which has irked other online ad networks specializing in display ads.
"Google's making a public statement that the only value of a banner is when it's clicked upon, and it flies in the face of all the research done in the last five years that demonstrates the impact a banner can have on brand awareness and purchase intent," said Dave Moore, CEO of 24/7 Real Media, a New York-based company that sells advertising for 800 sites worldwide.
"Why shouldn't I get paid for creating the step to the ultimate purchase?" Moore said.
Ultimately, publishers will make the decision about whether to adopt Google's service, and at least one major Web site has said "No."
Yet Google's move carries tremendous weight because the company has become the poster child for the second coming of the Web. With annual revenue of nearly a billion dollars, it plans to raise $2.7 billion in the largest public offering since the Internet's heyday. Its search marketing programs have helped overall online advertising prosper again and are fueling its fastest-growing sector.
Sales from U.S. search engine marketing will reach $2.1 billion this year, up from $1.6 billion last year, according to Jupiter Research. By 2008, sales are expected to hit $4.3 billion.
Pressure to grow revenue
As Google seeks Wall Street's approval, it will be under increasing pressure to show new revenue streams and growth margins. Already, it has by saying it will hawk them for publishers. Yet many advertising executives say that Google's broadening of its search engine ad network into display advertising is the only logical step in its pursuit of branding budgets, which amount to $60 billion annually for TV alone.
"Google's future revenue growth could depend on attracting major brand advertisers, because that's where the money is," said Nick Nynan, CEO of Dynamic Logic, a brand measurement company.
In offering the image ad service, Google is responding to requests from advertisers, according to Salar Kamangar, the company's product development director. To ensure publishers and advertisers get their money's worth, Google will only run graphical ads that generate enough clicks to compensate for those from two to four tiny text ads, depending on the size of the graphic. Otherwise they'll be replaced. He added that advertisers will naturally bid a higher amount for certain keywords carrying brand value.
For now, Google has no plans to offer CPM pricing.
"Our advertisers are focused on direct response. But brand advertisers are still driving toward more clicks and more sales," Kamangar said. "We don't think this product will preclude other types of branding. This is really an added level of flexibility and value."
Google started out as a search engine and eventually followed the lead of rival Overture Services into auction-style ads that appear as tiny links on the margins of search-results pages. It later syndicated that service to outside search providers, and then, to publishers.
Specifically, Google last year introduced its AdSense service to let publishers display text ads next to content on their sites. Google's technology analyzes a publisher's page to figure out the best set of keywords to match its meaning. Then keyword-related ads are placed on the page in real time.
Going forward, Google will let advertisers attach an image to those campaigns, in four sizes. AdSense publishers can choose to run those ads in lieu of the text ads.
For some, that leap is a no-brainer.
"Search has proved that advertising on the Internet works," said Greg Stuart, CEO of the Interactive Advertising Bureau. "The media doesn't set the objective--the marketer does."
Yet for critics, it fosters concern that Google is growing too fast, without thought for the health of Internet advertising.
Search-related ads have often been equated to Yellow Pages advertising, or direct marketing in which marketers pay $5 in the hopes of making $7 after reaching the right audience in a buying mood. Brand advertising is fundamentally different. Marketers spend billions to reach the masses and leave an ephemeral impression via TV, billboards and print.
Proving ads' viability
Banner ads were introduced in the mid-1990s as the Internet's response to offline advertising. But because the Net is inherently trackable, advertisers slowly watched their rates of response to banners decline to less than 1 percent of every thousand. That called into question the viability of Web ads altogether.
As a result, Internet publishers have invested significantly in research to prove that the Web is viable for branding, too. For example, a cross-media optimization study released by the Interactive Advertising Bureau in May showed that 6 percent of sales of Ford Motor's F-150 pickup truck introduced late 2003 were the direct result of online ads that didn't receive click-throughs. Click-on ads attributed to sales above and beyond the 6 percent.
Web advertising has turned around, with expected revenue this year of $8.4 billion, up 15 percent from last year, according to research firm eMarketer. That figure will also top sales of $8.1 billion in 2000, when the Internet ad market was at its height.
Still, one legacy of the Internet bust is the popularity of accountable advertising like cost-per-click search campaigns. In the fourth quarter of 2003, Web advertisers devoted 41 percent of their budgets to performance deals that delivered a click or a customer, according to the Interactive Advertising Bureau. That's up sharply from 26 percent in the same period of 2002. CPM deals accounted for 40 percent of last year's fourth quarter, down from 46 percent in 2002.
Google is hardly the first company to attempt cost-per-click banners, but it is certainly the largest. ValueClick is a publicly traded ad network that began by selling display ads by this measure, and it has slowly adapted to publisher demands by selling display ads by the impression. Performance display ads can range in price from 10 cents to 70 cents per click. CPM-based ads can range in price from $2 to $50 per thousand, depending on the targeting and visibility of a page, ad executives say.
Impression-based advertising makes up the lion's share of ValueClick's business today, thanks to advertisers' willingness to pay for exposure on "decent properties," said John Ardis, ValueClick's vice president of corporate strategy. "Paying by clicks goes against the branding theme and puts pressure on publishers."
Still, he added, "It's one method of marketing. It's not the be all and end all."
For big publishers like The New York Times on the Web, a Google AdSense partner, the image service is not an option. Jason Krebs, vice president of sales and marketing NYTimes.com, said that he likes the delineation between tiny text ads on the publishers' site and large graphical ads it sells to Fortune 500 customers.
"We don't need our pages displayed a la Nascar, with logos all over the place," Krebs said. NYTimes.com sells ads only on a CPM basis, he added.
Some ad executives speculate that Google has seen click-through rates for text ads fall over time, much like banners have in the past. That's why it has turned to flashier graphics as a way to appease marketers.
But it could run into conflicts of interests with publishing partners. For example, a publisher may have sold a display ad campaign to Ford, allowing its ads to appear exclusively on auto-related pages. But an AdSense publisher may also display General Motors' banners on those pages because of Google's automated keyword-matching system, thereby jeopardizing its relationship with Ford.
Google said that to avoid this situation, publishers can block images or specific Web addresses of advertisers.
Some advertising executives say that there's opportunity for both systems of payment and various ad types.
"Direct marketing will always pay on cost-per-click basis. Brand advertisers will be more comfortable with cost per impression," said Chris Saridakis, COO of Pointroll, a technology company that specializes in rich-media display ads.
"The Overtures and Googles have to figure out how to translate the dollars from display ads into these paid listings, and these brand advertisers aren't going to settle for text-based ads," Saridakis said.