Google’s ad gamble raises doubts

Lisa Baertlein

SAN FRANCISCO: Google Inc. made its name from Internet searches but made its fortune from Web advertising, a near-total reliance on a single revenue source that presents risks for prospective investors, analysts said.

As it marches toward an initial public offering, Web search giant Google Inc. appears to be following the lead of an earlier generation of Internet firms that bet the farm on online ads and lost when the dot-com bust saw demand for banner ads evaporate. In 2003, 95 percent of Google's revenue of $961.8 million came from a new type of targeted advertisements.

This time around, Internet advertising is seen as a far more resilient market, but analysts said that depending on it alone it is not without risks for Google.

Google, along with Web search provider Yahoo Inc., makes money providing "paid search" services that deliver ads when users type in certain key words. For example, if a user types "laptop computers" into a Web search engine, they will see ads from such computer sellers as Dell Inc. and Gateway in addition to other non-commercial Web search results.

Advertisers quickly learned that key-word ads were terrific lead generators and easier to track than other kinds of ads. In fact, they have become so important to online marketing that the fortunes of some businesses rise and fall based on how high their ad appears on Google -- a dynamic that is pushing up advertising costs and squeezing out some small sponsors.

"I'm sure I'm not alone in rooting for others to take away Google's market share," said one advertiser who now spends around $110,000 a year with Google and requested anonymity.

U.S. spending on paid search advertising more than doubled to reach $2.5 billion in 2003. That growth is expected to cool this year, when paid search is projected to hit $3.2 billion and account for close to half of all online advertising spending, which is forecast at $8.4 billion, according to Internet research company eMarketer.

Google, which shared $504 million in ad revenues with its various distribution partners in 2003, controlled roughly 20 percent of the paid-search market last year and was effectively one of the biggest ad agencies on the Web.

While overseas growth could further bolster ad revenues at Google, the company cautioned investors in its prospectus that ad spending has historically been tied to economic cycles.

RESURGENT RIVALS, OTHER CHALLENGES

Yahoo, meanwhile, has closed the gap on Google since spending $1 billion last year to buy search provider Inktomi and Overture Services, the pioneer of paid search advertising. Microsoft Corp.'s MSN Internet unit is building its own Web search service and exploring a move into ad services.

If they were to steal key traffic partners like AOL or Ask Jeeves, Google's revenue would suffer. Competition also could prompt Google's partners to demand a bigger share of ad revenues, which would also dampen growth.

Elsewhere, some small advertisers say Google's success is making it harder for them to do business on the Web.

"Trying to get noticed on the Internet is just really frustrating," said Paul Obis, owner of a magazine subscription firm called Owlly.com, who has had difficulty finding an inexpensive and effective way to advertise on Google.

Other political groups, including a nonprofit critical of the cruise industry's waste dumping practices and a California vendor of T-shirts criticizing U.S. President George Bush, have complained that Google has blocked their ads much in the way that television network CBS refused to air a Super Bowl ad from the political advocacy group MoveOn.org.

Various legal threats also loom.

Yahoo, through Overture, has sued Google, charging that its ad technology violates an Overture patent.

Google has lost trademark infringement lawsuits in France but prevailed in Germany. The company is litigating numerous similar cases in the United States, Germany and France.

"As of yet, we don't have crystal-clear resolution on the issue," said Rose Hagan, senior trademark counsel at Google.

© Reuters