Google Counting on Video Ads for Growth

October 26, 2006 0

Surprising Third-Quarter Report Contrasts with Rival Yahoo’s Doldrums
Internet giant Google said its third-quarter profits nearly doubled as revenues rose 70 percent, has increased its lead over its rival Yahoo! in the battle for the booming Internet advertising sector, driving its stocks up in trading with its results.

Its increasing share of the market contrasts starkly with the fate of advertising in the traditional media as several US newspaper groups, including the New York Times, announced a fall in revenue and the NBC television group decided to prioritize Internet over television broadcasts.

That $2.6 billion in advertising revenue that Google raked in during the third quarter is not shabby.

But that is only a start, coming largely from text ads placed alongside search results. Next up: ad revenue Google stands to gain when it absorbs viral-video Web site YouTube, which it has agreed to acquire for $1.65 billion.

Google’s shares gained 7.3 percent to 457.22 dollars (362 euros) after analysts urged people to buy stocks in the Internet giant following its seven-percent gain, when it closed at 456.34 dollars.

Some enthusiastic analysts predicted the shares could even surge to 600 dollars.

Google expects to use its advertising network and its newly purchased asset to ratchet up the sale of video ads and search words for programming, ranging from NBC and Fox broadcast-television shows to amateur video clips.

“There is a lot of revenue here for everyone to share,” Google co-founder and president of technology Sergey Brin said on a teleconference with Wall Street analysts.

Brin said Google would work with advertisers on video spots that can run on Web sites affiliated with the search giant, as automaker Saturn did earlier this month through a deal crafted by ad agency Goodby, Silverstein & Partners. That test campaign combined banner ads in six cities with video clips, the Google Earth satellite map service and a means of determining where computer users are located.

Clicking on the banner ad produced a view of the Earth that took the Web surfer to the nearest dealership, where a Saturn general manager introduces a brief commercial and afterward provides other details about a particular Saturn car.

Google’s favorable financial report contrasted with the downbeat performance of Yahoo, Google’s chief rival in Internet advertising.

Yahoo!, however, announced a 38 percent fall in profits in the same quarter, at 158.5 million dollars (125.7 million euros), and a rise of only 19 percent in revenue to 1.58 billion dollars (1.25 billion euros), and forecast a meager 5 percent growth in search advertising through the end of the year.

Google almost doubled its net profits in the third quarter to $733 million and increased its revenue by 70pc to $2.6 billion, of which 99pc was online advertising.

A year ago, Google and Yahoo! were roughly neck and neck, each claiming 18 percent of US advertising revenues.

Today Google commands 23 percent of these revenues compared to 19 percent for Yahoo!, and is expected to end the year on 25 percent, according to the specialized institute eMarketer. The stakes are high because US advertising revenues are expected to reach “16.7 billion dollars (13.2 billion euros) in 2006 and 29.4 billion dollars (23.3 billion euros) in 2010.”

Google’s search engine, by far the world leader, is also making major gains.

Google promised its robust growth would continue and could conceivably get stronger, thanks in part to a growing roster of blue-chip partners, ranging from hardware makers like Dell Computer to software makers like Adobe Systems and Intuit to major media companies like News Corp., Sony BMG Music Entertainment and Warner Music Group.

Google is “more effective when we partner,” Chief Executive Eric Schmidt said in a conference call to discuss third-quarter financial results.

The group notably won a contract this summer to provide advertising exclusively to the popular Internet exchange site MySpace and signed a similar deal with the online auction giant eBay’s international sites.

Google has also just pulled off the biggest acquisition of its eight year history with the purchase of the YouTube video swap website for 1.65 billion dollars (1.31 billion euros), betting on the advertising opportunities in the expansion of online video services.

Most of Google’s ad revenue comes through ads on Google.com and other sites owned by the search-engine giant — it pulled $1.6 billion in ad revenue on its own sites in the third quarter. But about $1.04 billion in Google’s revenue came from partner Web sites such as AOL, MySpace.com, and Clear Channel Radio, which run advertising on their sites that come to them from Google’s AdSense keyword-spotting technology.

YouTube generates most of its ad revenue by selling traditional banner ads and short video spots. Combining Google with YouTube, however, could make Google a player in brokering advertising for video programming, analysts said.

“What Google has done for the Web with text-based advertising with Web based results, they are now going to try to do in the video world by putting video ads against video content,” said Internet analyst Will Richmond. The Broadband Directions president said the YouTube acquisition — expected to close by the end of the fourth quarter – could allow Google to “turbo-charge” Internet video advertising for Google and TV programmers looking to boost revenue via the Web.

If Google was able to demonstrate that they could monetize for a content provider that video they have been selling in a traditional way because they have this ad engine — that makes Google extremely attractive to both content providers, who can monetize their video better, and also advertisers, because now there is $60 billion a year spent on TV advertising, Richmond said.

Google already dominates the current online-advertising market, which the Interactive Advertising Bureau placed at $4.1 billion in the United States in the second quarter. And if Google could apply its AdSense advertising model and network to YouTube.com, it could dominate a fast-growing new sector of online advertising.

New York-based market research Web site eMarketer projects video advertising to triple to $1.1 billion Internet-wide in 2008, from $385 million this year.

If media buyers shifted just 5% of the money they spend on TV advertising to video advertising sold by Google, YouTube and other Google affiliates, Google stands to gain an additional $3 billion in annual ad revenue.

The group is also diversifying its products, with specialized search tools for finance, newspaper archives, online word processing and further developments to its email service, including advertising linked to the text in emails.

Its model remains one of providing free services to web surfers funded by advertising revenues.

The numbers surprised Wall Street analysts, who had expected Google to earn 20 cents less per share. Sasa Zorovic of Oppenheimer & Co. said he had conducted a study of search-engine marketing companies in September that indicated advertisers were shifting their spending toward Google and away from its competitors. Still, Zorovic said, Google’s strength surprised him.

Schmidt attributed Google’s growth to several factors: More people used the Google search engine, the quality of research results improved, the quality of ads improved and the company added new advertising products, at the same time that Internet users outside the United States flocked to Google.

Schmidt said a final factor in the successful quarter was that “the blizzard of new product releases — unprecedented for our scale and confusing for almost everyone — seems to create new opportunities for us every day.”

Despite Google’s $1.65 billion acquisition of YouTube, the leading video-sharing site, announced recently, Google’s executives said they were not counting on a windfall of video-related advertising in the new future.

Chief Financial Officer George Reyes said Google would continue to spend its growing cash hoard, now up to $10.4 billion, on prudent investments in technology and real estate. Reyes said Google spent $492 million on data centers, servers and networking equipment during the last quarter.

In addition, Google added more than 1,400 new employees, for a total of 9,378.

“They are really gaining a lot of traction outside their strongest markets, and I think that bodes very well for their growth ahead,” said Marianne Wolk, an analyst with Susquehanna Financial Group.