Google Needs to Ramp Up Display Advertising - Citi

 

A decade ago, the leading Internet companies were AOL (TWX), Amazon (AMZN), eBay (EBAY), and Yahoo (YHOO). With the exception of Amazon, which is experiencing a renewal as it embraces digital distribution and cloud computing, they all fell by the wayside because they failed to adapt to a major market transition. For AOL, it was the transition to broadband. For eBay, it was the rise of search as the primary way to find goods to buy online. And even Amazon had its dark days.

The question for Google (GOOG), the current Internet market leader, is whether it too will miss the next major market/platform shift. Or will it somehow be able to get ahead of it and maintain its leadership position (and stock market premium). Some long-term platform shifts that are just now beginning include the rise of the mobile Web and the shift to cloud computing—both areas where Google is putting a lot of resources.

But in the short term, the biggest growth opportunity for Google is to extend its dominance in search advertising to display advertising. In a report issued yesterday, Citi analyst Mark Mahaney lays out Google’s opportunity and what it needs to do to make sure it does not slip away. The vast majority of Google’s revenues, which were $16.6 billion last year, comes from search and contextual advertising.

Mahaney estimates that every one percent gain in display advertising market share that Google can grab will translate into about $200 million in incremental revenues and $50 million in incremental net profits. So if Google can get 10 percent of the display ad market, that would add about $2 billion in revenues and $500 million in profits. Even that would amount to only a 12 percent boost to its 2007 profits of $4.2 billion. But Google needs to establish itself in display to keep its current market premium.

There are two ways that Google can make more money from display advertising. It can sell display ads on its own sites, including YouTube, Google Images, and Google Maps. And it can sell display ads on other sites through its $3.2 billion purchase of DoubleClick.

But the single biggest opportunity for Google to become a major player in display advertising is not DoubleClick. It’s YouTube. At least in the short term. Mahaney estimates that Google can sell $500 million worth of display ads (including video ads) on YouTube in 2009. In contrast, he estimates that DoubleClick will contribute only $280 million in revenues in 2009. Google Images, Google Maps, Google Videos, and Google Finance could bring in another $265 million, if fully plastered with ads.

Here’s how he comes up with those numbers. First he applies a $1.13 CPM estimate for MySpace to YouTube, factors in a 50% growth in pageviews, and backs out a 40% revenue-share to come up with $491 million in display-ad revenues. These numbers maybe aggressive, though, because so far Google has sacrificed ramping up revenues on YouTube for market share gains. In fact, Mahaney’s analysis of the top 100 videos on YouTube right now shows that only 28 have ads, and only one of those is an interactive overlay ad. (The rest are banners or AdSense).

He applies the same CPM to Google Images, Maps, Videos, and Finance. Again, putting as many ads on these properties as there are on MySpace could sour some people on using the various services.

Add in the $280 million estimate for DoubleClick, and all together that’s a potential $1 billion in extra revenues for Google next year. It wouldn’t be a lot compared to Google’s overall revenues, but it would begin to assure investors that Google is not going to let its leadership lapse.

Original post

Comments

[tedstr]

Display is a completely different business. Think of it this way. Google is the Yellow pages. Display is News corp. Google will find this frustrating and will stumble. It will be their first major failure.

Display is not about technology and technology has been a large part of Google' s success. The highest margin part of Google is google.com and unless they want to completley change their signature interface and add ads (which I highly doubt they will), display will be a minor addition to their business (which they are actually already doing).
Video ads on Youtube will be a minor side show.

[Medici]

The shift towards display bodes well for Value Click-

[John Kimmen]

Pages filled with Ad's is absolutely against the concept of Google. Look at Yahoo and MSN...ads ads ads. You accidentally click on them without noticing it!

This is something Yahho and Microsoft do not get into their brains.

Sure, monetizing is an important factor but as long Google rules the Internet and can hold its stock price shareholder wont push Larry Page and Sergey Brin too much.

Also keep in mind that YouTube.com is a community site. Once user smell the the commercial background they might move away.

I guess Google comes up with a genial idea again.... :)

[tyneham]

A decade is too long in digital technology. Citigroup analyst Mark Mahaney failed failed to assess the negative impact of Internet click fraud which is underestimated by web-traffic auditors. The fraud is deceptively downplayed by major financial beneficiaries and their small time accomplices or affiliates. Big or not, no online advertiser is immune from growing the fraud. There is mounting unease and concerns over the fraud on all websites that have affiliate programs. These serious, legal issues are not being addressed by the law makers in most countries.

By some logical estimates, click fraud could be over sixty percent. However, even one percent of $90 billion of global 2008-2009 Internet ad spend is too high, mainly because advertisers, big or small, are still deceived, overcharged by millions and thus defrauded every day.

Mahaney also overlooed the impact of regulatory scrutiny. US Rep. Bobby Rush, D-Ill., Rep. Joe Barton, R-Texas, the Commerce, the Justice Department, Trade and Consumer Protection panel, the House Small Business Committee panel, the Senate Judiciary Committee’s antitrust panel, the House Energy and Commerce Committee’s Commerce, Trade and Consumer Protection panel and the Senate Commerce Committee and all law makers, for example, must also scrutinise the pending/proposed Yahoo-Google deal, and its impact on defrauded advertisers, big or small.

Internet fraud and the clutter would bring down search engine titanics. Consumers who don't like reading manuals cannot be expected to read zillions of cluttered web-pages, ads or not. Read how, for example, "Yahoo protects online fraudsters, locks out legal ethical experts," web links here tyneham.wordpress.com , del.icio.us/tyneham?se... where some cases are cited, www.networkworld.com/c... , tyneham.blogspot.com , tyneham.newsvine.com