Can Google Do for TV What It's Trying to Do for Yahoo?

Google (GOOG) is the undeniable king of internet advertising, but can it be successful in other mediums? My answer is YES! Here's why.

To understand how effective Google's systems are, you simply have to look at the Yahoo (YHOO) deal. Under how many circumstances would the second largest player in an industry subcontract the largest player in its direct line of business? The proof is in Yahoo's willingness to do this deal, which Yahoo projects will add significantly to its bottom line. Why? Liquidity!

If the credit crisis has taught us anything, it's the value of liquidity. Higher liquidity generally improves a business' risk/reward trade-off in an absolute sense. Yahoo benefits in many ways from this liquidity. Firstly, the company insulates itself more from a slowdown in advertising revenue. If there's a downturn in the general level of business, Google would still be flooded with ads. Yahoo on the other hand might struggle to fill some ad spots. That being said, the spots would likely be filled at a lower cost AND with lower quality (less relevant) ads, leading to lower clicks and lower revenue. A deal with Google would increase liquidity for Yahoo – a definite benefit.

In the case of business as usual, liquidity equals competition and competition leads to higher prices in an auction model. This truth is reflected in the incremental revenues that Yahoo expects to realize from the deal. Adding liquidity to Yahoo's inventory is a clear benefit for Yahoo in this deal.

So how does this translate into the television ad market? Yahoo originally adopted an approach that was somewhat similar in nature to the way television ad campaigns work. Its primary approach was targeted to display ads that had to be purchased in large campaigns, keeping the small businesses out of the market. Take the deal recently announced between Bloomberg TV and Google. As of now, to advertise on Bloomberg is expensive, relatively few companies are in a financial position to do so. The introduction of a 'per impression' system changes everything. It means that a small business can come in at their appropriate price point and get a TV advertising campaign running.

So what are the benefits to the various players? I will try to keep this as concise as possible.

Businesses

• Smaller businesses can gain exposure.
• Large and small businesses can use revolutionary demographic targeting tools to optimize their campaigns.
• Using the analytics in the Google system, businesses can track the success of their campaigns and get a better understanding of their ROI than they have ever had access to.
• A wider variety of ads and increased targeting may in fact increase the end users' attentiveness to the commercials they watch.
• Advertisers are not forced into bulk deals by media networks.
• It stimulates business for media companies as the marketplace for companies demanding the creation of video ads rapidly expands. This will likely bring down the long run cost of producing an ad, a benefit that will ultimately help the advertiser's bottom line.

Television Networks

• Through reverse tracking, Google could possibly provide insight into the best performing times, demographics, and user habits of the viewers, based on their responses to ads.
• Increased competition will likely lead to viewing time being bid up beyond current levels. At a quoted rate for 1000 impressions, some highly targeted demographics could possibly go for twice the rate they currently go for, a rate advertisers would be willing to pay for the increased control over targeting.
• Cut sales costs significantly as your advertisers in most cases will find you.
• Not forced to sell bulk contracts for unfilled ad slots, as the market system would have those slots priced at their market rate.

Google

• The first benefit for Google is the potential for massive growth as the system will ultimately be global. For example, a law firm offering immigration services to the U.S. could run a campaign in foreign countries for minimal cost with the click of a button.
• If the program is a huge success, Google may gain a piece of the networks' existing business as they move on to the platform.
• Internet video is also exploding and the market for advertising is very illiquid right now. I personally get very frustrated when I sit and watch 10 videos on WSJ and I am forced to re-watch the same 1 or 2 ads over and over again. The Google model may provide steady liquidity to the online content providers.
• Lastly, it provides a broader product line for existing customers.

I definitely think that the pros outweigh the cons for all the players involved. The big holdup right now in the adoption of this model is the networks' unwillingness to give up their viewer data to Google. This will change. Big networks are coming on board to test the platform and if the tests go well, the rate at which networks sign up may grow exponentially.

Disclosure: Author holds a position in Google.