Google's New Native Advertising Is Actually A Very Big Deal For Investors
- Google's new Native Ads for AdSense are an extremely valuable growth opportunity for a stagnant revenue segment.
- The company now can effectively compete with, and even beat out, privately held native ad competitors such as Taboola and Outbrain.
- With Google's strong global presence and a naturally higher click-rate, investors may enjoy over $1 billion in additional annual revenue as a result.
Google (NASDAQ:GOOG) (NASDAQ:GOOGL), as the world’s search engine giant, generated 88% of their revenue in 2016 from advertising alone. Thus, when the company announced on July 5th, 2017 that they would begin offering native advertising to publishers through the AdSense network, this was an enormous step forward, despite seemingly scarce coverage of exactly what this means for the company and shareholders. Although Wall Street seems to have brushed off the news as just another day, I strongly believe this is an enormous catalyst for Google that will propel the company further in to dominating the world’s advertising market.
What Are Native Ads?
Before we analyze the financial prospects, we must first understand why native ads are so uniquely different from and more advantageous than any other type of ad. Whereas traditional banner ads were once very effective earlier in the Internet age, banner ad effectiveness has since dwindled as users grew banner blindness. This psychological concept means that users are simply ignoring banners and anything else that does not look and feel the same as the content they truly want from a web page, often unconsciously and without the user intentionally working to block out ads.
With this concept being the reality, banner ads and general display advertising have an incredibly low click-through-rate of only 0.08% on average. This means that for every 1,000 impressions of a banner ad, an advertiser can expect less than one click on average at best, largely due to users either using ad blockers or simply experiencing banner blindness.
Banner ads, therefore, have entered the realm of the universally annoying pop-up ad and the pig-squealing, seizure-inducing ads of the mid-2000s and earlier. Further, ad-blocking technology is on the rise in 2017 with 18% of users in the United States and 11% of users worldwide utilizing some form of ad-blocking technology, according to PageFair’s 2017 annual advertising report.
Additionally, PageFair reports that 615 million devices worldwide utilize ad-blockers, and thus the actual amount of individuals that never see a paid ad may be even higher than reported due to many devices being shared (such as at libraries and internet cafes) and thus not being counted in this figure.
To combat this, advertising networks began offering native advertising placements, or simply “native ads,” which look and feel identical to the content that users are seeking in a web page. For example, if you are reading a news article, rather than being blind to a distinguishable banner ad, you are more likely to notice a native ad that looks exactly like it can be an official link to a genuine news article.
This has led to increased click-through rates of up to 0.38% on smartphones (a near 400% increase over traditional banner ad click rate of only 0.08%), with many ad-blockers being unable to effectively block such ads since they mimic the rest of the website.
As an example, consider this screenshot from an Adobe website:
Adobe's organic content is linked on the top half of the screenshot where the arrow originates. The paid native advertisements are on the bottom half, where the arrow points to. As you can see, both the ads and the organic content are identical in look and feel, and it is not immediately apparent the difference until you notice it states, "From Our Advertisers." This example illustrates why users are more likely to not only see the ads and bypass ad blockers, but also click on them, whether accidentally or intentionally.
A Stagnant Revenue Segment
A quick look at the company’s Q1 2017 earnings report, released on April 27, 2017, reveals that advertising clicks on Google-owned web properties, such as Gmail and Google Search, continuously grew over 30% each quarter year over year for all of 2016 and thus far in 2017. This is excellent growth, but the new native ads feature is not intended for Google-owned properties.
Instead, the new native ads are for Google Network Member properties, which are websites that are not owned by Google but display AdSense ads. Unfortunately, for this revenue segment, the earnings report states that quarterly growth ranged from 0% to 10% over the last five quarters, with an average of only 4% growth per quarter year over year since Q1 2016. This is exactly where native ads are likely to make a huge difference for Google.
Further, annual revenue growth from 2013 through 2016 for advertising on Google-owned websites grew approximately 42% annually from $45 billion to $63.79 billion, yet advertising on Google Network Member sites grew only a measly 7% from $14.54 billion to $15.6 billion. Clearly, native ads will be a much-needed catalyst to a very stagnant and slow-growth sector of Google's total revenue.
As for why Google-owned properties are growing enormously while non-Google owned Network Member sites are so stagnant, the answer may very well have a lot to do with native advertising. Google has long had native-style advertising placements in Gmail, search, and YouTube recommended results, as well as other locations on their web properties. These are all ad placements that blend in extremely well with the surrounding content (such as Gmail ads looking like legitimate emails), but that are all obviously only on Google-owned properties.
Non-Google-owned properties did not have such luxuries and were provided with blatant display ads to publish. Thus, non-Google websites often struggled to test many positions on web pages to find the most effective way to reduce banner blindness, leaving non-Google websites to deal with a seemingly outdated and aging advertising style.
Now that Google will provide AdSense publishers with native ads to properly match the look and feel of publisher websites, Network Member properties can drive higher revenue due to all the benefits that Google-owned properties have been enjoying for years.
Financial And Competitive Projections
So how does this all translate into dollars and cents for Google and shareholders? To figure this out, we must do reconnaissance on existing native ad networks.
U.S. based Taboola is a monster of native advertising and their ads can be seen on some of the most major websites in the United States. Unfortunately, for our research, Taboola is privately held, but the most recent financial figure publicly revealed is that they pulled in revenue of $350 million in 2015. The company currently reports over 1 billion unique users viewing their ads monthly in the present day, and a reach of 88% of U.S. internet users.
Given that Taboola is one of the largest native advertising networks in the U.S., most likely reaching nearly the same U.S. audience that Google is capable of (since Taboola ads are usually used alongside AdSense display ads on the same page), it is reasonable to draw a starting point of at least $350 million for Google as AdSense will now be able to effectively compete and take market share from Taboola, as well as other native ad providers such as Outbrain and MGID (both privately held companies).
In 2015, Google Network Member’s advertising pulled in $14.54 billion in revenue. If our starting point of $350 million in revenue were to be injected into Google’s 2015 figures for Google Network Member ad revenue, this would mean at least an increase of 2.5% in revenue. While that might not seem like much, it is important to remember that Taboola’s reach is largely in the United States, whereas Google provides advertising to a worldwide audience.
Additionally, as Google strictly monitors publisher websites to ensure that advertising does not hinder the user experience and thereby limits how many AdSense units can be placed on any single webpage, it is likely that publishers will gravitate toward native advertising with higher click-rates while abandoning at least some of their traditional display ad units. Thus, considering how the average click-through rate on a native ad can be upwards of four times the click rate on traditional banner ads, revenue is likely to also increase significantly by virtue of much higher click-through rates.
Therefore, factoring in Google’s strong global presence that trumps that of its native advertising competitors, I estimate that the addition of native ads to AdSense may equal upwards of a 10-15% increase in revenue for the Google Network Member revenue segment, which could add over $1 billion annually.
Further, whereas AdSense publishers had to turn to Taboola, Outbrain, MGID, or any other native advertising network for native ad inventory, now those publishers can increasingly drop Google's competitors and start serving AdSense native ads instead. This further positions Google to enjoy global advertising domination and presents a real, imminent threat to native ad networks that, so far, have enjoyed the safety of Google not supplying native ads to network publishers.
In addition, websites that currently only serve native ads and do not have any AdSense relationship as a result may drop their current native ad networks and become AdSense publishers, further increasing publisher count and revenue for Google.
Native advertising is a smart choice for Google since the company places a premium on good user experiences while also delivering clever paid advertising to users. With an average click-through rate that is almost 400% higher than Google’s existing banner ad inventory, combined with Google’s enormous global reach compared to competitors such as Taboola and Outbrain, the new addition of native advertising in AdSense is likely to provide significant growth in Network Member revenues that has so far been elusive, as well as allowing Google to overcome competition in the native advertising realm.
This article was written by
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