NEW YORK (AdAge.com) -- Google has won a lot of fans in the marketing world -- and created a fast-growing business -- with a search ad model that takes relevancy into account in pricing, but it may have to move beyond that business following its IPO and put its consumer-sensitive reputation on the line.
Google generated ad revenue of $916.6 million in 2003, with its Web sites and network of publishers accounting for 96% of first-quarter 2004 net revenues, according to its recent Securities and Exchange Commission filing. "For the first quarter of last year and Q1 for this year, it shows a growth rate of 117% in net revenues," said David Hallerman, senior analyst at marketing research firm eMarketer. "Projected out for the full year 2004, that gives them more than $2 billion in net revenues. That all points to their doing well in paid search."
But Mr. Hallerman and others believe Google has to develop other sources of ad revenue outside of paid search once it is a public company.
"Good search means that users come to your site and leave really quickly, but the sort of advertising that larger companies want to do online has to be done on sites where people stick around," Mr. Hallerman said.
Yahoo! Search and MSN Search are the second and third most-popular search destinations behind Google, but through their news, e-mail and shopping, they provide a wider berth of advertising inventory than Google.
Yet becoming a portal like Yahoo! and MSN could be a mistake, said Jake Winebaum, CEO, Business.com. "The reason Google has garnered such a big and loyal audience is it directs people to what they want to find," Mr. Winebaum said. "It doesn't direct people to content on their own site."
Indeed, relevancy and speed in search is the concept on which Google built its brand. The question is if they can extend its relevancy proposition to other services, Mr. Hallerman said.
Google already has two nascent projects under way to expand its ad opportunities. One is its Gmail service, another way to get consumers to view ads. Gmail, currently in beta, would offer consumers who opt in a free gigabyte of space for e-mail in return for permission to serve ads relevant to the user's e-mail messaging.
"That they offered Gmail in the month before their IPO is not a coincidence," Mr. Hallerman said.
But when the service made its debut in April, privacy advocates complained. Google has pointed out that the scanning is done automatically by technology related to spam filters, and it provides an obvious notice and consent form as part of Gmail registration. But it admitted in its IPO documents that privacy concerns could pose a risk to its good name in the market.
It has also launched a location-targeting feature, which allows consumers to search for businesses in their local area. Local search will grow more slowly than paid search advertising in general, but is expected to total $824 million by 2008, according to Jupiter Research.
Yahoo! is ahead of Google in local search, having operated a geo-targeting area on its site for eight years. It also has several agreements with Yellow Pages companies, according to Mr. Laughlin.
In its core business, Google will look to improve the AdWords paid placement technology, said Matt Naeger, VP-operations at search marketing company Impaqt, which handles keyword search for advertising clients. Google's projections of what an advertising client's impressions and daily clicks will be is often inaccurate, Mr. Naeger said. So projections don't match up with actual results. "Google is going to have to improve things for companies like mine."
But, despite the hurdle of achieving growth without deserting the brand value, the potential is there for online growth, said Charles Laughlin, VP, Kelsey Group, a research company that specializes in Yellow Pages and local interactive media. Yellow Pages advertising was about $14.3 billion in 2003, including printed phone books and online directories. "Local Yellow Pages have sales channels already communicating with small businesses," Mr. Laughlin said. The challenge for Yellow Pages publishers is building traffic for online databases. "So the Yellow Pages need Google and Google needs the Yellow Pages," he said.