Life's Still Good at Google as Quarterly Profit Triples

Despite Forays Into Other Ad Models, Search Still Cash Cow

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NEW YORK ( -- Google remained the brightest spot in the online-ad industry today, as its profit tripled in fourth quarter and its revenue grew 67%.
YouTube is in the midst of doing 'all sorts of interesting deals,' Google CEO Eric Schmidt said on today's earnings call.
YouTube is in the midst of doing 'all sorts of interesting deals,' Google CEO Eric Schmidt said on today's earnings call. Credit: James Duncan Davidson

Net of $1.03 billion
"Business continues to be very good here at Google," said CEO Eric Schmidt. The company reported revenue of $3.21 billion for fourth quarter 2006. Net income was $1.03 billion or $3.29 a share, compared with $1.22 a share for the same period a year ago.

A large group of Google executives, including co-founders Larry Page and Sergey Brin, presidents of products and technology, respectively, joined Mr. Schmidt on the earnings call, which focused on YouTube, Google's offline ad models and its continued surge in search.

On TV advertising, Mr. Schmidt said, "Whatever we do will be new and different from the way it's currently sold and marketed. We're experimenting using our targeting technology and our tremendous reach to see if we can improve what is already a good business that others are in." He said advertisers will pay much higher rates for ads that are targeted, and pointed out that TV set-top boxes are addressable and can target end users.

Omid Kordestani, senior VP-global sales and business development, said the radio side of the business was busy building out a sales force and that dMarc, Google's platform in the radio space, is "making great progress with both advertisers and pursuit of great partnerships for inventory." A recent test in that space included inventory from 700 stations in more than 200 metro areas.

YouTube and copyright owners
YouTube is in the midst of doing "all sorts of interesting deals," Mr. Schmidt said. He didn't break out YouTube revenue but said early returns and justification of the acquisition look "really positive."

The lure of YouTube to copyright owners, said Mr. Schmidt, is its fanatical fans and the way it can connect copyright owners with end users. He suggested copyright owners submit content to YouTube to measure its fan base and the community that exists around it. Ultimately YouTube will develop partnerships in advertising, "many of which are very unusual," he said, suggesting a link between Google's ad system and the ad systems of content partners "so they can do things around the communities that have developed around their content online."

While YouTube CEO Chad Hurley unveiled this week that YouTube will begin sharing revenue with its content creators, Mr. Schmidt said there is no formal user revenue-sharing program in place -- Mr. Hurley made headlines earlier in the week when he spoke about such plans in Davos, Switzerland, at the World Economic Forum -- but said a revenue-sharing program will begin to roll one out this year.

As to the Google Video brand, Mr. Brin said, "We're taking our time to do integration so we preserve the value of both Google Video and YouTube ... over time we'll continue to have both Google branding and YouTube branding."

More search products
Mr. Brin also detailed several Google search products, including book, patent and video search, and said the company had invested in infrastructure to make search faster, index better and handle more complicated algorithms.

Mr. Schmidt said the company is actually showing fewer ads per search but those ads are of higher quality and have better monetization potential. "The technical improvements and targeting improvements are creating better returns, even with fewer ads," he said, later adding that mobile holds even more promise -- advertising revenue per search query is expected to be "significantly higher" on mobile.

More ad models
And indeed Google's search success share doesn't look to be slowing. According to eMarketer, Google is expected to nab two-thirds of total search revenue in 2007, while its next closest competitor, Yahoo, will have 15.8%. Search is expected to be an $8.3 billion market -- 40% of total online ad spending.

In addition to search, Google is investing in other online ad models, including testing a video ad network across its AdSense publisher network. The test is under way with a select number of publishers and content partners including to major music publishers: Sony BMG and Warner Music Group. The test involves a post-roll ad that would run after content or in between multiple pieces of content and is sold on a CPM basis.

'Cash cow'
Incidentally, Google-owned sites grew faster than revenue generated from partner sites.

"It's interesting that in spite of all the time and attention focused on the ad network and the offline trials, it's Google's search site that continues to grow faster of the rest of the business," said Bryan Weiner, president-chief operating officer of search-marketing firm 360i. "Search is a cash cow and it's a snowball over the hill -- Google doesn't have to pay a lot of attention to it, they can focus on some of these other things."
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