March 2010
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Google's Display - Ad sales should Top $1 Billion

As analysts say rising demand for Internet display ads will begin paying off for Google in 2010, one asks: "Is this a $10 billion business?"
Google CEO Eric Schmidt hinted in July that display advertising would probably be the next of his company's businesses to generate $1 billion in sales. Analysts say 2010 is the year he'll deliver on that prediction.

Display ads are likely to contribute a little more than $1 billion, or about 4% of Google's (GOOG) total sales this year—an increase of as much 40% over last year—say analysts, including Doug Anmuth at Barclays Capital. That marks an important threshold for Mountain View (Calif.) based Google, which makes most of its sales from ads placed alongside search results and which has been criticized for not getting more revenue from other businesses. Demand for display ads, which include marketing messages in videos and banner ads adorning Web pages, may rise faster this year than for search-related ads, according to eMarketer. "You have to go somewhere else to get the next legs of growth," says Jim Friedland, an analyst at Cowen & Co.

In display advertising, Google lags behind Yahoo! (YHOO), which had revenue of $6.5 billion in 2009 that was generated largely from its display ads. Google has tried to catch up in part through acquisitions. Two of the biggest were aimed at the display ad market: The company paid $1.65 billion for YouTube in 2005 and $3.1 billion for DoubleClick in 2007.

Sales of video and banner ads on YouTube, the world's most popular video site, are expected by analysts at Barclays to contribute the bulk of Google's display revenue this year, about $700 million. And with DoubleClick, Google acquired a technology that handles the placement of display ads on sites across the Web. "Display is now a key business for us," says Susan Wojcicki, Google's vice-president of product management and one of the company's earliest employees.

Neal Mohan, the executive in charge of Google's display business, says Google will draw on its strength in search-related advertising to expand in display. It became the leader in search by using algorithms to help it know which ads to place where. "Our goal is to bring the science of search to the art of display," Mohan says.

TV and print ads shift to Web display
Mohan says the company is developing tools to help marketers create more effective banner ads and automate their placement. To that end, Google in December bought Teracent, which customizes colors, language, and other elements of a banner ad, depending on who is viewing it. Soon, Google will pair Teracent's technology with DoubleClick's ad-placement expertise and its own flagship search ad program, AdWords. Mohan is also trying to expand DoubleClick Ad Exchange—a kind of stock market launched last fall for buying and trading display advertising space on the Web—and offer further options for advertisers on YouTube.

Companies tend to use online display advertising to raise awareness of a brand or product while they deploy search ads to encourage customers to take a specific action—for instance, click on a Web site or make a purchase. Because search ads are often cheaper and their effectiveness easier to measure, budget-conscious advertisers flocked to them during the recession. Now, however, display is getting a boost as big advertisers that have traditionally focused branding efforts on TV and print are shifting more ad dollars to the Web. "There's a lot of money to be tapped that otherwise would be allocated to TV, that will be moved online," says technology analyst Greg Sterling. This year, online display advertising may grow 8.2% to $7.9 billion in the U.S., from $7.3 billion in 2009, eMarketer says. Search advertising is expected to rise 5.6% to $11.4 billion.

Google is trying to help advertisers better measure the effectiveness of display ads. "One of the challenges we put to ourselves was: 'What are the ways a brand advertiser would look to measure [ad impact]?'," Mohan says. The result: Campaign Insights, a tool developed over a year by dozens of Google engineering teams around the world before it was released in December.

Hair-care company Regis was one of the first to test Campaign Insights. It ran banner ads for Hair Club For Men across hundreds of Google's partner sites while Campaign Insights tracked the number of people who had seen the ads and then performed related Web searches. "Display [advertising] drives searches and Web site visits," says Luke Hubbard, vice-president of Beverly Hills (Calif.)-based Integrated Media Solutions, the ad agency that coordinated the campaign for Regis. "We knew that effect was there before, but now we are able to quantify it." Impressed by the results, Regis increased spending on display ads for the brand in 2010, and Integrated Media Solutions has signed up seven other clients eager to tap the analytics.

Yahoo pitching display-ad strengths
Google offers Campaign Insights free to advertisers that spend above a certain amount on other products. It's inexpensive and easy for Google to comb through search data, compared to the effort required for Yahoo to offer such a service, says eMarketer analyst David Hallerman. "Google has a lot of potential opportunity in that they can add a lot of these analytics that usually cost companies more," he says.

Competitors say they're bracing for a fight. During Yahoo's Jan. 26 earnings call with analysts, CEO Carol Bartz talked up brand advertisers' increasing interest in getting their ads placed on professional content sites—a strength for Yahoo.

"As these marketers look to position new products and brands in the marketplace, they will need display ads to tell their story," she said.

To succeed in display, Google has also had to hone its ability to market products through a people-friendly sales force. In search, Google has tended to rely more on the technical effectiveness of its products, analysts say. "Advertising is a lot of hand-holding and schmoozing," says analyst Sterling. "Historically, Google has not been good on managing the people side."

That's changing, says Amy Curtis-McIntyre, senior vice-president of brand communications for hotel chain Hyatt. She says Google has begun regularly sending sales reps to her Chicago offices. "When they develop new search tools or new advertising tools, they bring them to us and present them in a usable way," says Curtis-McIntyre.

With $1 billion in sight, how big can Google's display business get? "Google is incredibly well-positioned to be a winner here," Friedland says. The question he's now asking: "Is this a $10 billion business?"

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