A decade ago, the leading Internet companies were AOL, Amazon, eBay, and Yahoo. With the exception of Amazon, which is experiencing a renewal as it embraces digital distribution and cloud computing, they all fell by the wayside because they failed to adapt to a major market transition. For AOL, it was the transition to broadband. For eBay, it was the rise of search as the primary way to find goods to buy online. And even Amazon had its dark days.
The question for Google, the current Internet market leader, is whether it too will miss the next major market/platform shift. Or will it somehow be able to get ahead of it and maintain its leadership position (and stock market premium). Some long term platform shifts that are just now beginning include the rise of the mobile Web and the shift to cloud computing—both areas where Google is putting a lot of resources.
But in the short term, the biggest growth opportunity for Google is to extend its dominance in search advertising to display advertising. In a report issued yesterday, Citi analyst Mark Mahaney lays out Google’s opportunity and what it needs to do to make sure it does not slip away. The vast majority of Google’s revenues, which were $16.6 billion last year, comes from search and contextual advertising.
Mahaney estimates that every one percent gain in display advertising market share that Google can grab will translate into about $200 million in incremental revenues and $50 million in incremental net profits. So if Google can get ten percent of the display ad market, that would add about $2 billion in revenues and $500 million in profits. Even that would amount to only a 12 percent boost to its 2007 profits of $4.2 billion. But Google needs to establish itself in display to keep its current market premium.
There are two ways that Google can make more money from display advertising. It can sell display ads on its own sites, including YouTube, Google Images, and Google Maps. And it can sell display ads on other sites through its $3.2 billion purchase of DoubleClick.
But the single biggest opportunity for Google to become a major player in display advertising is not DoubleClick. It’s YouTube. At least in the short term. Mahaney estimates that Google can sell $500 million worth of display ads (including video ads) on YouTube in 2009. In contrast, he estimates that DoubleClick will contribute only $280 million in revenues in 2009. Google Images, Google Maps, Google Videos, and Google Finance could bring in another $265 million, if fully plastered with ads.
Here’s how he comes up with those numbers. First he applies a $1.13 CPM estimate for MySpace to YouTube, factors in a 50% growth in pageviews, and backs out a 40% revenue-share to come up with $491 million in display-ad revenues. These numbers maybe aggressive, though, because so far Google has sacrificed ramping up revenues on YouTube for market share gains. In fact, Mahaney’s analysis of the top 100 videos on YouTube right now shows that only 28 have ads, and onlyone of those is an interactive overlay ad. (The rest are banners or AdSense).
He applies the same CPM to Google Images, Maps, Videos, and Finance. Again, putting as many ads on these properties as there are on MySpace could sour some people on using the various services.
Add in the $280 million estimate for DoubleClick, and all together that’s a potential $1 billion in extra revenues for Google next year. It wouldn’t be a lot compared to Google’s overall revenues, but it would begin to assure investors that Google is not going to let its leadership lapse.
ya i cant imaging Amazon $280 million estimate Cool
Wow that seems twisted. Isn’t the fact that google was clean and function at a time when the competitors were “fully plastered with ads” one of google’s major advantages? How is adorning google with banners anything to do with anticipating a major shift in the marketplace - that spectre of fear is introduced but never connected to the rest of the argument. This looks like a FUD piece designed to undermine confidence in google’s stock price more than anything else.
I agree with Robin. The argument seems to boil down to “Here are major shifts that other companies missed and google seems to be working on things for the next major shifts. Therefore they should do the thing everyone else tried and has been getting their butts kicked, by google.”
Simply Brilliant
the biggest near-term issue for all the ad players is that recessions eat ad dollars first, even the long tail dedicated mostly to search advertising. why advertise to consumers who are broke? all the ad players are getting a haircut later this year
I don’t think google has Anything at all to worry about trust me.
http://www.crunchnow.com/
The next big thing for google is local advertising. The print yellow pages market is a $14B business. Who will be checking the YP books 10 years from now?
Isn’t this the same analyst who predicting that there was a 90% chance that Microsoft would acquire Yahoo and that Amazon’s Kindle would be selling like hotcakes, creating a billion-dollar revenue stream in the process?
Why TC gives this guy any play is beyond me.
Not a smart post. Google is quite good at creating value with innovation, I think that’s better than jamming in more ads. You know: making things people want.
There are actually a bunch of untapped billion dollar markets people haven’t thought much about yet.
I better keep my mouth shut. Contact me if you want to know more
Search is big, but the search for Spock is bigger.
Given the fact that Adblock has been downloaded over 20M times and is growing in a pace of 683k downloads a week, I think that for a firm thinking of new ads direction - banner ads is not the right place to head.
Sure, it has money in it today, but it would divert them from finding a way to monetizing these services tomorrow - and this is the key question here.
I think the answer lies beyond search. It actually lies in offering paid services. Perhaps additional to the core free services (image search/youtube etc.)
Not sure the post here really captured our report correctly. But could be that our report wasn’t written well…
We were doing two things. 1) Reviewing what we considered the four key success factors for Net stocks — based on our active following of AOL, YHOO, EBAY, and AMZN over the last 11 years and applying those less/screens to GOOG; 2) Detailing what we viewed as the Display Advertising opportunity for Google.
We WEREN’T arguing that GOOG needed Display Advertising to stay on top. But we do view Display & Mobile Search as two of the most material new revenue opportunities for Google. We published a detailed report on Mobile Search back in November. With this report, we focused on Display Advertising, leading off with the crown jewel — YouTube.
As for platform shifts, we highlighted two in the report, including the move from PC to Network Applications (TKA Cloud computing). This is a clear positive shift for Google, given its core competency in running massive networks, etc…
As for MSFT-YHOO, yes, we got that wrong. Thought the odds were manageably low that both sides would act irrationally. Tho we never said 90%…
As for Kindle, way too early to know whether we got this right or wrong…
That’s the stupidest fucking “advice” or prediction I’ve heard since Jesus wore shorts. What he doesn’t calculate is the mass emigration from the sites, which would be the result. Luke Stanly said it: giving people what they want is what Google understands best. And more ads it is not. That analyst is on crack. Fire him. Alternative cost…. ever heard of that??
Interesting analysis, YouTube definitely has a lot of upside (in the advertisement space). They tried the mid-roll advertisements, maybe pre-roll might work better.
The problem with YouTube is that they have too many low-quality videos for which no one should get credit for, or money. Hulu, with significantly less views has a better business model by having high-quality videos that users don’t mind watching an ad.
Whoever finds a way to monetize social networks will hit the biggest jackpot we’ve ever seen!
Mark Maheny - you are a complete and utter tool, thinking you’ve got it sussed where the little you say about a limited subject is narrow-minded, ill-informed, and just plain wrong.