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 More than just an online search company, Google is at its core a comprehensive internet advertising business. In 2007, annual revenue had increased 38-fold from 2002, from US$ 440 million to $ 16.6 billion. In the short-term, Google's growth rates continue to be high, with the company reporting 2007 year on year growth of 56%. In May 2008 Google was rated as the number one visited website in the world by ComScore, trumping Yahoo! for the first time.[1] Google is almost totally reliant on its advertising sales for revenue--the sector accounted for 99% of 2007 revenue. The company uses its core search technology capabilities to place ads on its eponymous search engine as well as through a network of third-party websites. What distinguishes Google's "paid search" advertising business is that it is performance-based (advertisers only pay when someone clicks) and ads are contextual (e.g., a DVD ad typically shows up when someone searches for "DVD"). Internet advertising is the fastest growing segment of the advertising market, but still only represents 8% of total U.S. advertising dollars -- so there is room for further growth. In order to tap these opportunities, Google has used the profits from its paid search business to expand in many different directions related to advertising.
But Google faces real obstacles. Its core paid search products have been accused of click fraud as well as privacy and intellectual property violations; the recently acquired YouTube online video site is at risk for the latter. (It is also being sued by Viacom for distribution of copyrighted video material.) Google's acquisitions of DoubleClick and YouTube have also made it an anti-trust target. While the Federal Trade Commission approved the deal in December, regulatory authorities in Europe, where a combined Google and Doubleclick would hold up to 90% market share in internet search, have yet to weigh in on the acquisition. [2] Additionally, the potential combination of Microsoft and Yahoo has the potential to create a formidable competitor to Google.
[edit] Business Overview Google states that its mission “is to organize the world's information and make it universally accessible and useful.” Electronic storage is now so cheap that it would be difficult for most people to fill up their hard drive even if they wanted to. The challenge is not in retaining information, but in recalling it--and this is the service Google provides to its users, monetizing its business primarily through online advertising revenues. Google has grown rapidly, more than doubling its revenue on average every year from 2002 to 2006. The company's revenue growth rates have slowed, as seen in the graph, with quarterly earnings growth sliding from the high sixties and seventies to fifites-range (2007 saw revenue increase of a comparatively slim 56%).[4] Is Google just normalizing, or is this gradual slowing indicative of a larger issue? It is difficult to know for certain. Either way, it is important to note that Google's earnings are reported before TACs (Traffic Acquistion Costs) are deducted--costs which take nearly 30% of out of total advertising revenues. 2007 TACs have seen slight decreases of 1% from 2006. GOOG reported 1st quarter results after the closing bell Thursday, 17th April, and results came to $4.12/share in earnings versus an estimated $3.96/share. Excluding items Google earned $4.84/share vs an expected $4.55/share. Profit Q1 2008, rose to $1.3Billion from $1Billion on a year over year basis and climbed from $1.2Billion over the holiday quarter. With that also comes net cash additions of almost $1Billion into Google's coffers. At the top line, Google for the first time broke the $5Billion revenue mark for a quarter. More importantly, for the first time, international revenue led US Revenue by a 51-49% margin.[5] Recently, Google announced that it would be launching an alternative energy venture through google.org, its philanthropic arm. The company has been able to produce one gigawatt of energy, or about one fifth of the total energy needed to power the IT servers in the U.S., through alternative sources through solar panels at the Mountain View site. This venture is one example of the fervor with which the company pursues business venture that are unrelated to the core business. [edit] Search Engine Technology Co-founders Larry Page and Sergei Brin created Google's core PageRank technology to archive and organize Internet webpages and develop a searchable database. The basic tenet of PageRank is that when one website links to another, the first website is endorsing the second. Pages are then "ranked" according to the ecosystem of all webpages archived by Google. While the company has since utilized numerous other ranking systems, PageRank still remains a central technology. Google also creates search products for photos, videos, and specific websites types such as blogs. Google does not charge consumers for its search capabilities, instead receiving most of its revenue from advertising and a small portion from licensing its search technologies to enterprise companies. [edit] Online Advertising: Paid SearchThe company generated 99% of its 2007 revenue from advertising, the inventory of which is sold both directly to customers as well as in conjunction with advertising agencies serving large clients. Google's two primary advertising products are AdSense and AdWords--both paid search products. Paid search is a form of online advertising that displays text ads that are based on the context of a website or a particular search query. [edit] Performance Based MarketingGoogle sells its ads on a cost per click (CPC) basis, meaning that advertisers are charged only when a user clicks on their ad. This distinguishes Google from most non-search online advertising (including banners) as well as traditional media, both of which charge advertisers for impressions, or the number of users who are presented with an ad. For instance: traditional online banners count page views; print newspaper and magazines count circulation; and television uses statistical ratings. Since Google only charges per action--in this case, a click--the advertiser pays for marketing performance, which in theory generates higher advertising returns.  [edit] AdWords ProductAdvertisers can have their ads displayed when particular words are entered into Google's own sites, including its namesake search engine. Since words are often bought by multiple advertisers, Google utilizes an auction format to determine the order of ads (typically, the higher bids will result in ads with higher, better positions). Through the auction platform, advertisers specify the maximum amount they would pay per click. Revenue from AdWords comprised 64% of revenue in 2007 or $5.8 billion. [edit] AdSense ProductAdSense embeds advertisements into websites that have signed up to be included in Google's network. The product displays ads based on the context of the content on a particular website; for example, financial service ads would be placed onto sites about personal finance. AdSense is hosted by non-Google websites, so Google has to share a portion of its revenue with them through revenue-sharing agreements. Revenue from AdSense grew 37% in 2007 but comprised only 35% of advertising revenue, down from about 44% two years prior. [edit] PartnershipsGoogle has formed long-term revenue-sharing partnerships with websites to provide text-based ads through its AdSense product. In other words, Google provides an inventory of ads, websites provide content and an audience, and the two parties split the advertisers' fees. Google has relationships with MySpace and many other entities owned by Fox, as well as eBay's Skype, Intuit (INTU), and New York Times' About.com. [edit] Expanding Beyond Paid Search [edit] Online Display AdsIn addition to paid search, the second major type of online advertising is display ads, which consists of graphical ads embedded into web pages. Paid search is often considered direct marketing while display advertising is typically considered brand marketing. As seen in the chart below, display ads accounted for the majority of the online advertising market until 2004, when paid search decisively overtook the display category. Google is often considered the primary catalyst for this accelerated growth rate. In April 2007, Google acquired DoubleClick, a display ad-serving technology company, for $3.1 billion from a private equity firm. DoubleClick's offerings allow advertisers to manage and track their display advertisements. This acquisition allows Google to immediately expand their online advertising business beyond paid search to display advertising. Google's hope for this acquisition is to increasingly consolidate the share of overall online advertising budgets of its advertiser customer base.
 [edit] Offline ChannelsIn addition to online advertising, Google has embarked on several ventures into offline advertising channels, in particular radio, television and outdoor. The offline advertising opportunity is very large; while the Internet channel has grown the fastest in the past several years compared to other channels, it currently accounts for less than 10% of the overall advertising market in the U.S. The common thread underlying Google's acquisitions is to extend the company's expertise in managing and delivering ads to other advertising channels.
[edit] MobileThe development of 3G technology for mobile phones enables people to access the Internet from anywhere. Often considered one of the fastest-growing and most ubiquitous computing platforms in the world, the mobile channel represents a new area of expansion and development for Google, which has begun unrolling products designed for mobile phones. These products include a text messaging service that provides information on directions, restaurants, movies, and sports among other things as well as mobile email. Google has leveraged these kinds of products to introduce AdSense for Mobile, which was announced in late September. AdSense for Mobile will be similar to their traditional AdSense product as prices will be set by auction and advertisers pay when users click on ads. [8] Google's mobile profits (and opportunities for further expansion) are no secret, however, and wireless carriers want a slice of the pie. To keep them out, the company will join the traditional wireless heavyweights in bidding for a 700 mHZ broadband spectrum to be auctioned off by the federal government. Google proposes to keep this spectrum and its new Android mobile software package open, allowing third-party members to design compatible handsets, software extras, and even to step in for Google, the spectrum owner, in setting up wireless companies. In order to garner support for this effort, they have established the Open Handset Alliance. [9] 34 companies have signed on to this alliance so far from the US, China, Japan, and Europe. The companies include mobile operators, phone manufacturers, chip builders, and commercialization companies. This alliance would help Google in rolling out mobile applications while saving them the cost of building and maintaining a mobile network. With carriers supporting their deices, this will position them well as demand increases for location-specific mobile advertising. [edit] Other ProductsGoogle licenses its search technology to corporate businesses so that these enterprises can store, track, and recall vast quantities of data with relative ease. In 2006, licensing represented about 1% of Google's revenue. Google has also developed numerous products that take advantage of its search and data-recall capability for the company and, importantly, generate significant user traffic for the company (i.e., more opportunities for ads). These include:
[edit] Trends and Forces[edit] Internet advertising focusIn the United States, advertising revenue totaled $107.8 billion in the first nine months of 2006, and climbed slightly to $108.1 billion in the same period of 2007. Internet advertising, however, grew by 17% over the same period, from $7.1 billion to $8.4 billion. The bulk of that advertising was in search and display, but, as the following table shows, search--Google's specialty--and email grew fastest. Although video advertising is small at 0.6%, video viewing is increasing, with 126 million viewers in the U.S. in March 2007 (70% of all Internet users). Thus video advertising, which carries far higher prices, represents a large potential source of advertising revenue. The table below shows the breakdown of advertising by source. Google's Ad game is in full stride with AdSense and AdWords, the earnings and revenue speak for themselves, but now with the beginnings of monetization of YouTube and Video Advertising Google is looking beyond search ads towards next generation drivers of explosive growth. This same strategy applies to DoubleClick with banner/display advertising also. Becoming an all-encompassing Ad-Platform is clearly in Google's sights.
 [edit] Fresh growth opportunities abroadOverall since 2000, the number of Internet users in the world has more than doubled. However, certain regions have grown faster than others. Google seems to be positioning itself to grow even more substantially internationally and as the slowdown in the US, especially in the Financial Sector, continues to put pressure on earnings, and advertising Google seems poised to hold its own and continue to deliver top notch results. The recently completed test ad partnership with Yahoo (YHOO) was reported to be a success and Yahoo is reportedly trying to expand the partnership in order to shore up its own bottom-line. Well, international growth do seem to be very strong, and this is somewhat inflated by the weakening of the US dollar as well. The table below shows that Africa, the Middle East, and South America have grown far faster than Europe, North America, and Asia. This is due in part to the low absolute penetration rates that exist currently in that region. The low rates of penetration in the fast growing areas, particularly in Asia, imply opportunities for companies to gain market share. In 2007, more than half of Google's search traffic came from outside of the US.
[edit] Intellectual property/privacy problemsGoogle specializes in connecting users to information, some of which is copyrighted. As a result, Google risks running afoul of international intellectual property right agreements and has frequently been taken to court.
[edit] Vulnerability to click fraudGoogle's performance-based CPC advertising model has exposed the company to allegations of click fraud, as courts have established that Google is responsible for preventing it. Because Google benefits whenever someone clicks on an ad, the company is vulnerable to charges that it has taken measures to artificially inflate the number of clicks. Courts throughout the world have held Google responsible for preventing click fraud, and to date Google has had settle multiple law suits for failing to protect its advertisers against it. Since advertising represents 99% of of Google's revenue, combating click fraud remains a high priority for Google. [edit] CompetitionGoogle's main competitors are Yahoo! (YHOO) and Microsoft (MSFT), which is currently expanding into the online search and advertising business. Yahoo, founded four years before Google, was historically the leading online search site, but in January 2007, Google made headlines by overtaking Yahoo in unique users per month. Google currently leads Yahoo and all others by a comfortable margin in Internet searches (66% of total searches in 2007). Thus together, these facts indicate that although Yahoo! and Google have a comparable number of users, Google's users search far more often than Yahoo's. However, Google may soon face a new threat from a possible merger of Microsoft and Yahoo, announced February 1, 2008. Microsoft's $45 million bid for Yahoo may enable the #2 and #3 internet search companies to compete more effectively against Google. [11] However, Yahoo has rejected that bid as an undervaluation. It is not known whether Microsoft will follow up.
 Google2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Google vs. Yahoo! Because Microsoft has many sources of revenue beyond advertising, it is difficult to compare it in more detail to Google and Yahoo!. Relative to Yahoo!--and almost any company--Google's expenses are quite low. In 2006, Google spent an additional $100 million in expenses to generate an incremental $4 billion in revenue compared to Yahoo!. The expense breakdown suggests different priorities for the two companies: Google's highest cost sector is product development, at 9%, while Yahoo! allocated 20% of revenues for sales. And while Google spreads its costs evenly among the three principle areas, Yahoo!'s expenses are clearly concentrated in sales, with development and administration trailing far behind. Google's operating advantage is clear by looking at operating margin trends over time (see chart). For every year since 2002, Google's margins have exceeded Yahoo's, and since 2004 Google's margins have grown faster, as well. In addition to the separation in operating efficiency, Google's also grew revenue much faster than Yahoo!.
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