- Search revenues are projected to triple to $44.5B over the next 5 years (Piper Jaffray). Google is already positioned to capture a significant majority of those revenues.
- But Search only represents ~50% of all online advertising revenue (current & projected)
- This deal is about positioning Google to go after the other 50% of revenue projected to come from non-Search ads
PROJECTED GO-TO MARKET STRATEGY:
Google is most likely going to bolt the DoubleClick ad server platform and ad network on to their existing AdWords system over time. By doing so, Google will open up a lot of additional graphic/rich media/video ad inventory for AdWords, addressing a big hole in their current offering. While they’ve had the ability to serve up banners and video ads for a while, non-text ads currently account for only a tiny slice of their overall inventory and revenue. When this happens, Google will not only be serving those ads – they’ll be selling that inventory.Why? Because Google’s huge network of 500,000 advertisers will help publishers monetize that inventory better than they can themselves. And if Google needs to partially subsidize some of those high-value publishers by paying guaranteed CPM’s for some time, they can do that. They certainly have the cash. And that will quickly become a moot point as the big brand advertisers (and their agencies) who are currently buying that inventory directly at high CPM’s will realize they’ll need to buy that inventory via Google or risk losing it to a higher bidder.
They will probably continue to offer the DoubleClick ad server product as a standalone product for quite some time so as not to alienate existing advertisers/agencies or publishers, but the real goal will be to make participation in their marketplace a no-brainer for everyone by offering better distribution and accountability for advertisers and better monetization for publishers. As Google gains more advertisers and publishers, the holdouts will have a harder time resisting the gravitational pull.
WHAT IT MEANS FOR:
Advertisers – Win
Online advertising gets more efficient. With Google as the primary hub and marketplace, advertisers get to deal with one entity and cut one check for most of their online advertising. Managing those campaigns will be very complex, but will still be much more straightforward than dealing with individual publishers with different pricing and deal structures.
Publishers – Win
The enhanced AdSense program becomes even more attractive by offering better monetization via advertisers who are willing to bid up effective CPM’s for their inventory.
Probable side effect of this: Many mid-tier publishers who are currently fielding their own ad sales forces will likely decide they can make more by just selling their inventory via Google, meaning a lot of ad salespeople will likely get pink slips.
Other Ad Servers – Lose
Over time Google will have the only ad server that will seamlessly integrate the dominant Search platform and Graphic/Rich Media/Video ad serving and reporting – thus partially resolving one of the major headaches advertisers and agencies face. And they’ll probably offer it at a substantially lower price. Some specialization will be required to compete.
Performics – Lose
Google will have to spin out or sell Performics in order to avoid the perceived conflict of interest inherent in a Search Engine owning a Search agency. The uncertainty accompanying this speculation and the eventual transition will likely result in at least a moderate loss of new and existing clients for Performics in the short term. (Full disclosure: My firm competes with Performics).
Google has already updated their official statement on the deal relative to Performics from “no plans to dispose of it at this time” to “evaluating all strategic alternatives for this business.” So the writing on the wall is pretty clear at this point.
Other Search Engines & Portals – Lose
With Google locking up so much inventory on 3rd party sites, other engines and portals will have an increasingly hard time growing their ad revenues beyond the market growth rate and will continue to lag behind Google in both revenue and prestige.
Agencies – Win
As mentioned above, manually configuring and integrating reporting from Search and non-Search advertising is a major headache and productivity drain for most agencies. Google will go a long way toward easing this problem by seamlessly integrating Search and non-Search ad serving and reporting into a single platform.
Even more compelling for agencies, though, will be the opportunity to boost profits by cutting their ad server bills by switching over to Google’s lower cost ad server.
Google – Big Win
The media has missed the point on this deal by viewing it as a defensive move or a technology play (which is really laughable given that Google already has the world’s largest ad server and marketplace). While they certainly paid more than they would have otherwise in order to outbid Microsoft, it’s important to point out that Google doesn’t think or operate with a defensive mindset. Virtually every move they’ve made has been part of a larger strategy. This is no different.
With this move, Google has put themselves in a position to capture an even bigger slice of the global online advertising revenue pie by giving them direct relationships with the advertisers/agencies and publishers who will be responsible for deciding how those funds are spent.
Google already accounts for 19% of all online advertising revenue (32% in the US) – almost all of that from Search. With global online advertising projected to grow to $81.1B by 2011, it is not unreasonable to think Google could break even on this deal in as little as a few years IF they execute this product integration and transition well.
Given their deft execution to date and penchant for blowing away expectations, I wouldn’t bet against them. This deal positions them to dominate the non-Search online advertising market in the same way that they’ve come to dominate the Search market – by making it easier and more efficient for advertisers/agencies and publishers.
Don’t be surprised if 50%+ of all online advertising revenues go to Google in five years (and possibly a decent chunk of offline ad revenues – but that’ll have to be a topic for another post). If that scenario plays out, this could be looked back on as one of the best deals in the history of business.
DON’T BE DISTRACTED:
The press will play up these issues related to the deal because it’s easy to generate buzz on these topics, but they are ultimately insignificant.
There is very low likelihood that the FTC will block this deal, as the online advertising market is so difficult to define and, more importantly, there is no reasonable argument to be made for how consumers, advertisers or publishers will be harmed as a result of this transaction. And Google’s success with all of this isn’t assured anyhow, despite my views. The FTC can’t block this deal because Google might execute brilliantly.
People will make a lot of noise about privacy concerns, but in the end most will act in their own economic best interests and ignore the conspiracy theories about what Google might do with all the data at their disposal (regardless of how much truth there may be to them). And while Google has certainly used the massive amounts of data at their disposal to benefit themselves by improving their products, there is no indication that they have done so at the expense of their users. In fact Google has a pretty strong record on protecting privacy rights, as Matt Cutts explains here.
OK – fire away…