Google: Ad Slowdown, What Slowdown?

On September 19th, 2006, when Yahoo warned about an online advertising slowdown, we asked GigaOM readers if it was a Yahoo-specific problem. Nearly 38% of 982 readers who participated in that poll said that it was a Yahoo-specific problem. And how right were they, because Google’s third quarter earnings show that online advertising is not only working, but also thriving for the search giant.

After the market close today, Google reported sales of $2.69 billion for the quarter ended September 30, 2006, an increase of 70% compared to the third quarter of 2005 and an increase of 10% compared to the second quarter of 2006. The net income for the third quarter of 2006 was $733 million as compared to $721 million in the second quarter. That works out to about $2.36 a share for the third quarter.

Google’s good fortunes are at a divergence from others in the online advertising business. Every quarter the naysayers say the music will stop, and Google finds a way to prove them wrong. A few days ago we compared them to Cisco, gobbling up tiny innovators (or eyeball aggregators) just like Cisco gobbled up networking startups. Like Cisco, Google keeps beating expectations. Of course we know sooner or later the music is going to stop, but timing that – it needs a very smart and brave soul. And I am neither.

The problems of online advertising were passionately debated a few days ago, based on a report by Blackfriars, a Maynard, Massachusetts-based research group. We followed up with Carl Howe, author of the report, and he graciously answered most of our annoying queries.

“We can say that online budget allocations have actually been decreasing as the year has worn on, with a corresponding boost in offline advertising,” he wrote back in an email. “Our hypothesis there is that as marketing budgets have been cut, companies have been falling back on tried and true methods, resulting in less investment online than they originally thought they’d make.”

His comments indicate that the downturn might be in the display type advertising – as shown in the C-minus performance turned in by Yahoo. The keyword based advertising clearly is more effective and it is reflected in Google’s earnings; which also show that Google is less reliant on big spenders: automobile companies, financial brokers, insurance companies and retailers.

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