Blog Post

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.

8 Responses to “Google: Ad Slowdown, What Slowdown?”

  1. I’m not going to pretend to know anything about Google, other than the fact that I’ve used their search engine since 1996 on a personal level and have used Adwords and Adsense since they were introduced on a professional level.

    As far as I’m concerned, Google needs to create a slightly enhanced method to determine a “pay out” on a click-through. Click fraud might be characterized as a one-click experience. The user clicks the ad and moves on rather than viewing the destination site, whereas a true click-through represents multiple clicks. That’s to say that the user that clicks an ad will most likely view several pages from the destination site.

    Google might well be tracking such things, but if they’re not I think the problem could be solved with a little bit of code.

  2. I don’t believe this is a Yahoo specific problem. Sure they are having trouble innovating their ad platform but I think this is a display advertising problem. Google’s displays ads are a tiny fraction of their revs. Yahoo’s is very leveraged to this segment. Companies like Bankrate have said they are having problems as well.

  3. I have read Googles 2005 annual report and their statement on Click Fraud. It says if necessary, they if necessary they will pay RETROACTIVE payments to anyone who claims click fraud.

    I think that 20% of Googs revenue is click fraud. Just like the 1 minute dropped on your cell phone – you dont call the cell company to get a credit. Adwords is the same thing. The mom and pop who buys an Adwords account are not going to challenge some click that costs them fifty cents. They just pay and move on.

    I am not implying Goog is doing anything improper and may be profiting from an ignorant consumer but as click fraud tools become better and more users fight back, Goog could see a tremendous hit to the numbers.

  4. Loved the article, and I agree with many of your points.

    Actually, Google is demonstrating the ad slowdown as well; you just have to look at their slowdown in revenue growth. The effect just isn’t as profound as Yahoo since they are the market leader. You can see the graph showing their downward trend in revenue growth on the Blackfriars blog:

    I have to agree with you though; the company that comes through this smelling like a rose is Google.


  5. The beauty of Google’s model is that I think it reflects the small business economy.
    How many times have we heard this already “small business is big business”?
    So I am glad that Google is showing increasing revenue because that directly relates to measure of the new economy. It’s a tale of two economies, the old and the new, both existing simultaneously.

    However I do hope the click-fraud thing is not major portion of their reported earnings.

  6. Charlie Sierra

    I don’t know what Yahoo’s problem is but I can say this with certainty, their web experience sucks.

    You were bitching about how bad Comcast is in SF, but I gotta say nearly all the yahoo services I use suffer from (far too) long webpage load times. I’ve used these services for along time, but I’m phasing them out because they’re PITA.

    I need solutions, not aggravations.