Blog Post

Google Spends a Bundle on Ads — But Why?

Three years ago, a survey found Google (s goog) to be the world’s best-known brand, topping Microsoft (s msft), GE (s ge) and others. It was an impressive achievement not just because Google wasn’t even a decade old but because it did so little advertising. So why has Google been spending nearly $2 billion over the past year to strengthen its brand?

Google, the company that has redefined advertising in the 21st century, is itself becoming a major advertiser in traditional media. Remember the “Parisian Love” ad that ran during the Super Bowl (a $3 million piece of TV real estate)? Or how Eric Schmidt, in tweeting about the ad spot, joked that “hell has frozen over”? Then there was the Chrome ad on the, as well as other print ads in magazines and newspapers around the world.

But when hell freezes over, you have to wonder why. Yes, Google launched new products like the Nexus One (to disappointing sales); and yes, its brand takes a hit with every perceived violation of its don’t-be-evil ethic. It also wants to let people know about new twists on search ads like remarketing. But does a company with a two-thirds share of the search market really need to beef up its marketing budget?

Google’s marketing costs have long been around 8 percent of its revenue. Last year, sales and marketing (excluding stock-based compensation) totaled $1.8 billion. Yet in the first quarter of this year, it spent another $553 million, a 47 percent increase over the same period a year ago. Granted, the beginning of 2009 was a bad time to be spending on anything, but that 47 percent rise is more than twice Google’s revenue growth rate.

The question of why Google is buying so many ads was on the minds of analysts during the company’s earnings call this week. When a Bank of America analyst asked about it, a Google executive responded that it was driven by return on investment. Which is a silly answer: All advertising is directed at a return on investment. That’s like saying you’re going into business to make a profit.

What’s more, marketing an ad-driven company has an absurd Ponzi scheme logic to it, a kind of media usury where ad revenue is spun out of ad revenue. Just stop and think about Schmidt’s Super Bowl ad tweet: Here was the CEO of an online ad giant advertising a TV advertisement. If it gets any more meta than that, our heads could explode.

But, as another analyst pointed out on the call, Google is facing long-term threats from social sites like Facebook, where major advertisers like eBay (s ebay) are spending more of their own ad budgets. Jeff Huber, a SVP of engineering, responded by saying that online advertising is growing so fast it’s not a zero-sum game. That’s true for now, but it won’t be for long. Google, of course, has had a number of failed initiatives in social media. And mobile search is not only a clear priority for Google, it’s a fledgling market up for grabs, perhaps by Google’s newest rival in web advertising, Apple (s aapl).

Google’s sudden interest in buying expensive ads in visible advertising spots may suggest that the company is bracing for a period when its core market matures and growth slows. Coded into those rising marketing numbers is a slight but growing concern about what life will be like in middle age.

Still, at the end of the day, I doubt there can be much return on investment for Google to advertise its search engine and its ad model. Does anyone with web access need to know what Google is, or what it does? If so, I suggest they Google “Google.” Ow — once again, my head hurts.

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23 Responses to “Google Spends a Bundle on Ads — But Why?”

  1. Remarketing, one of Google’s newest strategies – that you briefly mentioned — can be very effective in driving sales. The strategy focuses on visitors who left your site without generating a lead or purchase. So, a portion of your ad spending focuses on those who are currently interested in your product. Sometimes that extra nudge at a critical point in the buying phase can be quite beneficial. Here’s an interesting case study on how effective retargeting can be.

  2. Well I agree with the Post about google spending more on advertising because they have long term threats from sites like facebook etc also there initiatives are not doing good in the market you take chrome, nexus. So be the market leader in the field of search as well in other areas it has to market itself. Also they need to come up with new applications and social networking sites. In next couple of years Facebook would be the leader in online advertising than google.

  3. Your facts are wrong, and your logic is flawed. As another commenter already pointed out, you’re incorrectly assuming that the $2B in “sales and marketing expenses” is all going to ads, which is not the case at all if you read more closely.

    “What’s more, marketing an ad-driven company has an absurd Ponzi scheme logic to it, a kind of media usury where ad revenue is spun out of ad revenue.”

    So essentially, you’re saying that a company that makes money from ads shouldn’t advertise. Following that logic, a car company should never buy cars, a power company should never use power, and a television network should never advertise its own shows. That is absurd. Most companies have some use for advertising, and Google is no exception.

    Also, a previous commenter suggested that Chrome’s market share is low and not growing fast. That’s inaccurate as well. By many market share measurements, Chrome surpassed Safari as the #3 most used browser in about a year and its market share continues to grow rapidly (see for details and links to other numbers).

  4. Rainier Seidel

    Excellent post. I think Google has become the evil monopoly it did not want to be. Advertising is a way of countering the reality of being evil.

    As with Microsoft in the desktop era, it is now impossible to develop an application in or around the Google ecosystem. If you get traffic from Google, they will “de-index” you as you grow. If you get ads from them, they will close your account as you grow. It is because search is valuable only in a fragmented ecosystem.

  5. Kevin, I am not sure about the reasons for the surprise element here. Probably, analysts have to ask questions for the sake of asking. As the industry matures, marketing expenses need to increase. Google has taken most of the low hanging fruit. Now they have to go for the tough customers. Obviously the profit margins will decrease and business growth will decelerate in the existing domains.

    Of course, they might find one or two niches and make it big. But the niches won’t be as big as AdWords.

    Regarding the browsers, you are right. I was speaking with one of my friends, who retired as a senior executive and using the Internet for more than 10 years. When I asked him to open the browser, he asked ‘What is a browser’. The majority of the lower end of the computer users are not tech savvy.

    It seems that recessions and economic cycles do not teach anything to wall street folks and analysts! They want exponential growth!

    BTW, I have received at least a dozen print mailers from Google (or its partners) in the past year. I guess they are innovatively using the opportunities.

  6. Very interesting article. Clearly, they perceive legitimate threats to their core business — advertising.

    On my site yesterday I noted how the fundamental reality of search is being shaped by the smartphone and the concept of NOW (real time). I don’t want 1 million results super fast. I want the exact right one — for where I am and what I am doing and who I am with. As well as Google does on many fronts, including mobile, right now that fundamental search question is best served by my friends and my social networks (e.g. Facebook).

    • Not to discount your friends and social network, but if you think back over the past week, how many queries did you use Google for and how many did you use friends / social network for? How many of these queries were successfully answered quickly, unambiguously and with greater ease / convenience?

      I have heard about the value of friends and social network as opposed to search engines from many tech writers, but some how, in terms of sheer search volume and efficiency, I find myself using search engines far more often than friends. I don’t know, may be I just don’t have as a great a social network as many tech writers do. Even when I get some information from friends, I find myself having to check Google for more information about it. Eg: A friend mentions a great new restaurant to me, I Google it to get more information, driving directions, menu, business hours, etc.

      • Thanks, A S. You gave me a new post.
        I thought about your response and realized…I almost never use Google for search.
        On rare occasions, I do. And I use “Google” all the time (YouTube, Voice, gmail, Adwords). But rarely anymore for search.

        No wonder Google’s spending all that money on advertising!

    • Kevin Kelleher

      Thanks. Here’s what I saw:

      “Sales and marketing expenses increased $37.7 million from 2008 to 2009. This increase was primarily due to an increase in advertising and promotional expense of $104.0 million, partially offset by a decrease in travel, conference and related expenses of $49.8 million.”

      In other words, more ad spending.

      • I’m sure you’re right that they spent more on ad spending than they did the previous year, but your article suggested that they spent $2B. According to the 10K, it’s mostly labor cost for sales and support (7,338 employees according to the 10K).

  7. Many well established brands spend quite a bit on advertising to maintain brand awareness as well. The traditional media still reach people the internet can’t and advertising still influence consumers’ choice. Everyone knows about Microsoft and Windows, and they still advertise on Window 7 big time.

  8. Johan J.

    I am sorry, but don’t agree. Google isn’t aiming for more searches. They are aiming to “become the internet”. If your site has been blacklisted by google, you already don’t exist online. If they can extend this from the information search range to social media and gsm’s and such, they can control the entire internet, and form a monopoly with all of it’s advantages including securing (future) profits.
    Brand marketing is only one of the many steps involved in a monopoly. If we keep associating Google with evil, they will never reach the “global domination”. Very lucky for us, is protecting a monopoly very hard, if the prices/risks for entering a market are very low. Too many people with better ideas or implementations can eat your customers away. (Remember Altavista and ICQ?)

  9. Two things about ads for Chrome:

    1. Market share of Chrome is quite low and it is not growing very fast. Google realized that many people don’t even know what a browser is, let alone switch to a new browser deliberately. So, they feel the need to educate the general public through more traditional media.

    2. The EU has decreed that Microsoft should offer a choice of browsers to computer buyers. Google realizes that the first time a user sees a screen with a bunch of different browser options, they will choose the one they are most familiar with, which would be IE or Firefox. So, it had to get its name out there into the forefront of people’s minds.

  10. Google’s just making sure it’s name is out there, but it won’t go to the ridiculous level that Apple does to do overhype marketing of its overpriced trinkets.

    • Kevin Kelleher

      Not to defend Apple’s ubiquitous ads, but they are promoting a product to consumers. And they have mastered the art of generating hype to spur sales.