Google Spends a Bundle on Ads — But Why?

Three years ago, a survey found Google to be the world’s best-known brand, topping Microsoft, 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 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.

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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