Google and Internet Advertising in the US
November 30 (Thursday) 2006
Toru Maegawa
Senior Research Fellow
Summary
- On April 20, 2006, the Interactive Advertising Bureau (IAB), a US internet advertising industry group, announced the US internet advertising market size for 2005. According to this report, the internet advertising market size increased 30.3% from US$9.63 billion to US$12.54 billion in 2005. This figure is the equivalent of 4.7% of the entire US advertising market. It is also more than a 50% increase from the height of the internet bubble (US$8.09 billion) in 2000, and is more than double the 2002 figure (US$6.01 billion).
- More than the expansion of the market size, it is the percentage distribution of advertising types that is showing the greatest change. A look at the US internet advertising market in terms of different advertising types over the last five years reveals a significant shift in the percentage distribution.
A Change in the US Internet Advertising Market
In 2000, banner advertising was 47% and sponsorship advertising 28% of the entire advertising market. In other words, banner and sponsorship advertising occupied US$6.07 billion or 75% of the entire US$8.09 billion market.
However, a look at the percentage distribution for 2005 reveals substantial share decreases of 20% in banner advertising (the name has been changed to "display advertising") and 5% in sponsorship advertising. In terms of money figures, the combined US$3.14 billion represents a 50% contraction.
In contrast, search-type advertising showed sharp expansion. Search-type advertising refers to linked advertisements that are generated in response to keyword searches and are displayed on the result page, or AdSense advertising which automatically loads text advertising strongly related to the content of affiliated websites. In 2000, search-type advertising was receiving attention as a method of target delivery advertising, but its share was marginal at 1%. In 2005 its share had reached 41%. (Furthermore, the share of classified advertising also expanded from 7% in 2000 to 17% in 2005).
Growth in Google's Business Performance
Google is a company that relies on this search-type advertising for its primary source of revenue. Coupling Google’s financial results with IAB's internet advertising market data shows that Google controls roughly 70% of the US search-type advertising market.
Google's 2005 sales increased 92.5% from the previous year to reach US$6.14 billion, while profits came to US$1.47 billion or 3.7 times the previous year. These sales were comprised almost entirely of advertising revenue. A breakdown of sales data reveals that 55% (the equivalent of US$3.38 billion) came from search-linked advertising on directly managed sites, and the rest came almost entirely from AdSense.
On July 20th, Google announced its financial results for the 2006 April-June fiscal quarter, and compared to the same quarter in 2005 sales were up 77% to US$2.46 billion while profits more than doubled to US$720 million.
Search-type advertisements have relatively high advertising efficiency, as they are displayed to users who are assumed to have interest. Moreover, generally the advertising fees are in proportion to the number of clicks the advertisement receives, so the cost versus effect is made clear. These characteristics of search-type advertising have been welcomed by advertisers, and have lead to a growth in the share of search-type advertisement while buttressing Google's rapid business growth.
Google's Strategy and the Convergence in Broadcasting and Telecommunications
The internet advertisement market is growing as its share and performance is driven by Google. In the end, however, internet revenue represents the primary source of revenue for Google, and there are those who believe there is a limit to the growth.
On the other hand, there is also the viewpoint that Google has its sights set on the advertising markets in broadcasting, newspapers, and magazines. On January 27, 2006, Google announced the US$102 million acquisition of dMarc, a company that distributes advertisements primarily in radio broadcasting. dMarc provides a platform that has the function to deliver advertisement distribution performance reports to advertisers and set schedules and advertising slots for radio companies. Google's plan is probably to install advertising target distribution technology on this platform and gain the support of radio advertisers.
There are others who hold that Google is targeting the entire advertising market once broadcasting and telecommunications have been integrated. The essence of Google's innovation in marketing is to be able to efficiently deliver advertisements to interested users, and utilize the interactive nature of the new media and respond to advertisers' demands regarding cost and effect. This kind of technology should work effectively in a world where broadcasting and telecommunications have been integrated.
In fact, Google has announced an agreement with MTV Networks (a division of Viacom International Inc.) to begin a trial distribution of video clips with advertising sponsors in AdSense networks.
Considering these points, it seems unlikely that the expansion of the internet advertising market and growth in Google's business performance will stop in the near future.