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Sunday, March 05, 2006

Google wants the world's $800bn advertising industry

SOMETIMES it pays to think big -- really big. Just ask the chief executive of Google, Eric Schmidt. The company's share price has had a bumpy ride lately as Wall Street tries to digest the fact that Google is unlikely to carry on growing until it reaches the sky.This in itself is somewhat bizarre. In the final three months of 2005, Google made as much money as it did in all of 2003. How could it possibly keep on growing at that rate? If it did, then by the end of next year its revenues would probably be greater than those of Time Warner or News Corporation, and its cash flow would exceed both of those media giants combined.
You could never accuse Google of ducking a challenge, though. If you like big, hairy ambitions, this is the company for you.
Mr Schmidt faced down his critics last week with a grand promise. Google was not going to limit itself to the keyword-driven search engine advertising on which its business was founded. It was not even going to limit itself to online advertising: who would, when that still only accounts for around 6 per cent of all the money spent on advertising around the world?
No. Google is after everything. Think $US600 billion ($806 billion) or so, the size of the entire global advertising industry, across all media, from the signs in the subway carriages in Beijing to the help-wanted adverts at the back of your local newspaper. Sooner or later, Google aims to be in every nook and cranny -- if the advertisements you see are not brought to you directly by Google, it will at least have had a big hand in the process.
This immodest ambition puts Google among a growing band of technology companies that believe they can own it all. Ebay executives are fond of describing their potential market as the entirety of global commerce. Period. Michael Dell has been only marginally less of a megalomaniac. When his personal computer company's revenues got to $US40 billion or so a year, he sketched out plans to get to $US80 billion. Servers, printers, televisions -- Dell would make them all.
What all these companies have in common is a belief in method, a confidence that what sets them apart is not the services or products for which they are known but a way of doing things. If Dell makes cheaper PCs by collecting customers over the telephone and internet and building machines to order, then why not apply that principle to any type of electronic product? If Google has used technology to bring a higher level of targeting to advertising, why not use that brain power to squeeze the inefficiency out of other corners of the advertising industry?
Grand plans such as these run into a couple of problems. One is that a process perfected in one market often does not transfer quite so neatly into another.
In Google's case, it may be that search engine advertising will prove to have been the purest expression of its technology. When people type keywords into an internet search engine, they are exposing a specific need for information, often linked to a desire to buy something. Deliver the right advert at that moment and the chances of a sale are high.
Any attempt to extend targeted advertising to other media will represent a dilution of this ideal, particularly as Google tries to address the off-line world. The internet company has started to experiment with placing adverts in magazines on behalf of its advertising customers and has bought a company that sells adverts on radio stations. Neither has the interactivity or the intention-based approach of search engine advertising.
The second problem is that, as competitors catch on, they erode the technology or cost advantages of the pioneer -- or they are quicker to apply the lessons to new markets.
Ebay, for instance, has run into problems in China, where a local internet auction company, TaoBao, has stolen a march by letting sellers list their items free of charge. Google now has Bill Gates to contend with -- Microsoft has not perfected its search engine advertising technology to anything like the degree that Google has, but it may be able to start using it as a weapon to undermine pricing.
None of this detracts from the fact that Google -- like Dell and Ebay -- is the undisputed king of a big and growing market. Mr Schmidt knows this. Seventy per cent of Google's research and development is focused on the core search engine advertising business, however much attention it attracts for everything else it does.
Indeed, if Google sits tight, the world will only move further in its direction. One day, all media may be delivered over interactive electronic networks.
News Courtsey
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