Record New Online Ad Spend

The latest figures from PricewaterhouseCoopers and the IAB shows another quarter of tremendous growth in online ad spending. By now it has reached just about double the spend during the year 2000 before the tumble. Inside the numbers, search is going to be a fraction of that total spend since media placement with banners, email and affiliate marketing also are represented in “online ad spend” figures. Online ad spending shifted since the year 2000, to a better portion of it ending up with search than ever before.

Tim Beyers of The Motley Fool helps us do the numbers with respect to Google and Yahoo!. Tim used the search engines‘ own revenue reporting assuming their revenue is entirely from online ad spending. He can show what fraction of the total online ad spend each engine has, finding Google captured 22% of US ad spending. He expected to calculate Google’s share to be 40%.

Tim may not assume that online ad spending includes all online forms of advertising and not just search. He found Google’s portion to be strikingly low. It’s actually quite high considering the history of total online ad spending and search’s share. What’s more, he favorably compared Yahoo! with Google after calculating Yahoo! captured 16% of the spend. Yahoo!’s revenue includes earnings from other businesses, such as their Internet connectivity deal with SBC, and a myriad of other business offerings that would not be calculated into IAB’s “online ad spend” figure. This makes Tim’s characterization of Yahoo!’s share of the spend potentially too high against Google.

What Google has been able to do, is capture far more text-based search advertising dollars than anyone else. Google makes 99% of its revenue from text-based search ads, and most of that comes from ads served at its own properties. Google is vulnerable that way, but it is also driving search ad spending. The ratio for text-based search ads alone may be close to Google earning $4 for every $1 Yahoo! currently earns.

The final thing to point out about all this, is during the year 2000, the search ad spend was a minuscule portion of the total online ad spending at that time. If you see fantastic growth in Google’s earnings, and increasing portions of the online ad spending that goes to search, it is because search growth has begun and continued to outpace media placement, email and affiliate spending. Search is the secret tactic become mainstream. Google exemplifies what is possible with search ads when advertising dollars meet the inquisitive, interested and engaged target audience and at just the right time.

Postscript: Tim wrote in to say the Yahoo! numbers he crunched came from his calculating Yahoo!’s revenue from “online advertising” after subtracting revenue from other businesses. No available further breakdown means the numbers are likely to include Yahoo! revenue from banner and other image-ad media as well as strictly search. From an investor standpoint, this makes sense (to compare apples to apples). A one-to-one revenue comparison with respect to our search industry, however, is not exactly possible here. Yahoo! appears too competitive against Google’s search ad dominance.

To clarify (and reference) some other things about Google’s revenue source, 99% of Google’s income is “advertising related,” and this means primarily text-based search ads. As much as 90% of Google’s revenue is from the AdWords program because the majority of AdSense revenue is given to the publishers that host the ads. Google is experimenting with other media formats, but has encountered real trouble making anything else work. Google has not discovered the formula for making anything else work. Even though they are getting into video and radio advertising (as well as offline print), the format that is responsible for bringing in the revenue at this time is text-based search ads.

Contextual ads make up the remaining roughly 10% ad revenue after AdWords. AdSense is contextual advertising, and technically speaking, they may not be search ads per se, but the Google crawler uses its search prowess to match ads to the site nonetheless. The format that works best with contextual is also text-based, (although Google is pushing other formats on publishers and advertisers). They want to experiment, gather data and uncover another winning formula. I’ve heard from big brands I work with that Google is anxiously pitching them alternatives (I’ve heard with radio especially). I’d guess from my own anecdotal evidence that they want the recent purchase of dMarc Publishing to start paying off.

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