Friday, May 07, 2004

Bringing sense to web advertising

Google's $30-50B IPO valuation means investors are making strong assumptions about Google's future growth. Where will that growth come from?

At 40-50% of the worldwide search market, Google is close to saturating its core market. Any additional search market share will be fought tooth-and-nail by Yahoo and MSN. New products may offer some opportunity for traffic growth, but not on the scale required to support Google's lofty valuation.

But, Google doesn't need to drive traffic on its site to drive advertising revenue. Through the Google AdSense program, Google's ads are distributed across the web, already accounting for 22% of revenue in 2004. Google can grow revenue by helping other sites with advertising.

And other sites do need help. Despite evidence that big flash banner ads and popups cause long-term reductions in traffic, marketers seem addicted to them. Marketers ignore the long-term costs and optimize for short-term clickthrough rates. Sites like Salon have gone even further, requiring clickthrough on multipage full screen ads before being able to view content. Annoying is in.

But advertising doesn't have to be annoying. By targetting the right customers, marketers can get their message in front of people who are interested in that message. Google ads are remarkably successful with unobtrusive, text-only ads. How do they do it? The ads are targetted and optimized. Ads are matched to relevant searches and sites. Ads are optimized; ads that attract clickthroughs are shown more frequently and ads that don't appear to be working are quickly removed. Google ads are so well targetted and optimized that they're helpful, often yielding the exact product or information you were looking for with your search.

Google isn't the only one doing text-only ads. But their product has some unusual characteristics. Any site, no matter how small, can buy ads or sell advertising space using Google AdWords and Google AdSense. And Google's impressive infrastructure, in-house expertise, and substantial market share should allow them to produce higher quality targetting than the competition.

AdSense is the future growth channel for Google. As Google grows AdSense, it will change the face of web advertising. Welcome to the new world.

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