Google search advertising gold mine at risk

Google CEO Eric Schmidt proudly told the world Thursday that “business is very, very good here at Google,” and asserted the company’s intentions to “continue to do very well” going forward (see “Is Google unstoppable: Q3 record performance defies market conditions”).  What drives Google’s financial success?

Google CEO Eric Schmidt proudly told the world Thursday that “business is very, very good here at Google,” and asserted the company’s intentions to “continue to do very well” going forward (see “Is Google unstoppable: Q3 record performance defies market conditions”). 

What drives Google’s financial success? Is there no limit to Google’s profitable growth?

Google Dependence On Search Advertising
Google Q3 Conference Call Commentary

Schmidt: 

search advertising will be the majority of our advertising revenue for many, many years.

Safa Rashtchy, Piper Jaffray asked:

My question is really about the components of your operation that help you grow about 84% according to my calculation, on Google sites. I want to focus on Google sites because you have control.

Eric, you outlined the five features or five characteristics that have been helping you grow. But we have been lumping all of these as search revenues. Is it fair to say that 84% growth didn't really come from what we would traditionally consider search revenues? Your competitors are reporting anywhere between a mid-teens growth. So there is a huge discrepancy here. I wonder if you can help us understand where this growth is coming from beyond the traditional search clicks?

Schmidt response:

Well in fact, the vast majority of our revenue is from search and search revenues, advertising revenues, so indeed it is that.

Google Dependence On Monetization “Gains”
Google Q3 Conference Call Commentary

George Reyes, Chief Financial Officer:

As with previous years monetization gains were the primary driver of sequential revenue growth.

Sergey Brin, Founder and President of Technology: 

we seem to be able to produce new ways to monetize all the time. So I don't see an obvious ceiling.

 

Google Search Advertising Monetization Dependency Risk

 

In “Google AdWords: Soon overpriced with poor ROI” I discuss how Google’s “one trick stallion” AdWords auction money making machine is fueled by advertisers’ inflated, non-optimal search advertising spends:

Google’s unprecedented gross margins and a seemingly unstoppable bid price inflation are derived from the Google-centric auction system which is economically dependent upon price inelasticity of demand.

To date, Google AdWords customers have in fact been overwhelmingly insensitive to rising bid prices.

I note, however, that it is unrealistic to assume that advertisers will continue to raise their own advertising costs in Google’s favor.

I often put forth at this Digital Micro-Markets Blog that Google search advertisers are operating contrary to traditional, standard media buying best practices. Rather than negotiate down published ad rate terms, media buyers blindly, and willingly, bid up their own keyword costs at Google.

At the Search Engine Strategies Conference last August, Schmidt expressed confidence in his company’s ability to continue to generate outsized gross margins in search advertising, and to increase those margins.

I suggested to Schmidt that his belief in advertisers’ willingness to continuously bid up the prices they pay for participation in AdWords might soon be tested, however; I recount my exchange with Schmidt in “Google CEO Eric Schmidt on recession, competition: Google makes more money,”

I asked Schmidt if he was concerned that there might not come a day when advertisers object that Google’s outsized gross margins are achieved at the advertisers’ expense and, subsequently, decide to revert to advertising purchase behavior more aligned with their own interests, that is to bid down prices to achieve higher ROI.

Schmidt’s responded with an emphatic NO.

Despite Schmidt’s confidence, however, Google advertisers are indeed reevaluating their search advertising spends and dependence on Google.

Travelocity, a $25 million annual search advertiser and top Google account, is shifting advertising dollars out of search and into offline media.

Jeff Glueck, Travelocity Chief Marketing Officer, presented a case study at the recent Shop.org conference in NYC on “Why paid search may not be the best ROI for your incremental dollar.”

I cite Glueck in “Travelocity to Google: Stop dissing multi-million dollar ad clients!”:

In an impassioned solo panel appearance before ecommerce professionals and brand marketers, Glueck put forth a business case for why keyword-based search advertising 1) embodies the law of diminishing returns, 2) is not self-funding and 3) is not inherently “golden”…

 

Glueck underscored that despite its glory, search is not the dominant method for Web sites to gain traffic, or sales.

Seventy-five percent of visits are non-search referrals: direct URL entry, email links, banner ads…Eighty-six percent of sales dollars come from people typing in URLs for direct navigation, he said

Glueck stressed that while search engines deliver reach, they are not always the most efficient source of transaction acquisition. He said that Google and other search engines push advertisers to continually spend more on paid search by touting “self-funding” and portfolio theories.

Glueck likened such self-centered strategies by the portals to gambling casinos enticing people to ‘leave your profits at the casino.’ 

Glueck told his fellow advertisers that if they succumb to Google’s self-motivated sales pitches they may end up destroying shareholder value and end up risking their own year-end company bonuses!

Glueck’s message to search marketers is a powerful one and will undoubtedly resonate with other key Google search advertising accounts:

You deserve to be part of a community of advertisers that are knowledgeable about their overall media spends.

Search advertiser empowerment puts Google’s search advertising gold mine at risk; Advertisers will not knowingly enrich Google shareholders at the expense of their own.

ALSO SEE: Google failing to snag $116 billion print, radio, television ad markets
Google is NOT invincible: 5 reasons why

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