I am not a high-priced financial analyst, but I do know that Google has succeeded in historic proportions by doing exactly the opposite of what Mahaney recommends. While other search engines and sites pasted blinking display ads wherever they could, Google instead put itself into the position of being the preeminent provider of search services to consumers and search advertising to marketers by providing a clean, user-focused interface. Perhaps Mahaney would be well advised to look at how Yahoo and MSN, with their pages of display ads, are performing compared to Google.
Mahaney's calculations provide some interesting insight into how miserably display advertising is performing on the Internet. To calculate how much incremental revenue Google might earn with display advertising, he started by computing the estimated CPM (Cost per Thousand) of advertising on MySpace. His calculations show that display ads are commanding just $1.13 CPM. That strikes me less as a financial figure than an indictment of display ad value and effectiveness. The impact of display ads are so minuscule, and consumers are so immune to them, that each view of a banner ad is worth just one-tenth of one penny.
Mahaney forecasts that plastering display ads on YouTube, Google Maps, Google Images, and other Google properties could add $1 billion of additional revenue in 2009. That sounds like a lot, but Google's revenues were almost $17 billion last year.
Google won't turn up its nose at a possible revenue increase of 6%, but I'm sure they are assessing Mahaney's suggestion with great caution. I don't have access to Citi's report, but according to the info posted to TechCrunch, it appears that Mahaney did not consider the potential negative ramifications that could come if Google includes display ads on every YouTube, Map, and Images page:
- Will users abandon Google? On this blog, I've frequently mentioned how fickle Internet audiences can be. MySpace ruled the social media roost just a couple years ago, but once consumers perceived it was becoming too commercial they began an exodus to Facebook (which many feel is now becoming too commercial, as well).
While today it's hard to imagine consumers abandoning YouTube or other Google properties, it isn't out of the question. Nor would it take a mass exodus to eviscerate Mahaney's proposed display ad strategy--if consumers begin to leave Google for other sites, Google could damage the commanding advantage it has in search advertising. Google shouldn't be too quick to kill the goose that laid the $16.6B golden egg in search of a mere $1B more. I question if Mahaney has fully investigated the potential risk of his proposed display ad strategy.
- What is the impact of so much advertising inventory entering the market? As noted, the CPMs for online ads are already quite a bit lower than they were in past years. What would be the impact of having Internet traffic giant Google enter the display ad market with an additional 1 trillion ad pages annually (725 billion for YouTube, 235 billion for Google Images, and 14 billion for Google maps)?
According to the Interactive Advertising Bureau, in 2007 display advertising revenues totaled $7.1 Billion. Mahaney is suggesting that new display ad opportunities could add $1 billion to Google's top line. So, it seems he is suggesting an expansion of total industry-wide display ad revenue of 14% in one year, and we can surmise this also means display ad supply will increase somewhere in the range of 14%. An increase this substantial in the supply of display ad inventory would exert even more downward pressure on CPMs, thus decreasing Google's potential gain.
More importantly, it seems to me Mahaney is neglecting to consider Google's brand. The company has always been respectful of its Web visitors and aware of how little value banner ads provide to either advertisers or to consumers. The sudden appearance of animated banner ads on a trillion Google pages doesn't strike me as congruent with Google's brand or their world vision.
Just a couple weeks ago, Google CEO Eric Schmidt shared his view of how online advertising will work in the future. He said, "The advertising has to be more entertaining, more interesting, more immersive compared to what we have today." Citi's Mahaney is suggesting Google offer more of "what we have today" while Schmidt sees more experiential and welcome ways to market to consumers.
I predict Google will not embrace the Citi report's suggestion that they step backwards by pushing at consumers some of the least successful and least welcome online ad media; instead, I believe Google will find innovative ways, both online and off, to provide value to consumers and advertisers.