Fred Wilson is amonst many who feels that the banner was due for a comeback. Today he wrote that Google’s $3.1B acquisition of Doubleclick is further proof of that. I’ve been always bullish on banners - which ulitmately translates into being bullish on branding. Advertisers tend go for a) branding, b) traffic or c) leads/sales. Search’s supremacy within online advertising (accounting for 40% of the pie) and Google’s supremacy within search meant that the first wave of advertisers online looked for traffic and leads/sales. Fitting, since the branding guys who made the Web worthwhile in 1994-2000 all saw their ad budgets dry up when the Nasdaq imploded and VCs stopped funding ad budgets.
Fred says something that reiterates why I just don’t get this deal:
Many marketers have reached the point that they can’t easily buy more search. It’s getting harder. Keyword markets are becoming efficient and supply and demand are coming into balance. Of course, that alone doesn’t mean that all the other money will move into banners. Banners also need to produce measured returns.
But, banners carry branding value that text ads don’t. The return on investment measure is not as cold and hard with banners. And the big branded advertisers that are leaving TV and print in search of better performance on the internet want to be able to brand with their ads. And they want to control where those ads are run. They’ll pay more for those two features.
So branding/banners may grow faster than search/CPC in the coming years, or at least grow as quickly.
I agree with the conclusion that display/banner ads will outgrow search in the years to come. Heck, it’s been “proven” by numerous surveys.
But my problem is this:
Google’s ad serving of paid search clicks was free, it was the network it built that was valuable.
Where Google made money was not in ad serving but in the difference between what it charged advertisers per click times the number of clicks it yielded, less the portion it paid out to advertisers.
From 2000 to present, advertisers fought with one another for clicks and drove up click costs. Fathom Online measured the average CPC (cost per click, hence Google’s revenue per click) at roughly $1.50 per click.
REVENUE FORMULA FROM GOOGLE’S PAID SEARCH ADS:
= $1.50/click x number of clicks - revenue share payment to publisher (on Google’s network of publishers, and not the Google.com site where it kept 100% of revenue).
The $1.50 RPC/CPC is limitless though. On some keywords, it can go up to $50 if not more. This translated, for example, to $10B in sales in 2006 and profits of $3.2B (incidentally, yes, Google paid 100% of its 2006 profit for DCLK!).
But with this Google/DCLK deal, Google buys the ad serving platform from DCLK, and not a network… after all, DCLK got out of the display/banner network business when it sold off that unit to L90’s MaxOnline. MaxOnline subsequently was sold to Ask Jeeves, today a part of InterActive Corp.
What did Google actually buy here?
Google has bought a commodity. Ad servers charge advertisers $0.05 for every thousand ads. In other words, Google’s revenue is limited in terms of what it charges its clients… it needs scale (and Google’s got it).
REVENUE FORMULA FROM THE DCLK UNIT IT JUST BOUGHT:
= CPM it charges advertisers and publishers to use Dart for Advertisers/Publishers respectively x Total impressions it serves.
In other words, Google does not stand to get the CPM that advertisers pay for display ads. That goes to the publisher, or network. Now Google can get back into the banner/display network business, but how many publishers and advertisers really want to make Google stronger?
So in terms of what Google actually bought, looking at that second formula: the latter is unlimited, but the former is capped… Google itself was going to launch a free ad server… and now, I think that MSFT or anyone else can put a dent in DCLK’s business by simply launching a free display ad server (even though why bother, it’s a cheap commodity).
Google is full of folks much smarter than me. But I personally think this was the wrong move for Google. What Google needed was inventory of ads so that it could make unlimited profit as rates rose, volume rose… That’s not what Google bought here. In fact, Google needed what DCLK was, and not what DCLK is.
I know what you’re thinking: Google bought DCLK for $3B for the relationships DCLK has with advertisers. That’s nonsense. The relationship between an advertiser and publisher (or network) is one thing, the relationship between an advertiser and a software is - while binding for a term of a year or so - really not all that valuable. The monetary value is capped to whatever the monthly fees are. It’s the upside (ad network) that is lucrative.
Risk of Publisher + Advertiser Flight
And, as I stated, a number of publishers will exercise their out clauses (MTV, for example) and many advertisers and agencies (already wary of Google’s ambitions in advertising) will seek an alternative. After all, agencies use Doubleclick to manage campaigns, serve and track advertisements. But agencies fear Google because Google wants to automate their existence and steal their lunch. As such, agencies will never use a Doubleclick product if it belonged to Google because it would represent them expediting their demise, something that Google has so sought to accomplish from Day 1.
Does anyone see this any differently?
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