Tuesday, September 23, 2008

The Worldwide Advertising Market in 2011

IDC projects that the worldwide advertising market will grow to over $780 billion by 2011. Of this total, 13.6% ($100-$110 billion) will consist of Internet advertising. These figures, according to IDC's press release, imply a 15-20% annual growth rate in Internet advertising spend over the next three to four years.

Assuming that search holds steady at roughly 40% of the Internet advertising market, this projection implies that Google could continue to grow at double-digit rates for the next few years just by maintaining market share in its core business of search-based Internet advertising.

The U.S. Advertising Market in 2007

Spending on advertising in the U.S. totalled roughly $150 to $200 billion in 2007.

Of this total, roughly $20 billion was spent on Internet advertising.

Within Internet advertising, the three largest categories were search (roughly $8 billion), display ads (roughly $4 billion), and classifieds (roughly $3 billion).

The information in this post comes from two sources: TNS Media Intelligence and IAB. Note that TNS does not include search in its internet advertising total.

Saturday, September 20, 2008

Google's Investments in its Core Business

Google continues to invest heavily in its core business, organically and by acquiring businesses.

Google's 70-20-10 model dictates that 70% of the company's time and resources will be devoted to the core business. A reading of Google's open job listings provides further evidence of this priority: Google continues to recruit people to build its advertising business, to improve and further popularize every aspect of its search user experience, and to improve its technology.

Many of Google's acquisitions helped to build or reinforce the three dimensions of Google's core business. For example: Doubleclick, Sprinks, and Applied Semantics reinforced advertising. Several smaller acquisitions (Outride, Kaltix) provided some contribution to search--although this aspect of Google's business was almost entirely developed internally. And acquisitions such as YouTube added new technology capabilities, including privileged access to a tremendous library of video.

Google's Core Business

Google's core business can be summarized in three words: advertising, search, technology.

Advertising provides 99% of Google's revenues. The AdWords program, which provides the bulk of Google's advertising revenues, lets advertisers pay Google to display their ads on Google's search results pages. The (considerably smaller) AdSense program enables Google to display these same ads on third party websites, sharing the advertising revenue with the third-party website owners.

Search is the key service that Google provides to its users. Search delivers the "eyeballs" that view the advertising. Google's brand and its user relationships are built around this service.

Technology is Google's core competency. Google's technology includes the people who work for Google, the software they develop, the hardware infrastructure they operate, and the data they index.

Friday, September 19, 2008

Drivers of Google's Future Revenue Growth

What major factors will influence the future growth of Google's revenues?
  • Growth of the advertising market
  • Increased share of online advertising as part of the overall advertising market
  • [Extension of Google's business into offline advertising]
  • Increased share of search-based advertising as part of online advertising
  • [Extension of Google's business into non-search-based online advertising]
  • Increase in Google's share of online searches
  • Increase in Google's ability to monetize online searches relative to its competitors
  • [Extension of Google's business into non-advertising businesses]
Any of these drivers can be considered, say, by country or by industry.

Google's Market Share

Google's U.S. Market Share

The Core Search Report from comScore measures competitive share of online searches. In July 2008, by this measure, Google had 62% share of U.S. searches. Google's relative market share was 3.0 times that of Yahoo!, Google's closest competitor.

IDC tracks online advertising spending. IDC's report for 2007 indicates that Google had 24% market share of online advertising dollars in 2007. Another report from IDC gives Google's market share of U.S. online advertising as 32.5%, representing a relative market share of 2.0 (twice that of Yahoo!, Google's closest competitor by this metric as well).

Google's European Market Share

European market share (of searches) is also available from comScore. These statistics show that Google has a dominant market position: Google's 79% market share is roughly 25 times the size of its nearest competitor, eBay. These results are supported by individual country data sources. For example, Hitwise indicates that Google has 87% market share of search in the UK, the largest online advertising market in Europe.

A detailed study by IAB and PriceWaterhouseCoopers found that search comprised roughly 45% of the overall European online advertising market in 2006. This would imply Google had 45% * 80% = roughly 36% share of European online advertising dollars. (Assuming the 45% proportion continued through 2008, that Google's advertising revenues are entirely driven by search and that Google monetized its searches as effectively as its competitors did.)

Google Revenue Mix (Domestic vs International)

Google's geographic revenue mix has steadily shifted from domestic to international. International revenue now comprises 52% of the total.