What's Google's secret to making a fortune on the Net? Provide a relevant search result for just about any esoteric, tiny piece of information. Then, next to it, provide an extremely relevant advertisement from anyone, including tiny niche advertisers, willing to pay a few cents a click, and sometimes more. Repeat millions of times, and collect a a couple of billion in revenues every quarter.
Google's novel combination of search and advertising has created a useful and wildly profitable business online. But so far, its attempts to translate its philosophy of pairing a massive index of information with millions of inexpensive, highly targeted advertisements into the offline world has brought Google (GOOG) trouble, whether in problems selling print magazines or angering copyright holders in books and television.
In the most explicit admission so far of problems with traditional media, Jonathan Rosenberg, Google's senior vice-president of product management, described the Google Publication Ads program as being disappointing when asked about it during a May 31 investor conference call. Offline print advertising "hasn't taken off as fast as we would like," Rosenberg told analysts. "[We're going to] have to work with a lot of the producers of magazines to come up with formats that work for the kinds of advertisements that we're placing."
It's not the first time Google has had a tough time using its strategy on content outside of Web search. "This is kind of a microcosm of some of the more intermediate-term and longer-term challenges that the company faces," says Scott Kessler, an analyst with Standard & Poor's. "Everyone knows Google is very good when it comes to Internet search advertising. But it remains to be seen whether some of these [new initiatives] end up being compelling enough to generate substantial revenues and profits."
Not that analysts are terribly worried. Even though Google is pursuing a strategy of putting advertising everywhere -- and in a way that's affordable for even the smallest outfits -- traditional media is just a blip compared to the massive strides the company has made in its core online business. "People view Google as an online advertising company that's developing online publications," says Mark Mahaney, an analyst with Citigroup. "I don't think people have a lot of stock in what they can do [offline] yet anyway."
Still, with a company as highly valued -- its shares closed down 12 cents, to $371.82 on May 31 -- and as closely followed as Google, even the smallest of stumbles can attract attention.
Add to that the fact that Google, usually tight-lipped about its strategy and prospects, held the conference call to improve its relationship with investors and analysts. The less-said-the-better strategy worked fine during Google's first few quarters as a public company, as it consistently exceeded even sky-high expectations. But in the fourth quarter of 2005 Google reported financial results that fell well short of Wall Street's expectations, setting off a sharp slide in its stock price.
In the far-ranging question-and-answer conference call, Google Chief Executive Eric Schmidt, Chief Financial Officer George Reyes, and Rosenberg discussed everything from a recent deal with Dell (DELL) (see BW Online, 05/26/06, "Tech Titans Take Sides") to the need to partner for any future municipal WiFi projects and dispelled rumors about an imminent release of a Google Web browser.
And the call came at a time when Google is pressing further into traditional media advertising. On Jan. 17, it acquired radio advertising company dMarc Broadcasting to help a future venture into radio advertising. And late last month, the search giant announced plans to distribute video ads from advertisers, which some day could be placed on television -- giving small advertisers without big ad budgets the chance to have a presence on that medium.
The print ads program, which launched last fall, gave advertisers the chance to bid to have small advertisements -- usually one of four to seven on a page -- placed in magazines, often at a discount from traditional rates. In much the same way that Google's online AdSense program can place the links of small-budget advertisers with small Web publishers all over the Internet, the program was supposed to be especially advantageous to smaller "esoteric" publications, said Rosenberg in the call. "They don't tend to have as large a salesforce, [and] if we make the ads really useful, then their publications become better," he said.
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But, from the beginning, Google has struggled with the program (see BW Online, 12/12/05, "Can Google Go Glossy?"). Advertisers complained they didn't receive the return they expected on the ads, even though they purchased them at steep discounts. Later, an auction for print space was extended several days, due to lack of buying interest (see BW Online, 03/24/05, "Google's Print Auction Fizzles").
Aside from the misfires in selling ad space, Google has also struggled to work its search and indexing magic with traditional forms of media. Two recent examples: In 2005, Google announced plans to, in essence, "crawl" both television shows and books and make the content searchable online, with mixed results. There, too, its plan was to use a similar approach to the way it indexes Web sites: It would record and index the media without the explicit permission of copyright holders, instead offering an "opt-out" clause to those who did not want to be included. In the early days of Google Video, it meant taping television programming around the clock. In the case of Google Books, this meant plans to scan the holdings of millions of library books from five of the world's largest libraries.
In both cases, an approach that worked exceedingly well with Web publishers and bloggers rankled traditional media owners. In early 2005, local television stations and major networks, including NBC (GE) and CBS (CBS) demanded that Google stop recording their programs. Several publishers (including BusinessWeek parent McGraw-Hill (MHP)) have filed a lawsuit against Google, claiming the Google Books program would infringe on their copyrights.
Though Google has said it has taken down content when the owner objected, it is still pressing on with its plans. It continues to scan library books for the Google Books project, maintaining that doing so constitutes fair use.
Still, Google has had some success veering off its customary path. The initiative Rosenberg named as being the biggest success in recent months was the acquisition of mapping program Keyhole. That led to the creation of Google Maps. Together with local phonebook listings -- another example of traditional, nondigital information -- Google Maps led to the Google Local service, which lets users find local businesses and landmarks while creating revenues with pay-per-click local business ads.
Google execs says the company will continue to push further into advertising in traditional forms of media. "People forget, even inside our company, that the model that is working so very well for us today [online] took a couple of years to get really right," Schmidt said during the conference call. "My guess is that for each of these new major media initiatives, we'll have a few cycles of trying to find the right combination that really takes off." And if success doesn't come the first time, Google certainly has the cash to keep trying.