Can Google Go Glossy?

Why its plan to resell print ads to its army of advertisers may be off to a slow start

It was a babystep that sent tremors through the media establishment. Seeking ways to expand its advertising juggernaut beyond the Internet, Google Inc. (GOOG ) this fall purchased about a dozen pages of ad space from niche publications such as PC Magazine and Budget Living. Google then divvied up the space and sold it in small pieces, often four to seven per page, to its network of several hundred thousand advertisers -- most of whom can't afford pricey magazine ads on their own. Now Google says the trial program, dubbed Google Publication Ads, is taking off, with hundreds of publications inquiring about it. The company is expanding the trial from four publications to scores of them, likely to include both niche and general interest titles.

However, a closer look at Google's foray into magazine ads suggests it could be in for a tough slog. Sure, plenty of publishers are clamoring to snare ad dollars from Google. But a BusinessWeek analysis of Google's pilot, including interviews with 10 advertisers and two publishers, indicates that advertisers haven't warmed to the program so far. Only one of 10 advertisers interviewed by BusinessWeek said their print ad performed well enough to recoup the money it cost. And eight of the 10 were unhappy enough with the results that they say they're unlikely to do further print advertising with Google. "The response was definitely less than we expected," says Ken Chang, director of operations at Apex Security Solutions, a seller of networked security cameras, which purchased an ad through Google in PC Magazine's Oct. 18 issue.

The lackluster results came despite deep discounts in magazine ad rates. Some ad pages were sold by Google for as little as one-quarter of the listed ad rates at these magazines, according to information provided by participating advertisers. It raises the question: If most marketers are reluctant to re-up, despite Google and the magazines forgoing profits, can this endeavor become a moneymaker for all the parties involved?

Certainly, Google has proven itself a versatile, innovative company and it could modify its approach in magazines to boost its chances at success. Still, the early feedback should be worrisome for Google. Its Internet ad business is going gangbusters, with 2005 profits expected to climb fourfold, to $1.6 billion. But with its stock at a stratospheric $400 per share, giving it a market valuation of $120 billion, many investors are betting Google can expand beyond the online text ads that constitute 98% of its sales -- into splashy online image ads, as well as new mediums such as radio, TV, and print.


On the surface, print ads make a lot of sense for Google. Magazine ads are expected to generate about $22 billion in the U.S. this year, compared with the $13 billion anticipated for online ads, according to researcher eMarketer Inc. Plus, Google boasts relationships with hundreds of thousands of small advertisers. By selling bite-size chunks of these ad pages, it hopes to draw in thousands of marketers who otherwise couldn't afford magazine ads. Google's ultimate goal: to extend its position as the nexus between advertisers, publishers, and customers beyond the Internet. Says Timothy Armstrong, Google's vice-president of advertising sales: "Advertisers are always looking for more places to show profitable ads."

But Google faces a couple of daunting hurdles in print ads. Foremost, most magazine ads aren't geared toward direct marketers, which constitute the bulk of Google's advertisers. Take, an online business that sells tools to individuals to reduce credit-card and other debt. TrimYourDebt's goal is to send users to its Web site, something it has done profitably by purchasing text ads next to Google searches for terms such as "debt consolidation."

But when TrimYourDebt tried Google's print ads, it found the approach far less profitable. Indeed, Google's core strength -- algorithms that link the appropriate ads with each search query or page of online content -- is much more difficult to apply offline. After buying a small portion of an ad page in Budget Living's November issue for approximately $3,000, responses trickled in a couple of weeks later. TrimYourDebt declared the trial a disappointment, estimating it would generate less than one-tenth as many leads as a similarly priced online campaign. "The whole power of the Web is to bring targeted visitors to your site," says Jennifer Blackhurst, co-founder of TrimYourDebt. "The print ad hasn't done this, so it didn't justify the cost."

Google's other major problem: It can't simply lower the asking price on print ads, as it can online, to the point where they make sense for marketers. On the Web, Google lets advertisers bid against each other for placement alongside search results. Since it costs Google essentially nothing to give each surfer results to their query, it can afford to let advertisers bid a few pennies for every time their ad gets a click. But producing and distributing magazines can be expensive, so publishers can't sell ads for pennies.

There's another hitch. Magazine publishers display ad prices on rate cards and typically give large marketers discounts from those rates. Publishers are reluctant to provide Google with bigger discounts than its best advertisers for fear of seeing rates collapse. "We'd need to make sure we're maintaining the same rate we charge other large advertisers," says Susan McNamee, group publisher at Active Interest Media Inc., which publishes titles such as Better Nutrition and hasn't participated in Google's program.

Google is already getting some of the cheapest possible ad rates, according to two participating publishers. For instance, Google has purchased several one-page ads from PC Magazine for approximately $20,000 apiece, according to a source familiar with the transactions. That's about one-quarter of the price listed on the magazine's rate card -- and below the level where PC Magazine makes a profit, says the source.

Even with such discounts, Google appears to be reselling ad spots without making money itself. For PC Magazine's Oct. 18 issue, Google resold a one-page ad to seven advertisers. BusinessWeek reached four of those, who paid an average of $2,750. Assuming that average for all seven advertisers, Google generated $19,250 for the ad, leaving scant room for profits since its cost was about $20,000.

Still, Google isn't backing away from the market. Co-founder Sergey Brin lauded the ad program during Google's third-quarter conference call in October. And ad-sales chief Armstrong says Google is working hard to improve its performance. "We view this as a long-term R&D project," says Armstrong, who wouldn't comment on specifics about pricing. "We're not as concerned with profitability right now as we are with finding value for publishers, advertisers, and customers."

Google certainly has the cash and patience to sustain a lengthy effort to penetrate the magazine advertising arena. But based on this assessment of Google's initial foray, don't expect it to replicate its online successes anytime soon.

By Ben Elgin

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