Google's New Billion-Dollar Baby

Google (GOOG) has long been criticized for relying too heavily on one source of revenue, but it may soon have its first billion-dollar business outside of search advertising. Analysts predict revenues from the company's display advertising business will rise as much as 40% this year, to slightly more than $1 billion. Most of that business will come from selling video and banner ads on YouTube (GOOG), which Google acquired in 2005.

There is some urgency behind Google's efforts to expand into display. The U.S. search advertising market is expected to grow only 5.6% this year, to $11.4 billion, according to researcher eMarketer, and Google has so much of the business it may struggle to grab more share. Display advertising, on the other hand, is projected to rise 8.2%, to $7.9 billion, and Google has only a small slice of the business. "You have to go somewhere else to get the next legs of growth," says Jim Friedland, an analyst at Cowen & Co.

While Google lags well behind leaders such as Yahoo! in display advertising, it's beginning to figure out how to use its strength in search to bolster the newer business. People conducted 2.8 billion searches on Google each day in December, according to the market research firm comScore. "Our goal is to bring the science of search to the art of display," says Neal Mohan, the executive in charge of Google's display business.

Companies often use display ads to raise awareness of a brand or product. They rely on search ads to encourage customers to take a specific action—for instance, click on a Web site or make a purchase. Because search ads are cheaper and their effectiveness easier to measure than display ads, budget-conscious advertisers flocked to them during the recession. Now display is getting a boost because big advertisers are beginning to shift money to the Web from TV and print. "There's a lot of money to be tapped that otherwise would be allocated to TV," says Greg Sterling, founder of the research firm Sterling Market Intelligence.


Google is developing tools to help the newcomers create more effective ads and automate their placement. It will soon roll out technology that will customize the colors, language, and other elements of a banner ad, depending on who is viewing it. Google also is helping advertisers measure the effectiveness of display ads. One Google product, Campaign Insights, correlates data from display ads and Web searches.

Hair Club, best known for its Hair Club for Men TV testimonials, was one of the first to try Campaign Insights. The tool tallied the number of people who saw Hair Club display ads on various Web sites and then went on to perform related searches. "Display [advertising] drives searches and Web site visits," says Luke Hubbard, vice-president of Integrated Media Solutions, the Beverly Hills (Calif.) ad agency that coordinated the campaign. "We knew that effect was there before, but now we are able to quantify it." Hair Club increased its spending on display ads for 2010, and Integrated Media has signed up seven other clients to use Campaign Insights. Google offers the service free to advertisers that spend above a certain amount on other products.

While Google's search ad business is largely automated, display advertising involves "a lot of hand-holding and schmoozing," says Sterling, the analyst. Amy Curtis-McIntyre, a senior vice-president at hotel chain Hyatt (H), says Google is getting better at the personal side of sales. The company regularly sends reps to her Chicago office. "When they develop new search tools or new advertising tools, they bring them to us and present them in a usable way," says Curtis-McIntyre.

With $1 billion in sight, how big can Google's display business get? The company is "well-positioned to be a winner here," says Cowen's Friedland. The question he's now asking: "Is this a $10 billion business?"

    Before it's here, it's on the Bloomberg Terminal.