You could almost hear the Internet breathe a sigh of relief at the realization that its bellwether, Google, would once again beat analyst estimates and post impressive growth numbers, even if guidance vaguely but ominously acknowledged unpleasant market realities. But what do these numbers really say about the health of the greater online publishing world?
Two factors were noteworthy. First, Google continues to see strongest growth on its own search results pages, while growth on the Google network remains flat. This is good news for Google’s bottom line, as it doesn’t have to pay for traffic on its own sites as it does for AdSense partners, but for the partners, not so good. Secondly, and perhaps more worrisome for online publishers, is the negative growth rate of TAC itself (that is, the fees Google pays to sites in its network that carry its ads). Google showed a graph underscoring this negative TAC growth as a positive for shareholders, but, as the industry knows, Google is the financial wellspring for a great many websites, so negative TAC means less for the world at large.
The chart below illustrates how small adjustments in TAC can have large impact on the after-TAC growth of Google’s network revenue.
Might Google’s lower TAC rates open the door for more competition in the ad network world? Unfortunately for Google’s competition, Google’s reported TAC rate – the payouts divided by network revenue – remain at around 88%, significantly higher than what ad networks appear able to achieve, so it’s very unclear that publishers will be able to do much better elsewhere, particular since many reports indicate ad network display CPMs are dropping (here’s an example from PubMatic and another from The Rubicon Project [registration required]).
But will things change? One comment Google CEO Eric Schmidt made was telling in this regard. In the context of discussing the near-complete state of the DoubleClick integration, he remarked on the benefits of DoubleClick as being, “to bring the science of search to the art of display.” This was reminiscent of Yahoo!’s recent refrain about “search/display convergence” and summarizes why Yahoo! is reluctant to sell its search business to Microsoft. Microsoft has made similar observations, and when those three speak similarly of developments, chances are they’re for real.
Mr. Schmidt and others also talked about the accountability of search, and how accountability means that falling consumer spending is bound to reflect directly on search revenue. Beyond this is a movement, led by Microsoft, to revise the way accountability is measured for online advertising. Historically, by convention, credit for a sale or conversion has been awarded to the last event before the conversion, which has generally been a click on a search page – most likely Google’s search page. Last year Microsoft sought to change this when it announced “Engagement Mapping” which would count all exposures (e.g., banners) within a given period leading up to a conversion.
A recent Gartner survey has shown that advertisers and agencies in the main are still mostly using conventional metrics to calculate ROI, but perhaps increased pressure for accountability will accelerate a move toward broader considerations, which could reverse last year’s trend which showed search gaining share over display advertising online.
Google’s network advertising business (which includes both AdSense for Search and AdSense for Content), when you remove TAC, is only about 6% the size of its Google.com search revenue. But that (along with its still-tiny “licensing and other” revenue) is the portion to watch if you’re looking for an industry health-check.