Online Economics - 2006 Annual Report

Surging revenues from online advertising ha ve not been limited to traditional newspaper companies. In 2005, non-traditional news sites like Google and Yahoo continued to generate headlines for their astonishing economic performances.

Google

Google became a public company in the summer of 2004 and quickly became the world’s biggest media company, at least in stock value . Deloitte Touche has named Google the fastest-growing company ever with its five-year revenue growth at over 400,000%.47 In 2004, Google’s revenues were $3.1 billion, a huge increase over the $1.5 billion in 2003 and just $440 million in 2002.48

Of course, almost all of Google’s revenue comes from search advertising . In 2004, 99% of Google’s total revenues were from advertising, according to the company’s SEC filing.49 And Google made a significant move in late 2005 to preserve its position atop the online search industry. In late December, it was announced that Google and AOL had agreed to a sale that would give Google a 5% stake in AOL. Th e agreement was generally seen as further consolidation in the online search industry and a setback for Microsoft , which had hoped to increase its revenue from online search advertising and increase its chances to compete with Google and Yahoo .

As of October 2005, Google was worth $80 billion in stock market capitalization , ahead of Time Warner, which was valued at $78 billion. Google’s annual revenues, though, are comparatively just a drop in the bucket — slightly over $3 billion in 2005 compared to $42 billion for Time Warner.50 The Silicon Valley-based company’s ad sales for 2005 were projected to put them fourth among all American media companies.51 At the end of 2005 there was discussion of whether Google’s stock valuation needed to be realigned. In late November, the stock fell from nearly $20 a share to $403.54.52

How has the company managed such success? In some ways, Google’s business strategy has been compared to the one adopted by ABC, CBS and NBC in the first days of network television. Google first allows people to conduct searches on almost any conceivable topic free, just as the networks distributed free programming. Then both Google and the television networks use advertising to produce revenue. And finally Google links together smaller Web sites with national advertisers, in much the same way that networks placed national advertising on local TV stations.

Yahoo

In 2004, Yahoo ’s revenue increased from $1.6 billion to $3.6 billion — a 125% increase.53 That was even higher than the 113% increase at Google. In the third quarter of 2005, 87% of Yahoo ’s revenue came from advertising. The other 13% came mainly from subscription-based services, like broadband access fees and Musicmatch.54 While Google’s appeal to advertisers is mainly built around the incomparable popularity of its search engine technology, Yahoo attracts advertisers for additional reasons.

First, it has registered over 190 million users, which means it can provide marketers with a wealth of personalized information they can use to customize ads. Google, on the other hand, has just started to collect personal information through its Gmail and blogging software.

Second, Yahoo users, who are exposed to a diverse range of features on the site such as sports, financial, health and entertainment information, personal and real estate ads, music downloads, e-mail, an instant message service, and a link for booking flight and hotel reservations, prove more engaged than users on other sites. For example, Yahoo generated 178 million page views in May 2005 compare d to 96 million for MSN, 68 million for Google, and 39 million for AOL, according to Comscore Media Metrix.55 For many marketers, the number of page views is a key indicator of the level of consumer engagement with the ads.56