Profit through Ads
For all of its search technology and algorithms, Googles rise has as much to do with its ability to capitalize on search as a way to deliver targeted advertising. Google first introduced advertising in 2000, earning revenue based on the number of times a search term returned an ad. In early 2002, Google evolved what became known as its AdWords program, so that advertisers pay only when a user actually clicks on the paid listing. Click here to read more about how search-based advertising is raising legal questions about the use of trademarks."If Google had not moved into the sponsored-listings space, then we would not even be worried about a Google IPO or be seeing one," Beal said. Part of what Google was able to do with its search ads was offer advertisers a way to more closely target their ads. Advertisers bid on the search keywords that trigger paid listings, and Google then displays the ads alongside its main Web results. It uses a combination of the highest bids as well as click-through rates to determine which ads receive the top listings. Such targeting was attractive to advertisers, particularly during the slow economy in recent years when ad budgets were slashed, Stein said. It also has proved successful for Google competitors such as Yahoo, which last year bought the other major search-ad provider, Overture Services. "Thats what carried them, and its not going away now that better [economic] times are back," Stein said. "Its established itself as a strong way of advertising." As Google becomes a public company, it will face new pressures and demands from investors. Page and Brin noted in the S-1 filing that the company will remain focused on long-term goals rather than short-term gains. But investors could pressure Google to diversify its source of revenue. Google depends almost exclusively on advertising for its revenue, to the tune of 96 percent in 2003. As it has offered new services, such as its controversial Gmail e-mail service and its Orkut social-networking site, the pressure could mount to become more like a portal site, with premium services generating a portion of revenues, analysts say. "They will get pressure to go the route that Yahoo has, but they are strong enough at this point to shrug it off," said Matt Naeger, vice president of operations at search-engine marketing company IMPAQT, in Pittsburg. "I dont think they want to be Yahoo or MSN at this stage but want to maintain their independence from that." Naeger said he expects Google instead to focus on extending its search-advertising technology, possibly offering more robust tools for placing ads and getting reports on the success of campaigns. At the end of the day, even some of Googles competitors agree that it is search technology that has primarily fueled the companys growth and the resurgence of the search market. The ability to find relevant results is what brings users to a search site, and that in turn provides a market for which advertisers will buy paid search listings, said Paul Gardi, senior vice president of operations and strategic planning at Ask Jeeves Inc., another publicly held search company. "If you take away search and search technology, then you take away the reason why people are coming," Gardi said. Check out eWEEK.coms Enterprise Applications Center at http://enterpriseapps.eweek.com for the latest news, reviews, analysis and opinion about productivity and business solutions. Be sure to add our eWEEK.com enterprise applications news feed to your RSS newsreader or My Yahoo page:
A year after Google started offering ads, it turned a profit. In 2001, it took in $86.4 million in revenues for a profit of $7 million. By 2003, revenue reached $961.9 million and its profits rose to $105.6 million.