By officially filing to go public this week, Google Inc. marked more than a milestone for a company borne from two Stanford graduate students innovative search technology. It showcased the ascendancy of Web search as a core technology of the Internet and of search-based advertising as a profitable business model.
To industry analysts, search-engine marketers and Googles rivals, the companys IPO provides testament to what they have already known for years: The search-engine market, once written off, is in a revival, sparking renewed competition and spawning an entirely new way to advertise that uses search terms as the currency.
“It clearly signals that the [search] industry is growing and becoming more and more important,” said Andy Beal, vice president of search marketing at WebSourced Inc., in Morrisville, N.C. “With Google now being a publicly traded company, it will be a strong voice for this industry and could lead to other companies following suit.”
The market for paid search listings—the text ads that often appear alongside regular search results and that are triggered by the highest bids on keywords—is expected to grow to $4.3 billion in 2008 from $1.6 billion in 2003, according to Jupiter Research, a division of Jupitermedia Corp.
Google on Thursday filed its official paperwork for an initial public offering. Breaking with Wall Street tradition, the Mountain View, Calif., company plans to offer shares in an online auction that could raise as much as $2.7 billion.
In a letter written as part of the filing, Google co-founders Larry Page and Sergey Brin indicated that the decision to go public was more about necessity than a deep desire to court Wall Street. One factor, no doubt, was an obscure securities regulation that would have forced the company to reveal closely held financial data whether it filed for an IPO or not.
But just as important was the intensifying competition Google is facing. Some of the biggest names on the Internet want to overthrow its search-engine crown and reap more of the profits from the search advertising model that largely propelled Google to nearly $1 billion in revenue last year. Its main adversaries are Yahoo Inc. and Microsofts MSN division, both named in Googles S-1 filing submitted to the Securities and Exchange Commission.
“Yahoo and MSN were coming, whether Google was ready for them or not,” Beal said.
Yahoo earlier this year dropped Googles Web search results, opting for its own technology. MSN has begun developing its own Web crawler, and top Microsoft executives have vowed to aggressively battle Google with the companys own search-engine technology later this year.
“Upstart Google has grown to a size that is a threat to some of the more established businesses out there, such as Yahoo, to some degree, and Microsoft, to a larger degree,” said Gary Stein, a senior analyst at Jupiter Research. “They needed an additional boost and acceleration [from an IPO].”
Google remains the leader in market share for Web search. In the United States, Google accounts for 34.7 percent of Web searches, with Yahoo on its tail with 30 percent, according to comScore Networks Inc. MSN has a 15.4 percent share.
But Yahoo already has shown to be a formidable opponent. In another measure of success, it had the highest penetration among search engines, with about 50 percent of all U.S. search-engine users conducting at least one search at Yahoo in February, compared with 45 percent for Google, according to comScore.
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.
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.
“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.