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From GooTube to GoogleClick

Is Google's latest string of deals a sign of strength or weakness?

Another month, another string of victories for Google, the internet’s emerging superpower. With the most popular search engine and the most efficient system for placing text advertisements alongside the results, Google already dominates the lucrative market for “paid search” advertising (where advertisers pay only for mouse clicks). On April 13th Google announced that it would pay $3.1 billion — making this its biggest acquisition ever — for DoubleClick, the web’s largest independent broker between online publishers and advertisers in the market for “branded” or “display” advertisements (where advertisers pay each time the ad is displayed). According to some estimates, this market segment, although smaller, is now growing faster than paid search.

Before the weekend was over, Google had also struck a deal with Clear Channel Radio, America’s largest radio broadcaster, in which Google will sell — online, of course — some of the airtime on 675 radio stations to advertisers in Google’s network. This follows the announcement at the beginning of the month that Google will place advertisements on the 125 television channels of EchoStar, an American satellite-TV operator, and Google’s separate push to put advertisements into traditional newspapers. Google is thus mapping out plans to dominate not just the internet, but the advertising market too.

In the process, it is rudely taking the wind out of the sails of Yahoo!, which had rather been hoping that this would be its month to impress. Terry Semel, its boss, emphasised this week that Yahoo! remains the clear leader in display advertising. Even so, Yahoo! must now feel threatened. Mr Semel says Google’s purchase of DoubleClick “validates” his own strategy in display advertising; but Yahoo!, along with Microsoft and Time Warner, had also been bidding for DoubleClick. For Mr Semel, having been outbid by Google for a stake in AOL, an internet portal, and for YouTube, the leader in online video, this is the latest in a series of strategic defeats.

All this is unpleasant because Mr Semel has recently been trying to engineer just the opposite outcome. Rather than defending against Google in display advertising, he had been hoping to attack it in paid search. Yahoo! has in the past placed text advertisements on its search pages based only on how much an advertiser bids for a given search term, such as “mountain bikes”; Google, by contrast, takes other variables (such as the number of click-throughs) into account and so makes its advertisements more relevant to web searchers, thus earning more revenue. In February Yahoo! launched a new placement system, called Panama, that is meant to close this technical gap.

So far, however, Panama has not helped Yahoo! match Google’s financial success. This week Yahoo! reported that profit in the first quarter fell by 11 percent compared with a year earlier, which was below Wall Street’s expectations. The boost from Panama will show up only in this quarter, says Susan Decker, Yahoo!’s second-in-command. Others are sceptical about how much of a difference Panama can make, since advertising systems depend not just on fancy software but also on signing up advertisers and publishers, as Google has done. Panama may only prevent Yahoo! from falling further behind.

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