GOOG Building Advertising's Operating System

Google’s Dominance of Search
Google has been consistently gaining share in the search market both domestically and abroad. Although the company is the clear leader in most markets, it has found the going a bit more difficult in some of the Asia markets, particularly China, Japan, and Korea. In these markets where Google has found it more difficult to operate alone, the company has established partnerships with local businesses (Sina in China and Daum in Korea). Google is expanding its sights to focus on the non-PC search oriented markets as well.

Display Advertising (DoubleClick acquisition)
Google acquired DoubleClick for $3.1B in cash in mid-April of 2007. DoubleClick provides ad-serving technology and online advertising analytics for online advertising and publishing customers. With DoubleClick, Google will be able to offer its customers an online ad solution for both their search and display advertising needs. Before this acquisition, Google’s ventures into the display ad space have been met with limited success. The established relationships that DoubleClick brings to Google will help greatly expedite the ramp-up of display ad revenue. With the display advertising market one of the more developed segments within online advertising, revenue opportunities will materialize for Google, should the company be successful taking share from competitors like Yahoo, AOL, and MSN. With Google’s existing success in the search market, the company should be able to leverage its relationships from sponsored search to drive up its market share in display.

Mobile Ambitions and the Android Platform
Google has stated it intends to bid on wireless spectrum in the 700 megahertz band. In an open letter to the Federal Communications Commission, the company discussed its vision of open access for this spectrum for wireless broadband and the potential benefits of such an arrangement. As a result of its interest in this spectrum, Google has set aside the minimum $4.6B to bid on this spectrum. This highly publicized move by the company has been frequently been misinterpreted as an early indication of Google’s potential foray in mobile phone hardware market. Despite the much anticipated Google Phone in the press, it is unlikely that this would fit into Google’s overall strategy. If the company were to actually produce a cellphone, it would be dilutive to margins and would bring Google into a hyper-competitive market where it would not have a distinct competitive advantage other than brand recognition.

Google and its partners launch Android
Google and its partners in the Open Handset Alliance announced Android, an open platform for mobile devices that is expected to be available on handsets starting in 2H08. The platform is a fully integrated software stack that includes an operating system, middleware, a user-friendly interface, and applications, and it will be licensed under a developer-friendly open-source license. Thirty-four companies have formed the Open Handset Alliance, which aims to develop technologies that will significantly lower the cost of developing and distributing mobile devices and services. The Android platform is considered the first step in this direction. Handset manufacturers and wireless operators will be free to customize Android in order to bring to market innovative new products faster and at a much lower cost. Participants include Motorola, Qualcomm, T-Mobile, China Mobile, Google, HTC, Samsung, LG, Sprint Nextel, Telecom Italia, Telefonica, Texas Instruments and NTT DoCoMo among others.

Implications for Google and other Internet Companies
This is a very early stage step in Google's wireless strategy. Their aim here, as with most of their moves outside of search, is to drive more online usage and thus more searches. By opening up mobile devices so that consumers can have a more "internet like" experience, Google is taking the network advantages that it has online and carrying them over onto the mobile platform. While Google will, at least initially, likely share a large percentage of the revenue that they generate back to the carriers in much the same way that they have with other online deals, over time we see Google accruing a significant portion of the value that is created in much the same way they have online.

The Mobile Search Opportunity
Various estimates suggest 300M PC units will be shipped in 2008 relative to the nearly 1.3B cellphones in the same year. With the nearly four-to-one ratio of cellphones to PCs shipped, the mobile market is clearly one of the more attractive platforms for online advertisers. Looking at the relative growth rates, cellphones unit shipments are also growing a few percentage points faster than PCs as well. Looking at the install base of the two markets, there are just under 3.6 billion mobile subscribers by 2008 and roughly 1.1B PCs in the same timeframe. In addition, commentary from Google management indicates that in certain markets such as China, there are actually more mobile searches performed than that conducted on computers. With cellphones often the platform by which users access the Internet in emerging markets, this clearly presents an attractive opportunity for advertisers such as Yahoo and Google.

YouTube and the Holy Grail of Video Advertising
Despite the measurable ROI from online advertising, many traditional ad executives have been slow, even reluctant, to shift their advertising spend to this medium. With the rise of broadband connections globally, publishers and online advertisers can now increasingly run rich media ad formats across the web. Eventually, rich media ads should transform into full video advertising, with 10-second or 30-second spots on webpages. Video advertising on the Internet is a format similar enough to television and cable-based advertising that makes it significantly more tangible and accessible for advertisers. YouTube has announced that it would begin monetizing some of its web traffic by allowing advertisers to place in-video advertising on certain video clips. These unobtrusive video ads would be shown in the bottom 20% of the video player after a certain point during playback and will only show in their entirety should consumers click on them. Google has initially set a $20 CPM for these video advertising units and over time, pricing could reach $40. Since the insertion of advertising in YouTube videos, Google also recently launched video units for AdSense. The company announced AdSense will now be able to serve video advertising units that streams relevant YouTube content to the site. These new units are accessible through publisher AdSense accounts and are currently only available to domestic-based online publishers with English sites.

Television Advertising (EchoStar)
Google has signed a landmark deal with EchoStar that would result in automated television advertising across the EchoStar DISH Network. The agreement calls for Google to establish an advertising system to purchase, sell, and measure television ads across the network that spans across all channels on EchoStar. The main upside to the Google television advertising platform is the targeted advertising that could be delivered to users. Despite the value proposition offered by EchoStar and Google, executives have been generally slow to adopt these new initiatives. Google has also signed an agreement with Nielsen to track audiences for TV viewing. Google will pay Nielsen to obtain detailed information on the demographics of the viewers and will help to supplement Google’s efforts already underway with EchoStar. Over time, Google should be able to provide this viewership data on a second-by-second basis. With the EchoStar deal already supplying Google with viewing patterns and habits, the Nielsen agreement helps unlock the other side of the equation, consumer demographics. By pairing the user demographic with viewing habits, Google will be able to serve more targeted advertising to viewers, something that is not currently a viable option on TV. For example, TV ad inventory is generally purchased by advertisers in a broad swath and is generally inserted into inventory slots without much targeting. However, with Google’s efforts to integrate demographic information and viewership trends, the company will be more successful automating better targeted advertising. For example, when a program about barbeque appears on the Food Network, under an automated system, Google can help the right advertisers (in this case, Kingsford for instance) reach their ideal audience.

Newspaper Advertising
Among the major sub-segments within advertising, one of the most challenged industries has been the newspaper advertising segment. Not only have viewership trends been on the decline in favor of other mediums such as online, ad revenue growth has also been difficult to achieve. From 2001 through 2006, ad dollars to the medium have expanded at a 2.2% CAGR in the U.S., meaningfully less than the 4.5% CAGR for overall advertising. According to the latest forecast out of Veronis-Suhler Stevenson, ad spending for the newspaper industry is expected to grow at a 1.6% CAGR from 2006 through 2011, below the 5.2% growth rate for the ad industry as a whole. Google first announced it would be entering the print advertising industry towards the end of 2006 and formally expanded its print program in July of 2007. The group of newspaper advertisers has now grown from 50 in November of 2006 to more than 225 by July and are all accessible through the Google AdWords platform. Over the coming years, Google should be able to grow its share in this medium as it presents an improved and automated experience. Ultimately, the introduction of an automated Google platform to purchase and sell ad inventory could help reduce the cost of sales at the newspaper companies. Around the same time that Google announced its partnership with various newspaper companies, Yahoo formed a consortium with a group of newspaper partners as well. The Yahoo deal, however, only encompasses the websites of the newspaper partners and will integrate Yahoo’s search monetization in addition to Yahoo’s local products on the sites. On the other side of the deal, the newspaper consortium will also be providing Yahoo with original content that can be used throughout Yahoo’s network. Overall, the uptake on the Yahoo partnership has been somewhat limited and has not yet contributed meaningfully to revenues. The same can be said about the Google partnership, but the opportunity will grow significantly over time as advertisers become more comfortable purchasing ad inventory through the Google AdWords service.

Radio Advertising (dMarc acquisition)
Google purchased dMarc in order to enter the automated advertising market for radio. The system allows advertisers to access radio ad inventory via the Internet and buy and sell inventory across various radio stations. Since the acquisition of dMarc, Google advertisers have been able to access this platform via their AdWords accounts. This radio advertising deal is very similar to what Google offers to Echostar advertisers. The opportunity in radio advertising lies in helping these radio companies reduce their cost of sales. Again, with Google helping to automate the advertising buying and selling process, radio companies should be able to reduce the amount of salespeople required to sell inventory.

Introducing the Google Advertising Dashboard
The ability for advertisers, marketers, and ad agencies to perform their media buying across various channels through a single platform will be the key driver for the success of the Google advertising dashboard. The ability for marketers and advertising agencies to control ad purchases from a single location across multiple mediums will drive significant leverage in the business model. Google’s ability to provide real-time (or near real-time) feedback on ROI and consumer viewing habits should allow for greatly expanded flexibility between advertising mediums in the future.
Thanks Credit Suisse Research, November 2007

"Digital Dashboard" - Potential for TV Ad Sales

The current sales process for the television broadcast industry is inefficient due to the many layers of personnel involved making it a prime opportunity for a more efficient online sales mechanism, like a digital dashboard. However, these layers also represent entrenched interests which would likely challenge any migration to a system that excludes them.

What is the “digital dashboard”?
A digital dashboard would give advertisers and agencies one digital platform through which to buy advertising, both online and off (television, radio, mobile, print, etc.) and manage their advertising assets. The platform would be used to better manage, target and measure the traditional media advertising that flowed through the digital dashboard platform. As more advertising becomes digital, advertisers would be able to house and manage all their digital assets through one platform; managing, deploying, targeting, and measuring the effectiveness.

Television Advertising Industry Fundamentals:
􀁑 Current analog process is inefficient and involves many interests.
􀁑 Slow movement towards selling ads via online.

Catalysts to Digital Dashboard:
􀁑 Current system is expensive, involves a lot of people.
􀁑 Easier-to-use digital platform could attract new advertisers.

Challenges to Digital Dashboard:
􀁑 Entrenched system employing a lot of people vested in keeping it unchanged.
􀁑 Networks protective of their inventory (especially broadcast primetime).

Television’s Current Advertising Sales Process
The television advertising market includes in-season broadcast primetime programming, out-of-season broadcast primetime programming, other broadcast dayparts, and cable network programming. Advertising is sold by both the networks and, in the case of broadcast television, local stations. The entire television market is expected to generate $74 billion in 2007 revenue or 25% of the entire U.S. advertising market.

Primetime Broadcast
The traditional broadcast primetime television season begins in September of each year and runs into May of the following year. Advertising buying for television season is sold through two processes: premarket sales, referred to as the "upfront," which account for approximately 80% of advertising sales and open market sales, referred to as "scatter," which are sold close to the program air date. The broadcast upfront takes place in the spring of each year, when networks introduce their fall lineups. Network primetime television is primarily sold at the network level.

Summer Programming & Non-Primetime Dayparts
Out of season network programming (summer months), and other dayparts are sold through a similar process, but by different specialists. Out-of-season is typically sold in the scatter market by the networks while other dayparts are typically sold at the local station level. All upfront segments including primetime, other network dayparts and cable accounts for approximately 25%-30% of total television and cable advertising sales.

Cable Network Programming
Cable network programming follows a similar process, but is more reliant on the scatter market. Cable networks sell approximately 50% of their inventory during an upfront process with the balance sold in the scatter market. Cable network programming accounts for approximately 36% of total television advertising sales this year.

Current Process Reveals Potential for Online Television Ad Sales
Currently, an immaterial amount of television advertising sales are done online, with the process generally facilitated by personal relationships. Traditionally, both the upfront and scatter sales processes involve numerous layers of buyers and sellers that pitch programs, negotiate rates and manage inventory. The large degree of human interaction appears unnecessary given the relative commodity status of the final product: viewers. However, this is an entrenched process that would require a significant change in philosophy to see a meaningful shift to an Internet-based process. Local sales and scatter sales would be most likely to shift to on online process, followed by cable network programming with primetime broadcast the last to shift.

Recent Steps toward Digital Sales are Small, but Significant
Recently, new entrants have looked to online as a way to sell advertising. In April 2007, EchoStar gave Google partial access to its inventory to create an automated system for selling, delivering and measuring impact of TV ads. This deal was not only low-value remnant inventory and included an interactive component. Another current seller of online ads is SpotRunner, which launched an Internet based ad agency in January 2006 that allows local advertisers to digitally create and buy ads to air on cable television. SpotRunner’s focus on cheap local ads highlights another opportunity for a digital dashboard, attracting new advertisers by opening up and simplifying the process. These are early steps toward digital sales of television advertising.

Economic Opportunity Should Pressure Migration to Digital Sales
A digital dashboard-type sales model for television advertising represents a solid economic opportunity for the broadcasters and cable network, but the migration could take a long time. However, the more aggressive the dashboard facilitators are in showing the economic benefits of online sales, the more pressure there will be on content providers and advertisers to start the transition to a new system.

Thanks UBS Research, November 2007

"Digital Dashboard” Approach to Media Buying

At a high level, Google’s success has demonstrated that advertisers are willing to pay more than anyone thought possible for highly-targeted advertising with measurable results. Over time, advertisers will demand the same type of targeting and measurability as they get on search across the other ad mediums. While most other ad mediums will never be as targeted a search (where users self select and ask for information), targeting on virtually all advertising mediums can certainly be improved from current levels. Additionally, advertisers are looking for ways to measure their non-search ad spend as efficiently and effectively as they can with search. When discussing measurement, the old adage that “50% of advertising dollars work, but we just don’t know which 50%” remains true for most ad mediums. Over time, as more media becomes digital, a digital dashboard approach will become the norm for advertisers. Advertisers will use a digital dashboard platform to execute their advertising plans. Such a platform will enable advertisers to upload their advertising creative and more effectively execute their campaigns with better targeting and measurability across multiple ad mediums, further enabling optimization for both publishers and advertisers. At the end of the day, the ability to optimize, manage and target is the key catalyst to drive a digital dashboard approach to advertising.

The key questions surrounding the opportunity are:

􀁑 Who will control the digital dashboard?
— While the answers are not entirely clear at this early stage, Google, Yahoo, and Microsoft are best positioned to become the early leaders.

􀁑 On what mediums will it work?
— Mediums that go digital earliest will be the primary beneficiaries of this platform strategy. Internet is already there, television has very large potential, and radio and mobile also should work well.

􀁑 How will the business models and economics change?
— While the economics and business models are still evolving, better targeting and measurement capabilities will enable platform owners to charge a commission on the total ad spend. However, if a simpler ASP/license model develops that is not based on the percentage of dollars flowing through the system, the potential revenue could be lower than expected.

􀁑 How long will it take for the digital dashboard approach to gain traction?
— As far as timing, it is still too early. The market will develop over the coming decade. Interestingly, the major impediments will not be technological, but instead overcoming the resistance to change among many, many players. As stated in the recent IBM report, “The End of Advertising as We Know It,” there will be more change in the industry in the next five years than in the past 50 years.

􀁑 How big is the potential opportunity for the platform provider?
— While sizing the opportunity is difficult (this is an understatement), the dollars flowing through such a digital dashboard could reach $500b world-wide in roughly two decades.

The skeptics’ view
This concept is exactly that, a concept. The acceptance or inevitability of the digital dashboard is far from certain. When discussing this concept with various industry contacts, there is a high level of skepticism for a variety of reasons, including:
􀁑 Platform Independence - Users of the dashboard might object to the lack of- independence of the dashboard provider. Conflicts of interest could arise between purchases of owned inventory versus partner inventory, each of which would offer different economics to the dashboard owner. The dashboard would probably offer both types of inventory; will dashboard users allow their ad spend to be allocated for them? This issue of “independence” could be the most important factor for advertisers, particularly as it relates to Google.
􀁑 Resistance to change - The digital dashboard represents a massive change from the current method of ad buying. Change often takes more time than expected, even if it is more efficient. There are many players in the advertising industry with vested interests that are challenged by the concept of the digital dashboard and they do not want change. While the dashboard concept will eventually take hold, the timing is unclear. Advertiser adoption and education will take time.
􀁑 Opposition from advertisers – ironically, given the potential scope for improvements in efficiency, one of the main barriers to change could be the advertisers themselves, particularly the bigger advertisers. The current system, where advertising budgets are pooled by media buyers who then buy space on media platforms, is beneficial for larger advertisers, who are able to use the size of their budgets to demand the slots that they want. Under a more transparent system such as the dashboard, advertisers run an increased risk of not getting the slots that they want due to being outbid in an auction process.
􀁑 Inventory and commoditization - Can a player acquire inventory across multiple ad mediums and various partners? Different aspiring dashboard providers will approach this issue differently. Google has already signed agreements to acquire inventory across multiple mediums, but many current and potential partners are reluctant to cede control of their inventory. The traditional media players certainly have a leg-up in creating a dashboard to sell their owned inventory, although they have made limited progress at developing a scalable, off-network model. Publishers also worry about the commoditization of their inventory.
􀁑 Lower overall advertising spend - There may be zero-sum relationships. For example, if ROI is higher on one medium than for others, will spend decrease on one and increase on the other, leading to flat or declining overall spending? Basically, if the platform takes hold and increases efficiency, could that lower the overall spend?
􀁑 Regulatory and legal concerns – Consumers and consumer advocacy groups will likely try to limit ad targeting capabilities because of privacy concerns. Potential legal and regulatory developments could limit the effectiveness of a digital dashboard/platform approach to ad buying.

What is the “digital dashboard”?
This concept is simple: give advertisers and agencies one digital platform through which to buy advertising, both online and off (television, radio, mobile, print, etc.) and manage their advertising assets. The platform will be used to better manage and target and, as importantly, better measure the advertising flowing through the digital dashboard platform. As more advertising becomes digital, advertisers will be able to house and manage all their digital assets through one platform; managing, deploying, targeting, and measuring the effectiveness.

Better targeted and measured advertising will increase pricing
Google’s success has shown that better targeting and measurability can lead to higher pricing for ad inventory. The digital dashboard providers will use this lesson as a key selling point in driving advertiser and publisher adoption. As targeting and measurability continue to increase, spending on mediums and platforms that incorporate these capabilities should rise. If advertisers can target and measure, then they should be better able to understand the ROI. This should lead to higher pricing for inventory. Think about how much more valuable television advertising would be if an ad was targeted directly at a viewer such that when two people are watching the same television program in the same town, they are shown two different, customized ads. While this is likely a long, long way off (if ever), the value of the inventory would be multiples higher than under the current model. (Note that technology may make this type of customizable advertising possible, but that privacy concerns could limit the extent of its deployment.)

Scale and data across mediums
Coupling greater measurement and targeting with increased inventory across mediums is a meaningful selling point as media firms try to garner a larger share of ad spending. Google is quick to explain that the targeting and measurement of its products make them desirable to advertisers. This underpins their partnerships with EchoStar, Clear Channel, and various other offline partners, as well as their decision to make Google Analytics free to users of its search product. The near real-time reporting that Google offers advertisers allows them to have greater insight and understanding of their campaigns and the associated ROI. Google is moving towards a situation where they may be able to offer an advertiser a view of their ad campaigns across multiple mediums with analytics and ROI for each piece as well as in aggregate. The level of complexity here is enormous, but the potential reward may make the goal worthwhile. This is a winner-take-all model. At the end of the day, all the potential platform providers will try to position their digital dashboard as the largest and most efficient. However, alliances and other general competitive pressures should eventually cause the market to consolidate around the top 2-3 players.

Thanks UBS, November 2007