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Deals with Clear Channel and EchoStar and an agreement to acquire DoubleClick have competitors worried. But they shouldn't give up the game just yet
Is Google gearing up to dominate the entire advertising business? Consider that this month alone, the search engine giant announced three major deals, promising to extend its reach in advertising for radio, television, and the Web. On Apr. 16, Google (GOOG) announced a deal with Clear Channel (CCU) to serve 30-second audio ads across the company's 675 AM/FM radio stations. The deal comes on the heels of a $3.1 billion agreement to acquire DoubleClick, a leader in online ad placement and tracking, and just weeks after Google signed a contract to deliver TV ads to EchoStar Communications' Dish Network (DISH).
The new partnerships include some big players in their respective fields. All irony aside, it's understandable that even giants such as Microsoft (MSFT) and AT&T (T) would seek to rein in Google's influence by raising antitrust questions about the DoubleClick deal. After all, Google already controls about two-thirds of the roughly $7.7 billion expected to be spent on online search advertising this year. If it gained a similar share of the $3.75 billion market for online display advertising—the multimedia ads found in a fixed spot on a Web page—many Internet advertisers would find themselves forced to deal with Google, whether they liked it or not.
It's simply hyperbole, as some critics charge, to characterize Google's recent deals as the beginning of a hostile takeover of the ad world. David Hallerman, a senior analyst at eMarketer, says the talk stems from general "FOG"—"Fear of Google." It's an apt term considering much of the FOG originates from confusion over how much control Google really has in the advertising world.
Getting into a Premium Market
To date, Google has had one gargantuan advertising success. It developed an online auction platform enabling businesses, even those with little marketing experience, to easily bid for space to serve tiny text ads related to information Web surfers wanted at a particular moment. Most of these ads—which exist primarily to drive traffic to Web pages and, ultimately, generate sales—run on Google's own search results pages. The others run on partner sites, including those owned by Google's publisher network, News Corp.'s (NWS) MySpace, and Time Warner's (TWX) AOL. In the case of bigger sites, Google's search ads are often located on the side of the page, out of the way from the prime real estate given to display and video ads that publishers often sell themselves or through ad networks.
DoubleClick, with its history of serving and tracking ads from big-name advertisers on large Web properties, gives Google an opportunity to get into this premium market. Google could, in theory, leverage its technology to sell display ads on sites with which DoubleClick has a relationship. For example, if it is serving ads on AOL and knows what display inventory is available, it could ask AOL to allow its network of advertisers to bid on that inventory (see BusinessWeek.com, 4/14/07, "Google's DoubleClick Strategic Move").
The key here is Google would have to ask. DoubleClick's main business isn't auctioning off advertising. If say, AOL had a relationship with Nike (NKE), DoubleClick would track the performance of that ad—how many times it was clicked on, how many times it was served, what sites people who clicked on the ad had recently visited. But it would not pair up Nike and AOL. DoubleClick does have a fledgling ad exchange that matches up advertisers and publishers. However, publishers do not put their inventory up for auction just by being a DoubleClick customer (see BusinessWeek.com, 4/3/07, "Google vs. Microsoft: Vying for DoubleClick").
Dismissing Antitrust Concerns
The DoubleClick deal doesn't suddenly give Google the ability to auction off both search and display inventory across the Internet. If it did, Google arguably would control so much of the online advertising auction business that it could unfairly impose high fees for using its auction platform. But even with a Google-owned DoubleClick, publishers can still sell their display ads themselves and set the prices however they want. "Advertisers aren't going to Google because someone is twisting their arm," says Hallerman. "Similarly, the advertisers and publishers won't stay with DoubleClick unless they find it beneficial."
During a conference call after announcing the DoubleClick deal, Google Chief Executive Eric Schmidt dismissed antitrust concerns: "This is a very, very competitive market in terms of the number of choices," he said. "We don't see the concern."
Of course, there are reasons for fearing a Google-owned DoubleClick could give too much control to a powerful search engine. The threat is that Google could use what it knows about what publishers are charging for their ads—based on its ad tracking—to undercut prices. For example, people fear Google could tell advertisers: "I know you are paying $5 per click on AOL. Advertise on YouTube and I'll let you have the same ad for less."
Not Many Alternatives
What scares rivals even more is the potential for Google to use DoubleClick's connections to further its lead in search. How? Google could offer to waive all the fees for DoubleClick customers, providing they either allow Google to deliver search ads on their properties or, if the client is an advertiser, buy search ads from Google. Mike Walrath, a former DoubleClick executive who is now the founder and CEO of competing advertising exchange Right Media, believes this is a real threat. "If your ad management platform is in any way restricting the competition for your inventory, as a publisher you should run away as fast as you can," says Walrath.
But where can publishers run? Not many places. Either their own in-house people can sell the ads and or they can pay an ad network such as aQuantive (AQNT) or 24/7 Real Media (TFSM) to track them. Publishers could also sell their ads on an open exchange such as Right Media's platform.
Advertisers would have less choice if major publishers with whom they wanted to advertise decided to put their entire inventory up for sale through Google. Such a brash move is unlikely, however, at least in the short run. Most major Web site publishers, such as online publications and media companies, have their own marketing teams. They wouldn't give Google a cut of their sales unless Google could offer a significantly better price than they could get by selling directly to their own advertising base. And, arguably, advertisers wouldn't be able to offer the best price if they either had to pay high fees or buy a pricey search ad that they didn't want.
Limited Access to Inventory
There's also a more practical reason advertisers needn't worry: Google has a lot to lose by bullying advertisers or publishers—about $3.1 billion. Without the relationships, DoubleClick isn't worth nearly as much to Google. It will want to play nice.
The same argument goes for traditional advertising. Sure, Google may have ambitions of someday serving much of the radio and television advertising available (see BusinessWeek.com, 4/9/07, "Is Google Too Powerful?"). However, it can only sell what content creators and publishers are willing to give it. And they won't give Google anything unless they feel they are making more money by allowing Google's large network to bid on their inventory than they would if they sold the ads themselves. Thus, much of the ads Google sells will be inventory for which content creators have difficulty getting the best price. That's why Clear Channel is reportedly giving Google access to less than 5% of its inventory. It can sell the other stuff itself.
Google is quick to point out that its deal with Clear Channel includes prime-time, drive-time ad spots and a variety of premium networks. "It was important that we had a variety of guaranteed premium inventory," says Drew Hilles, Google's director of audio sales.
If Google gets the ailing radio advertising industry better prices, it will undoubtedly get more space to sell, says Hallerman. The same goes for television advertising, print, and all the other places where Google could leverage its large auction network to sell ads. But it won't get the best prices if it starts throwing its weight around.