Google's Display-Ad Sales Should Top $1 Billion

As analysts say rising demand for Internet display ads will begin paying off for Google in 2010, one asks: "Is this a $10 billion business?"

By Douglas MacMillan

(This story was updated to clarify that Hair Club, a subsidiary of Regis, tested Campaign Insights)

Google CEO Eric Schmidt hinted in July that display advertising would probably be the next of his company's businesses to generate $1 billion in sales. Analysts say 2010 is the year he'll deliver on that prediction.

Display ads are likely to contribute a little more than $1 billion, or about 4% of Google's (GOOG) total sales this year—an increase of as much 40% over last year—say analysts, including Doug Anmuth at Barclays Capital. That marks an important threshold for Mountain View (Calif.)-based Google, which makes most of its sales from ads placed alongside search results and which has been criticized for not getting more revenue from other businesses. Demand for display ads, which include marketing messages in videos and banner ads adorning Web pages, may rise faster this year than for search-related ads, according to eMarketer. "You have to go somewhere else to get the next legs of growth," says Jim Friedland, an analyst at Cowen & Co.

In display advertising, Google lags behind Yahoo! (YHOO), which had revenue of $6.5 billion in 2009 that was generated largely from its display ads. Google has tried to catch up in part through acquisitions. Two of the biggest were aimed at the display ad market: The company paid $1.65 billion for YouTube in 2005 and $3.1 billion for DoubleClick in 2007.

Sales of video and banner ads on YouTube, the world's most popular video site, are expected by analysts at Barclays to contribute the bulk of Google's display revenue this year, about $700 million. And with DoubleClick, Google acquired a technology that handles the placement of display ads on sites across the Web. "Display is now a key business for us," says Susan Wojcicki, Google's vice-president of product management and one of the company's earliest employees.

Neal Mohan, the executive in charge of Google's display business, says Google will draw on its strength in search-related advertising to expand in display. It became the leader in search by using algorithms to help it know which ads to place where. "Our goal is to bring the science of search to the art of display," Mohan says.

TV and print ads shift to Web display

Mohan says the company is developing tools to help marketers create more effective banner ads and automate their placement. To that end, Google in December bought Teracent, which customizes colors, language, and other elements of a banner ad, depending on who is viewing it. Soon, Google will pair Teracent's technology with DoubleClick's ad-placement expertise and its own flagship search ad program, AdWords. Mohan is also trying to expand DoubleClick Ad Exchange—a kind of stock market launched last fall for buying and trading display advertising space on the Web—and offer further options for advertisers on YouTube.

Companies tend to use online display advertising to raise awareness of a brand or product while they deploy search ads to encourage customers to take a specific action—for instance, click on a Web site or make a purchase. Because search ads are often cheaper and their effectiveness easier to measure, budget-conscious advertisers flocked to them during the recession. Now, however, display is getting a boost as big advertisers that have traditionally focused branding efforts on TV and print are shifting more ad dollars to the Web. "There's a lot of money to be tapped that otherwise would be allocated to TV, that will be moved online," says technology analyst Greg Sterling. This year, online display advertising may grow 8.2% to $7.9 billion in the U.S., from $7.3 billion in 2009, eMarketer says. Search advertising is expected to rise 5.6% to $11.4 billion.

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