Internet November 9, 2009, 9:31PM EST

Why Google Is Buying AdMob

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Google CEO Eric Schmidt said recently that the search giant planned to make about an acquisition a month, mostly small purchases, while making a large acquisition every year or two. AdMob is seen as one of the large acquisitions, though the money involved is small next to Google's nearly $178 billion market capitalization. Besides DoubleClick, Google has paid more only for video sharing site YouTube, which it bought for $1.65 billion in 2006.

Blue-Chip Customers

AdMob's growth has attracted attention, though the privately held company doesn't reveal revenues. Collins Stewart (CLST.L) analyst Sandeep Aggarwal estimates it grosses $50 million to $75 million and, after payments to partners, has $20 million in net revenues. BusinessWeek recently featured AdMob as one of 50 companies that could be the next Google.Even more recently, a BusinessWeek story mentioned AdMob as a possible acquisition for Google.

Founded in January 2006, AdMob has some blue-chip customers such as Ford (F), Procter & Gamble (PG), and Coca-Cola (KO). It has raised $47.2 million in funding from Sequoia Capital, Accel Partners, DFJ Growth Fund, and Northgate Capital. AdMob claims on its Web site to have served more than 125 billion ad impressions.

Analyst Schachter said he was surprised Google decided to buy the technology rather than build it from scratch, given the nascent nature of mobile ads. He also said he would prefer Google pay cash from its $22 billion war chest to avoid share dilution. Google's shares rose 2.07% Nov. 9, outpacing the Nasdaq's 1.97% increase.

Google's acquisition could trigger more consolidation among mobile ad firms, which include JumpTap, Quattro Wireless, and Millennial, as well as Time Warner unit AOL's Advertising.com mobile network. "This really validates the enormous potential for mobile advertising," says Paran Johar, JumpTap's chief marketing officer. He says JumpTap aims to differentiate itself on its access to anonymous user data from carriers such as AT&T (T) and Sprint (S), which will allow for more precise ad targeting.

U.S. Regulatory Review

For its part, Google clearly is seeking to blunt anticipated objections to the company's ever-growing power in online advertising, dedicating another Web page to the issue of competition. Google said AdMob is "just one of more than a dozen mobile ad networks in the U.S. that have proliferated in recent years." Google said it expects a regulatory review in the U.S., but not in Europe, because the mobile ad market is so small there.

Google also noted how small the entire mobile ad market is to date. It notes that eMarketer estimates mobile ads brought in $416 million in 2009, compared with almost $24 billion for online advertising overall, $51 billion for television ads, and $38 billion for newspaper ads. Still, Google's entry not only will be seen as the biggest force in mobile advertising, but it will signal that ads on cell phones could be the next big opportunity in online advertising.

Hof is BusinessWeek's Silicon Valley bureau chief.