Aug. 02,  ISSUE #044
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As a tech-savvy professional photographer, Jeff Singer knew he needed a Web site to promote his business.

But he also knew that wasn't enough. So about five months ago, he bought simple text ads on Google that appear when a user searches for "San Jose photographer" or similar key words.

"It's a good way to get people to my Web site," said the Santa Cruz resident. "It's the primary way I get work right now."




More than any other company, Google has built itself into an Internet powerhouse with the help of tens of thousands of advertisers like Singer. About 95 percent of Google's $962 million in sales in 2003 came from advertising, and it has been the key driver behind the Mountain View company's phenomenal growth over the past three years.

Google's growth is representative of a fundamental change taking place in the advertising world. One estimate, by Jupiter Research, predicts the search advertising market will more than double from $2.6 billion this year to $5.5 billion in 2009.

That would seem to bode well for investors considering buying a piece of Google when the Mountain View company goes public this month.

Yet, Google faces challenges to its simple business model. Some analysts worry that Google is too heavily dependent on the simple text ads that appear next to its Web search results. And while advertisers are devoting increasingly larger shares of their online ad dollars to search engines, the number of "search sessions" by Internet users may begin to level off in the coming years.

A recent study by Nielsen/NetRatings concluded that the 34 percent growth in the number of searches at sites such as Google and Yahoo since January 2003 was due in large part to a growing online population.

Growth questioned "Given the fact that the online audience now includes 77 percent of the U.S. population, we must assume that such growth will not be sustainable much longer," the report said.

Whether such a slowdown in search queries would affect the total amount of search-advertising dollars is unclear. But if it does, Google could be particularly vulnerable, some believe, especially compared to its competitors. Yahoo, for example, earns money not just from search advertising, but also from flashy banner and box ads, and fees from subscribers who use its many services.

"Search has a lot of legs. They'll be able to sustain it for a while," Charlene Li, an analyst with market research firm Forrester, said of Google. "But Yahoo has three revenue streams. Google has one. They're my one-trick pony."

Google didn't invent search-engine advertising. It just perfected it. A Pasadena company called GoTo.com, later renamed Overture and bought by Yahoo, came up with the idea of allowing advertisers to bid for the top spot in search results in the late 1990s. Advertisers would pay only when a person clicked through to their Web sites, a concept known as "pay per click."

But the idea did not take off until Google -- an increasingly popular search engine -- coupled the ads with its computer-generated search results.

It was a match made in heaven. Google users are in a "search and find" mode, often close to buying a particular type of product, such as a camera or personal computer. Advertisers want to be there to meet them.

A symbiotic relationship "Suddenly, you had a symbiotic relationship," said David Carlick, managing director at Vantage Point Venture Partners in San Bruno and co-founder of online ad company DoubleClick. "Advertisers found they could find someone who was looking for them."

The pay-per-click pricing model is especially appealing to advertisers. Until that point, they had typically pre-paid for ads based on the number of times their messages were expected to be viewed.

But pay-per-click allows advertisers to pay only when a user clicks a link to their Web sites. That means small companies can launch ad campaigns targeted at specific groups of people -- those researching 20-inch women's bicycles, for example -- with little or no money up front.

Moreover, per-click prices can be surprisingly affordable. Advertisers bid against their competitors for the keywords that will trigger their ads. Prices can range from a nickel to more than $100 a click, depending on the popularity of the keywords.

"It started with mom-and-pop advertisers," said Brian Alexander, who handles search-engine marketing for ad agency Saatchi & Saatchi in Los Angeles. "It took ad agencies a while to understand it."

More spending Big advertisers and ad agencies get it now. Over the past six to eight months, the proportion of their ad budgets that companies devote to search has jumped from about 10 percent to 30 percent, said Ron Belanger, vice president of search-engine marketing for Carat Interactive, whose clients include Best Buy, Sun Microsystems and General Electric.

"My clients are saying, `More search, more search,' " Belanger said.

Demand for search advertising is growing so fast that it is threatening to outstrip supply, or the number of search-engine spots that can accommodate ads. That, in turn, is beginning to drive up keyword prices.

To keep up with demand from advertisers, search engines such as Google, Yahoo and MSN will need to persuade people to perform more search queries. And they will need to diversify out of search-related advertising by placing ads on other sites.

Google and Yahoo -- through its subsidiary Overture -- have both launched programs that allow advertisers to have their ads automatically matched to the content on Web sites such as newspapers and Weblogs, a practice known as contextual advertising. So an ad for a sporting-goods store may appear next to a sports story.

But advertisers are finding that people are less likely to click on those types of ads, compared with search-engine ads.

David Hallerman, senior analyst at eMarketer, said contextual advertising will probably not make up more than 10 percent of all paid search revenue.

Google is also experimenting with placing ads in e-mail messages and newsgroups. And like many search companies, it's gearing up to try to lure more local advertisers to its site, a market that some estimate could reach $100 billion a year.




Despite those innovations, though, Yahoo is still a more attractive overall buy for some advertisers, ad executives and analysts say. Unlike Google, Yahoo accepts a wide array of sometimes pricey ads throughout its network, such as colorful and interactive box ads that hug the top and sides of Web pages. Coupled with the text-based search advertising it offers through its search engine, advertisers can target customers at more points of the buying process.

Observers divided Google this year began to allow advertisers to place ads featuring photos or other images on its partners' Web sites. But industry observers are divided on whether Google will -- or should -- place image ads on its famously spartan text-only search pages.

"I think they would be wise to do that," said Nick Nyan, president of Dynamic Logic, a market-research company. "Yahoo has done an excellent job of that. If their competition can do it, it's probably a matter of time before Google does it."

Meanwhile, Google can probably get along quite well for the next several years doing what it does best -- selling ads next to search results.

"It's a one-trick pony," said Niki Scevak, a Jupiter Research analyst. "But it's a real pretty one-trick pony."

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