IDC reported last month that in the first quarter of 2011, Google Inc’s (GOOG) display market share had grown into the largest. Google has been gradually narrowing the gap between itself and the now second-largest player, Yahoo! Inc. (YHOO).
While the market shares of Google and Yahoo were 13.3% and 13.6%, respectively in the quarter ended December 2010, in the first quarter of 2011, they moved to 14.7% and 12.3%, respectively, according to IDC.
However, the display business of the two companies tends to differ, with Yahoo remaining strong in the big-ticket area and Google gaining mostly from its push into the small and medium business (“SMB”) segment. Google’s focus on the SMB segment over the past year or so has served to expand the market, as many smaller players that did not advertise previously started gaining from the Google Display Network (“GDN”).
The GDN is an ad network that reaches more than 80% of global Internet users serving more than 6 billion ad impressions a day (comScore key measures October 2008-latest available data). Google’s success on the ad network is traced to the effectiveness of conversions through the GDN.
Google’s own study of its GDN revealed that roughly half the advertisers running campaigns on both search and display networks saw equal or better cost per acquisition (“CPA”) on the GDN.
The results of this study helped Google to sell the concept into the SMB segment. In October, the company stated that its display business was already running at a $2.5 billion runrate and judging from the current momentum, there should be significant gains this year.
We think Google has executed superbly, since it has gradually built its expertise in the display market, which is on track to grow into a bigger market than search by 2015 (eMarketer). We think Google will now go all out to bring in the big spenders. We also believe that the increasing ad budgets and focus on branding in 2011 will work in its favor.
Additionally, Google may be expected to continue investments to improve the quality of its network. This is likely the reason for its recent acquisition of Admeld (a real time bidding platform), which TechCrunch said would cost the company around $400 million.
Publishers have ad space that advertisers require and the management of this space maximizes revenue for publishers. Admeld’s network includes a number of publishers and advertisers that are instantly connected on its own server, as well as several other networks such that the space is automatically allotted to the advertiser willing to pay the highest price for it at that point of time.
Therefore, while on the one side, the acquisition would enable Google to offer the best to publishers, on the other side, competing ad networks that are currently Admeld customers could get a bit nervous about Google’s insight into their inventory and cost per impression ("CPM"). This would lead to customer losses at Admeld.
Since this downside could not have escaped Google, we think Google intends to integrate the technology with an existing Google system, while in the meantime allowing Admeld to generate whatever additional business that it can in its current form.
While Google has been very acquisitive in the recent past, this is not the only area in which it is investing. The company has been adding a significant number of engineers and sales personnel to drive growth and we expect these investments to continue in the near future. Management at Google have said as much.
The higher expenses have driven down estimates, resulting in a short-term sell rating (Zacks #4 Rank) on Google shares.
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