Google ad biz numbers show Net potential

Media congloms take note: The Internet is back where it’s at.

Online search phenom Google submitted its much-anticipated initial public offering filings last Thursday, pulling back the curtains on an advertising-based business far more lucrative — and fast growing — than many had imagined.

While broadcasters squabble over whether next month’s upfront dollars will come in 5% or 6% over last year or whether local radio can recover to mid-single-digit growth, Google revealed its total sales soared 177% last year to $961.9 million, from which the company cleared a tidy net profit of $105.5 million. Based on its first quarter growth, ad sales at Google this year are likely to hit $2 billion — another 100% year-on-year gain.

Through its AdWords program, Google lets advertisers bid to have their sites listed for relevant searches in a separate “sponsored links” category. Advertisers are listed in the order of their bid and pay Google that amount for every click-through they receive.

While not quite as staggering, overall Internet advertising grew at a healthy clip last year as well, up 20% over 2002 figures to $7.2 billion. The fourth quarter’s $2.2 billion marked the biggest quarter on record for the industry, beating even the heights of the dot-com boom.

By comparison, TV advertising is projected to grow around 8% in 2004, and that’s an improvement over 2003’s anemic 4.2% growth rate. Cable nets are driving much of that gain.

So, if media companies like Viacom or Disney are wondering how to recharge the batteries on their wilting share prices, the answer may well be the Internet.

Over at Google, first quarter 2004 ad revenue was up 120% over the same period last year and up 27% compared to the fourth quarter. Better yet, Google’s operating margins are hovering just under 40% with a net profit margin of 16%, a level very few media businesses can match, said Fulcrum Global Partners analyst Rich Greenfield.

“These are not small numbers any more,” Greenfield said of paid search ad dollars. He believes that any advertising-based media company not involved in the Internet should be re-evaluating its long-term strategy.

With its acquisition last year of search advertising company Overture for $1.63 billion, Yahoo! has been moving aggressively into paid search as well. In its most recent earnings, Netco reported that Overture contributed a large part of its 235% increase in marketing revenue in the first quarter.

And while Microsoft currently lags far behind in the search business, company is investing enormous resources to catch up and make its MSN a big player.

Google’s success also could restore the shine on AOL’s image as investors reevaluate its long-term growth prospects under Time Warner. “AOL could be more of an asset than a liability when you consider where the market is going,” said Greenfield.

AOL is directly benefiting from Google’s success as well, as it serves Google search results and advertisements to its own users. For AOL and other Google partners, who include CNN.com and WashingtonPost.com, a cut of the ad dollars Google generates can be substantial and come at no cost.

The Google revelation should trigger some hard thinking about strategic acquisitions. Viacom prexy and chief operating officer Mel Karmazin last week hinted that the company could look to small and strategic investments in the Internet, mostly within its existing business lines.

But Greenfield thinks it may be time for the company to get more aggressive, especially if it wants to truly be a growth company. “Viacom thinks the best place for its money today is buying back its stock or paying dividends, but this could be a real growth opportunity.”

He suggests that with Google and Yahoo! forming a kind of Internet advertising duopoly, a conglom like Viacom could acquire a smaller search player like Ask Jeeves or InfoSpace “and transform them into a top-tier competitor.”

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