October 28, 2003 1:35 PM PST
Google searches for winning ad strategy
Google agreed to purchase online advertising network Sprinks on Friday, a deal that gives the search giant new customers and distributors while knocking out a key competitor. Moreover, the buyout hands Google a lock on a method of delivering content-targeted ads to Web pages that's radically different from its own contextual advertising system, which needs improvement, analysts said.
The buyout is "an understanding that they need something more," Forrester Research analyst Charlene Li said. "And it puts them in a position to have a leg up on the competition."
Google has increasingly turned to advertising to capitalize on its wildly popular search engine technology, which has won a wide following by delivering highly relevant results. The company operates a commercial search service called AdWords, which auctions sponsored link placements on search results pages and competes with Overture Services, a subsidiary of Yahoo. Marketers pay each time Web surfers click on their ads.
So-called content targeting, which Sprinks pioneered, expands on search engine advertising by delivering ads to Web pages based on subject matter and other contextual hints. Using search technology and responding to the demands of its more than 150,000 advertisers, Google expanded into content targeting earlier this year, as did rival Overture Services.
Google's program promises that with search technology, the meaning of a Web page can be boiled down to a few keywords. And a page can be matched to relevant ads it sells for those keywords.
Commercial search is expected to grow from a roughly $2 billion industry this year to a nearly $7 billion market by 2007, according to analysts. A subset of that market, content-targeted advertising, could be worth hundreds of millions of dollars this year.
But there are some holes in the system.Fine-tuning the engine
Content targeting can produce ill-matched results. In one recent example, an ad for a luggage company appeared adjacent to a New York Post news story about a gruesome murder that involved the use of a suitcase, according to reports. The system also produces less-effective returns for advertisers, according to Forrester's Li, who estimates that response rates to content-targeted ads are about one-fifth that of search-related ads.
Li said Sprinks has outperformed rivals, including Google, so far. That's because it matches ads to categories of Web pages editors create, rather than relying on technology to understand the page, she said. For example, Sprinks lets advertisers bid for placement on health-related or real estate pages so that they have an idea where their ads will appear beforehand. In contrast, Google's advertisers can only turn the content-targeting program on or off, meaning that once they buy into it, their ads appear across its entire network's keyword-related content, no matter how well they perform on any given site.
Even if Google decided to stick with its own technology, industry watchers said the deal could help Google improve its customer service by bringing on board up to 30 employees who specialize in pay-per-click advertising. A Google representative did not immediately respond to questions that concern its customer service.
"Everyone knows their customer service hasn't been up to par, even compared to Overture; they just haven't been the most accountable," said Jessie Stricchiola, a search engine advertising specialist. "Advertisers are now getting more granular in how they evaluate pay-per-click campaigns, and they need more hand holding."
For now, Google is evaluating the Sprinks technology, according to a company representative.
"This partnership represents a significant milestone in the rapid expansion of Google's contextual and search advertising programs," according to a statement from a Google representative.Assimilate and eliminate?
To be sure, not everyone believes that Google has grand plans for Sprinks' content-targeting methods, which might require the company to break substantially from its technology-driven approach.
"They've paid to get rid of the only alternative model in the contextual-targeting world," said Matthew Berk, research director for Jupiter Media, a New York-based research firm.
That strategy is similar to past Google moves. Earlier this year, the company bought Applied Semantics, a provider of technology for contextual advertising, only to abandon its software for its own. That acquisition delivered Google several customers for its contextual ad product and removed a rival.
"For Google, it's an ability to capture a lot of good people, some good distribution deals, perhaps, and certainly wipe out one of its closest competitors," said Danny Sullivan, editor of the industry newsletter Search Engine Watch.
The Sprinks deal knocks out another small competitor, as Google prepares for an initial public offering. Talk of an IPO crested last week, after Google Chief Financial Officer George Reyes met with investment bankers to discuss an offering in early 2004 that could value the company at more than $15 billion, according to reports.
Monetary terms of the Sprinks deal were not disclosed, but one financial analyst estimates that the unit will add between $50 million and $100 million in annual revenue to Google's ledger.
Others raised a skeptical note, saying marketers could cool on the technology over time.
"Keyword-based contextual advertising will begin to lose its luster within 12 months, as high-spending advertisers find targeting attractive but creative opportunities limited," said Gary Stein, a Jupiter analyst. Instead, Stein said, search-oriented companies such as Google and Yahoo must evolve by introducing geotargeting
Above all, analysts said, Google is looking to improve the relevancy of its advertising results.
"The greatest challenge that Google faces in the face of growth is customer satisfaction and relevancy," Jupiter's Berk said. "The whole economic model is based on relevancy. It's one thing to build a major distribution network; it's quite another thing to scale that, having over 100,000 customers. That's a big risk, and they have to be careful managing it."