This Is Why Online Ad Nets Can't Save Media Companies
Media companies have been signing up with Google and Yahoo! advertising networks.
It's a lucrative business for the search giants and that's what has fueled the recent M&A wave, with even a YHOO/MSFT merger possible.
But for most of the media companies on the advertising networks it will never be lucrative, or cover their operating costs. Because the cost of online advertising is set by the search giants.
For example: What does it cost for GOOG to publish a page of content and advertising?
-I don't need to know an exact answer. But I know that a newspaper or magazine's costs to publish a page of content and advertising are several factors greater.
-This means that media companies can only succeed with Google's network if their operating costs are in the same range as those of GOOG.
And that is impossible because Google's ad network costs are primarily servers and software and not editors and reporters and all the other people necessary to produce content.
GOOG Conflict of Interest
Google has a conflict of interest in that it competes with every company on its AdSense network, (this is the network that publishes ads on third-party web sites). And it is winning.
More and more of its revenue is driven by its AdWords revenue, which comes from advertising on Google's own sites.
In 2004 revenues were almost an even split: 50% from Google sites, 49% from its network web sites.
In 2005: Google sites 55% and 44% from network sites.
In 2006: Google 60% and 39% network sites.
In Q1 2007: Google 62% and 37% network sites.
In addition, its AdSense network is far less profitable than AdWords. Most of its traffic acquisition costs are payments made to AdSense publishers which is about 80 percent of AdSense revenues.
Google can increase profitability substantially more by boosting ads on its own sites rather than on third party AdSense sites.
It has a fiduciary duty to shareholders to maximize profits which means it has to invest in ways to boost AdWords over AdSense revenue. In this and other ways, GOOG is a competitor to media companies.
But media companies don't have much choice right now because they don't know how to do any better. That will change, hopefully it won't be too late.
Tom Foremski
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