Google’s Ad Revenue: No Real Surprise

“While announcing disappointing fourth-quarter earnings Thursday, Google executives said the company was having a harder time than it expected generating ad revenue on social-networking sites and figuring out the best ad formats for its YouTube video-sharing service,” the Wall Street Journal reported last week.

But the truth is, this really isn’t surprising. Eyeball aggregators like the large social networks have cracked the efficient user adoption code, but they’ve also known for years the simple truth that when you show billions of impressions, users will get burned out on them. Low CPMs are the well-known norm; they make it up in volume.

When it comes to video, there’s no surprise there either. Extracting enough contextual information from short video clips to present relevant ads in an automated way is incredibly difficult. Moreover, the correct video advertising user experience is still under development. After all, consumers just got used to skipping over ads on their televisions using Tivo. Plus, the necessary analytics and measurement for online rich media is just now being put in place by companies like Visible Measures.

There are several parts to a successful monetization strategy:

• Advertising. Clearly this is the core way to generate revenue. While users suffer from seeing too much of the same thing, the fact remains that when you’re at huge scale, big brand advertisers can’t get enough of you. Soft drink companies, wireless carriers, car companies, and the like spend billions promoting their brands. Many sites simply aren’t at a large enough scale to gain the interest of these advertisers, but the large social networks are. Different forms of advertising are beginning to appear as well: digital coupons and product offerings that are contextually targeted provide the potential for monetization lift.
• Payments for digital items. One behavior that has been widely established on virtual worlds sites is the willingness of users to pay for digital goods. These include items like clothes and property. In the social networking world, this translates into special badges, gifts, and other forms of “currency” that enhance a user’s status or allows them to interact with their friends in a unique way. As in the offline world, establishing the value of authenticity is critical. If a third party’s free gifts, for example, become seen as an equal to site provided gifts, the site’s gifts may become devalued. But users also value scarcity — items that can only be purchased in limited quantities, or are only available on certain dates, for example. Thus sites are beginning to drive very real revenue from digital items.
• Mobile.Mobile is yet another interesting source of revenue for social networks. This is because mobile networks provide a built in way to monetize since a billing relationship has already been established with the user. SMS messages and digital downloads offer a vast monetization opportunity.

Social networks have the eyeballs. Where there are eyeballs, there are advertisers. Computers are great at determining context when large amounts of differentiated, long-tail text are involved. Videos and eyeball aggregators, however, are different.

It was years after Internet search was widely available that text-based contextual advertising became the de facto way to monetize it. Untargeted banner ads were the norm. Without user specified search for context, it should come as no surprise then that high value monetization is harder. The only real surprise is that Google thought it would be easier than it is.

But if there’s a silver lining in this cloud, it’s this: Internet entrepreneurs are hard at work delivering solutions to this monetization challenge. Digital goods payments, mobile solutions, and new targeting technologies are just the beginning of a new wave of monetization innovation. The surprise won’t last long.