The Short-Term Value of Google Advertising

Is it possible that the text ads pioneered by Google have near zero branding value and, as one search advertiser noted in a Stifel Nicolaus analyst report on Google, the “lifetime value of a customer acquired through Google for his/her business [has] approached zero”? The Stifel Nicolaus report by Scott Devitt is cited in a Barron’s article about the risks to Google, which also includes this intriguing observation:

“In some case,” [Devitt] wrote in a report, “pure-play Internet companies have shifted advertising to TV, newspapers and branded alternatives on the Internet, at just the same time that traditional offline media buyers are heading to the Internet in droves.”

In other words, just as the smart money is pulling out of search advertising, the dumb money is flowing in. But it’s probably only a matter of time before everyone figures out the economics involved.

I’ve made the case before that traditional brand advertising will weather the storm of search marketing and other non-traditional forms of advertising (e.g. word of mouth), and that Google will ultimately need to get into the brand advertising business.

But this is the first time I’ve come a across evidence of advertisers eschewing the short-term gains of Google advertising in favor of a long-term focus on “lifetime customer value.” Is it possible that the dynamic nature of search, media fragmentation, content atomization, and contextuality actually makes it more difficult to achieve long-term goals like brand-building?

This is also the first time I’ve heard the assertion that “pure-play Internet companies have shifted advertising to TV, newspapers and branded alternatives on the Internet.” I will be on the lookout for evidence of this (please let me know if you have any). If it’s true that the “smart money” is exiting search, then we could be in store for another major pendulum shift that would favor “branded” media over impersonal networks.

But wait, you say, what if Google is successful in its efforts to broker brand advertising? After all, it already introduced CPM advertising and is experimenting with rich media.

I found this fascinating thread on Webmaster World (by Googling “Google CPM fail”):

Like most of you I am now totally frustrated with site targeted cpm ads. I have been monitoring all the discussions and negative feedback about them in this forum and unfortunately have deduced the same conclusions. My primary reason for being upset about these ads is Intensive targeting of my site by major advertisers.

My main bread winning site is in a low competitive but reasonably paid niche. The relatively small size of market in my niche has resulted in a fragmented distribution of advertisers. There are two to three major advertisers and about a hundred small time advertisers. Traditionally, majority of my income has come from these small time advertisers as almost all the visitors on my site know about the major players and do not convert well for their ads(*i). However, they (the visitors) do get inquisitive when they see a new small advertiser and obviously want to find out more about it. This behaviour on the part of visitors is quite expected as products need in my niche is still unmet. My site is an authority site in this niche and I thought that introduction of cpm ads will increase competition and therefore bidding for my ad space. Theoretically my revenue should have been on an upward climb, but in reality the opposite is happening. I would have been happy if the revenue stayed the same, but a decrease (significant, gradual, consistent decrease approaching alarming levels now) is almost unbearable.

In my understanding, the reason marked as (i) above is mainly responsible for this decline. I always see only a couple of advertisers targeting my website with cpm banners. I guess they must be bidding at a higher amount to keep the lesser beings away. But this reason seems less likely as total revenue has been falling. Other reason could be that the new and small players are apparently still not aware of site targeting feature of adwords or do not know how to use it effectively. Apparently the campaigns of these two biggies are being managed by professionals and they started cpm as soon as it was launched. This invasion by these two advertisers has literally driven away all other ads from my premium ad space and as a result my CPC is sinking day by day.
*
No one is interested in knowing more about them and they are not allowing others to show ads on my website.

What happens if the big money in advertising stays in branding, but web publishers find they are more successful selling to advertisers directly (albeit less efficiently) than using Google as a broker (which should, in theory, be more efficient)? The case quoted above is interesting because this site does better with smaller advertisers — and thus when Google’s CPM system allowed two large advertisers to dominate, the publisher saw no benefit in the short-term gain of this outbidding. Instead, the publisher focused on the long-term interests of site users, given that the “products need in my niche is still unmet.”

This is just a microcosm of how the market for media and advertising value is beginning to sort itself out. And these issues were raised last spring when Google first introduced CPM ads:

A stumbling block may lie on the publisher side. Many larger publishers who sell their own ads have used Google’s AdSense ads to monetize unsold inventory. If advertisers can get a better CPM rate through Google, the publisher loses money, and Google becomes a competitor for ad sales.

“If you ask the larger publishers if they’d be willing to outsource additional inventory, my guess would be ‘no,'” Pahade said. “Most of them would probably be able to get better CPMs on their own.

Will Google (or its wannabe rivals, Yahoo! and Microsoft) ultimately dominate digital media advertising? The answer to that questions is increasingly complex — and increasingly uncertain.