Now that European regulators have cleared Google’s (NASDAQ: GOOG) $3.1 billion acquisition of online ad server DoubleClick, is it time for online competitors to close up shop?
Hardly. Google has a long way to go before it can hope to gain anywhere near the level of market dominance in display advertising (DoubleClick’s specialty) that it does in text ads based on keywords.
“The whole market for online display ads worldwide is about $5 billion and DoubleClick has a fairly small share of that,” IDC analyst Karsten Weide told InternetNews.com. “It helps Google, but Yahoo is the market leader in display ads and it’ll be hard for Google to get even close to them in the near term.”
Weide said AOL is in second place after Yahoo, followed by Microsoft in a very fragmented market from third place down.
And in a similar vein, Weide notes Microsoft’s $6 billion purchase last year of online ad company aQuantive, was more about ad serving technology and where the market is headed, than about instant market share.
IDC estimates search is currently about 40 percent of the online ad market, display ads about 20 percent and rich media (including video) is about seven percent. “Today it’s search, which is good for Google, but where will that be in five years?” said Weide. “There’s a lot of money flowing into video ads already, so it’s a question of who will corner that market.”
He notes DoubleClick was working with Google providing ads for YouTube videos even before the purchase. Going forward, video and rich media ads figure to be a strong growth area as advertisers gravitate to what attracts more reader engagement. However, Weide said to date, YouTube, while wildly popular, has been hard to monetize because of the random nature of the user-generated content.
“In the next several years there’s going to be a renaissance in display advertising that will grow beyond 20 percent of the overall market,” said Weide. “Google would be in a tough position without a lot of display advertising. DoubleClick helps but it’s no secret weapon that’s going to win the war. Same with aQuantive, which has a good portfolio, but there’s lots of competition.”
Behavioral targeting of ads
Weide said one area the DoubleClick purchase doesn’t strongly address is behavioral targeting of ads. This is technology that allows publishers to monitor what consumers look at online and send relevant ads their way.
A simple example would be if a Web surfer looks at car sites, Chrysler ads appear. “It’s not the shotgun approach you see in broadcast TV and even on much of the Web,” said Weide. “It’s more effective because the viewer is getting truly relevant ads.”
He said this is far more complex than search related ads that pop up based on keywords.
“Advertisers want this because it provides a better return on investment, and publisher’s like it because it helps them prove the ads work and they can charge higher rates.” For now, Weide said, behavioral targeting is controversial because there are “Big Brother” privacy concerns about how it works. He advises companies that plan to use it would do well to enforce and openly state rigorous safeguards to ensure privacy.
In the meantime, Google’s DoubleClick purchase isn’t likely to be last of its kind, though it’s not clear any billion dollar-plus acquisitions are in the offing. “I absolutely expect more acquisitions in this space,” said Weide. “We think social networking, for example, is going to be huge and video is one of the big disruptors there along with the behavioral targeting of ads.”
Weide said IDC believes social networking functionality will be integrated across many types of applications and Web sites rather than center on specialty sites like Facebook and MySpace. Forrester Research analyst Charlene Li echoed those comments in a recent blog post:
I thought about my grade-school kids, who in ten years will be in the midst of social network engagement. I believe they (and we) will look back to 2008 and think it archaic and quaint that we had to go to a destination like Facebook or LinkedIn to “be social”.
Instead, I believe that in the future, social networks will be like air. They will be anywhere and everywhere we need and want them to be. And also, without that social context in our connected lives, we won’t really feel like we are truly living and alive, just as without sufficient air, we won’t really be able to breathe deeply.”
And if there’s anything nearly as ubiquitous as air, it’s advertising.
