At the Bear Stearns conference yesterday, Google’s Tim Armstrong spoke explictly about the company’s move into display advertising. Specifically, he said Google would be “very disappointed” if it didn’t soon have a major part of the global display ad market.
Depending on what Tim means, the move into display could have either a minor positive impact on Google’s financial performance–or a major, multi-billion dollar impact that could send the stock skyrocketing.
Key Distinction: Google.com or Third-Party Sites?
If Google merely serves display ads on third-party sites (as it is currently doing through AdSense), the display opportunity will be relatively small (relatively–we’re still talking a billion or more of revenue). Google will only keep 10-50 cents on the dollar of most ads it serves on third-party sites, and after deducting sales commissions and other costs, this doesn’t actually create a huge profit opportunity relative to Google’s $6 billion in operating income.
If, on the other hand, Google finally relaxes its religious commitment to not having display advertising on its own properties, the display opportunity could be huge and immediate.
How Big Could the Google.com Display Ad Opportunity Be?
Yahoo and Google are now about the same size globally (reach/users). Yahoo generated $7 billion of revenue last year, of which about $4 billion came from ads on its own sites. This $4 billion included some search revenue, but Yahoo probably generates at least $3 billion in revenue from display advertising. AOL and Microsoft, meanwhile, both significantly smaller than Yahoo, generate about $2 billion apiece.
Assuming that Google’s display ad capacity is similar to Yahoo’s, therefore, we can estimate that Google could use display to immediately generate an incremental $3 billion in revenue (20% increase), of which at least two-thirds would flow to the bottom line. This could quickly boost Google’s $6 billion in operating profit to more than $8 billion–an increase of more than 30%
Will Google Really De-Face Its Site With, Gasp, Ads?
Would Google actually take this step? In our opinion, only as a last resort. The collapse of Google’s stock price in recent months, however, might trigger demands among Google shareholders that it pursue this last resort–at least in a limited capacity.
If Google decided to turn on the display spigot slowly, it could most likely add enough incremental revenue to meet or exceed analysts’ current estimates for the year. It could also likely do this without offending anyone but the most fanatical segment of its user base.