But as the sector matures, the search powerhouse will be under pressure from Wall Street to find another billion-dollar business.
Google's closely watched public offering will raise US$1.66 billion and gives the company a market valuation of US$23 billion.
The company's worth is partially based on expected earnings of more than $1 billion this year from sales of simple text ads pegged to keywords used in Internet searches. But ultimately, it's an estimation of Google's ability to innovate as the market it currently relies on peaks.
"There's a natural ceiling to the category," said Pete Petrusky, director of new media at PricewaterhouseCoopers, an auditor that tracks the online ad industry. "Paid search will continue to drive this medium in the near term because that's where the eyeballs are. But longer term, there's more opportunity for creatively driven formats," such as display advertising.
Google's IPO comes at a turning point in the relatively short life of online advertising. After years of languishing, online advertising is a prosperous business again for Web properties like Yahoo and Microsoft's MSN Web portal. In the first quarter of 2004, online ad sales reached $2.3 billion -- the highest quarterly figure since the industry was first measured in 1996 and up 40 percent from the same period a year ago. The rebound is thanks in part to the health of search-engine marketing.
Paid search accounted for 35 percent of the $7.3 billion in online ad sales last year, as opposed to 15 percent of $6 billion in 2002, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. Year over year, the paid-search market rose 183 percent in 2002 and another 94 percent in 2003.
Plateau inevitable
Like any booming business, however, it will eventually plateau. Spending on commercial search will grow 45 percent year over year to an estimated $2.8 billion in 2004, according to Forrester Research, a Massachusetts-based market researcher. But by 2008, Forrester predicts, commercial search will only rise by 11 percent year over year to hit $5.6 billion.
Google is a microcosm of the trend. The company had posted double-digit sequential sales growth in every quarter since 2002. But its sales rose only by 7 percent in the three months that ended in June, according to a recent filing with the Securities and Exchange Commission.
4%
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