Page II: Search giant will need to innovate as keyword advertising inevitably reaches a plateau.
Industry executives expect sales from search-engine marketing to eventually comprise 50 percent or 60 percent of the total online ad business. But at that point in coming years, brand advertising is expected to take on a bigger role online.
Greg Stuart, chief of the Interactive Advertising Bureau, said that search typically has appealed to direct marketers, who value the efficiency and accountability of pay-per-click ads. Now that search marketing has proven itself worthwhile to marketers, it has and will continue to attract traditional advertisers, he said, similar to trends in the burgeoning cable TV industry during the 1980s. "There will be continued growth in search. Then it will be equalised with brand advertising in rich media and display ads," Stuart said.
Google, whose founders railed against graphics-rich banners in its early days, has recently began supporting image ads for partner Web sites in what could be the first step toward shifting toward the brand-advertising business.
"The most interesting question is, 'What will Google do next?' They have to continue to radically grow the business to support the kind of the valuation they have," said Sharon Wienbar, a director at BA Venture Partners, the venture arm of Bank of America.
She said the biggest worry as a venture capitalist is choosing to invest in a business on a collision course with Google in a newfound category. "There are not as many businesses that are as a profitable as the one they're in," Wienbar said.
Exploring growth
Google is already venturing into new areas of search. It is testing desktop software for searching the Web, and it plans to build out services for local and personalised Internet navigation. It is also planning to widely introduce Web-based e-mail services, and instant messaging could be an obvious extension of communications services, industry watchers say.
Sources familiar with the company say that Google has built a vast server farm of more than 100,000 machines that can be used to solve any computing problem, and yet another venture could be to offer thin-client computing for consumers.
What's clear, however, is that there's room to grow in the digital advertising industry.
Sales from Internet advertising make up only a fraction of total US ad spending, which was up 6.4 percent in the first six months of this year.
"People spend 20 percent of their media viewing time online, but only 2 percent of media dollars are being spent online. If you scaled media to time spent, it's a much larger market than it is today," said Wienbar.
Indeed, Internet consumption is expected to outpace that of magazines in the next three or four years, according to Jupiter Research.
Online publishers plan to milk the unique trackability of the Internet in coming years to improve its proposition to marketers. Monitoring tools and the ability to target ads based on user preferences are a rebounding trend among publishers. Video and other types of rich media ads are also becoming the norm as broadband becomes ubiquitous.
"The trends are the industry's friend," said Rich Lefurgy, a partner at Walden VC.
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