Google Gazes Beyond Online Ads

Online ad spending may be reaching new heights, but Google(GOOG Quote) knows that resting on its laurels means money left on the table.

A record $4.2 billion was spent on Internet advertising during the third quarter of 2006, up 33% from the $3.1 billion spent a year ago, according to a study released Tuesday by the Interactive Advertising Bureau and PricewaterhouseCoopers.

Though the news may seem like a cause for celebration for Google, a company that is almost solely reliant on online ads for its revenue, a closer look at the numbers reveals a more complex outlook for the sector and sheds light on a string of shrewd and aggressive moves by Google to expand beyond online advertising.

Online advertising is growing, but the rate of growth seems to have slowed. The most recent numbers show that spending quarter over quarter grew only 2% -- a far cry from the 31% growth of the other three quarters of the year combined.

"We did see a slowing of the growth rate, but part of that is due to seasonality," says David Silverman, a partner at PricewaterhouseCoopers. The pace of growth was so fast in the year before last that it masked seasonality, he adds.

But if signs of seasonality are now showing, the sector's overall growth rate may not be able to defy gravity much longer, either.

And while the rate of growth may be slowing in Google's bread-and-butter online ad sector, competition for those ad dollars is only increasing.

Rival Yahoo!(YHOO Quote) is continuing its push to earn more per search by rolling out its highly anticipated Project Panama, which the company said will kick into full gear in the first half of next year.