George Mannes

Return to Article

Google Grabbing at Content-Based Ad Market

George Mannes

A new front is opening in the pay-per-click advertising market, signaling a larger potential market for Overture Services (OVER Quote - Cramer on OVER - Stock Picks) as well as increased competition.

Google, Overture's prime competitor in the pay-per-click online ad business, says it is launching a new service that would automatically tailor advertising to Web pages by serving ads relevant to the page's editorial content.

The program, for which Google will start charging advertisers next week, builds on Google's current business of selling advertising keyed to the search terms people type when they use Google's Internet search engine.

The new program competes with Overture's plans, announced last week, to develop its own program for what it calls "contextual advertising," or serving ads based on a site's content rather than search engine queries.

While some outsiders have questioned Overture's business model, saying that the company will be squeezed by Internet publishers demanding an increasing share of the ad revenue brought in through their sites, Overture insists that any risk of contracting margins is offset by the untapped size of the search market. The industry's best days "are ahead of us," Overture CEO Ted Meisel said on a call last week.

On Tuesday, Overture's shares rose 20 cents to close at $17.01. Google is privately held, though it's widely expected to file for an initial public offering of stock once IPO market conditions improve.

First Service

In the new product, Google says it is using the same technology it uses in its automated search engine to find pages that are relevant to the terms an online user plugs into the search engine.

"We look at the page, we understand the meaning of the page, and we serve the right ad," says Susan Wojcicki, director of product management for Google.

Google, which has been testing the ad program since late last year, says the program benefits advertisers by extending the reach of their advertising online without affecting the price per ad they pay.

Internet publishers, says Google, will be able to monetize areas of their site for which they have not been able to sell ads. Setting up a site to be served content-relevant Google ads can take as little as 10 minutes, the company says.

Google's largest content partner for the new service is Knight Ridder's (KRI Quote - Cramer on KRI - Stock Picks) Knight Ridder Digital unit, operator of sites affiliated with such papers as The Miami Herald and The San Jose Mercury News.

First Impressions

Though advertisers on Google pay on a per-click basis -- that is, they pay only when Internet users click on their ads to visit their site -- Google says it will pay publishers on an "impressions" basis in the new program -- that is, a flat rate whether or not people who see the ad ever click on it.

Acknowledging the risk, Wojcicki says Google is willing to pay on a flat-rate basis while getting paid on a performance basis because the company is confident that Internet users will indeed click on the ads. "People are much more willing to click on an ad if it's targeted and related to content," she says.

For its part, Overture says its contextual advertising program and a separate local advertising venture were recently given the go-ahead after "several months" of research. While costing $10 million to $12 million in 2003 and generating minimal revenues, local and contextual search are expected to break even in 2004, says Overture.

As part of its announcement, Google said its active customer base has surpassed 100,000 advertisers -- 20,000 more than the base of active customers that Overture claimed as of Dec. 31. Unlike Overture, however, Google doesn't disclose advertiser revenues, so it's unknown how much their customers are spending.