Google Gazes Beyond Online Ads

Reading signs of seasonality or slowing growth, the search engine seeks to branch out.
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Online ad spending may be reaching new heights, but Google (GOOG) - Get Report 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)

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.

Software giant

Microsoft

(MSFT) - Get Report

is also gunning for ad dollars, and smaller search engines such as

Ask.com

are actually gaining market share.

Although online advertising has had a rapid ascent, a profound social impact and can be intoxicating -- it powers not only Google but also countless other small businesses that would not have existed without its affordable pay-per-click component -- it constitutes only a tiny part of the larger advertising world.

According to research by Morgan Stanley, in 2005, online ads accounted for a mere 3% of overall ad spending, with all sectors except outdoor advertising seeing more dollars spent.

Despite predictions that Internet content and online ads will put the newspaper industry out of business, advertisers allocated 4.5 times as much per household to newspaper advertising than to online ads in 2005.

As Google's native online advertising domain has become increasingly packed, the company has begun making serious efforts to branch out into new sectors.

Google recently picked up

video site

YouTube

, is aggressively building up a

radio sales force around its

dMarc

acquisition and announced that it would help newspapers sell

print ads.

Those sectors account for $133 billion in advertising spending, according to Morgan Stanley.

With a growing number of advertisers on board, and as the infrastructure to sell ads into different mediums develops, it's inevitable that Internet companies will make aggressive pushes into older forms of media, says Matt Booth, an analyst at The Kelsey Group.

"They will have to move into those markets because that is where so much of the money is," he says.