International Think-Tank on Innovation and Competition
Tectonic Shifts in Online Advertising
April 21st, 2008
Advertising is big business. Even with a looming global economic downturn, companies spend over US$ 600 billion worldwide on brand recognition annually. Today only around 12% of that total is spent on online advertising, but the figure is set to grow, and grow fast: half a million new Internet users a day, increased connectivity of mobile devices and even TV to the worldwide Web, websites’ increasing reliance on advertising to generate revenue, and the promise of reaching target groups with ever-greater precision, are just a few of the reasons for the migration of advertising dollars to the new medium.
The high stakes are prompting a scramble for Internet real estate, with dominant search engine Google taking steps to reinforce its position, and smaller rivals Yahoo!, Microsoft, AOL and News Corp (owner of MySpace) looking for combinations that would allow them to close the gap with the market leader. Google is the top search engine in the world, with a market share of 90%-plus in a number of EU countries, and exceeding 50% in the US (as against 17% for Yahoo!, 7% for Microsoft’s Live, 6% for AOL and 3% for Ask.com at the start of 2008). Beyond search queries, Google dominates the lucrative business of placing text ads next to search engine results, an area where Yahoo! and Microsoft working independently have been unable to catch up. Google AdWords accounts for about 70% of search advertising revenue worldwide. DoubleClick, recently bought by Google, leads the industry in contextual advertising (the placing of banner ads on third-party websites), accounting for more than 75% of the direct channel, that is, the valuable advert inventory that large web publishers directly negotiate with advertisers.
A similar alignment prevails in the market for so-called “remnant” advertising inventory, sold through intermediaries who buy from publishers and sell to advertisers. This can be seen as a separate market from the direct channel, and, again, Google plays a dominant role, with Yahoo! and Microsoft straggling behind. Google’s vertically integrated intermediation platform between online publishers and advertisers, AdSense, absorbs more than 80 % of the revenue in the indirect channel, targeting advertising to relevant websites and paying web publishers a percentage of its revenues. Advertisers buy inventories from the AdSense platform through bids on the keywords that match the content of the web-pages. DoubleClick has been offering an alternative ad serving/management product, DART, for both publishers and advertisers, with a market share of around 75 %. Its recent acquisition by Google leaves the latter with at least 80 % of the worldwide market for online advertising. It would be odd if this did not lead to price increases: before the merger, competitive forces kept online advertising rates under control (DoubleClick could not increase prices because many consumers would have quickly switched to AdSense, and Google was similarly disciplined by the prospect of customers switching to DoubleClick’s products DoubleClick’s products); following the merger, these competitive constraints no longer apply.
For consumers and advertisers, the consequences of the current consolidations are uncertain. A merger between Yahoo! and Microsoft would create synergies in R & D without impacting the prices of either company’s main products, which are complements rather than substitutes. It would allow the two to join forces and develop search engine capabilities and online services that could constitute a genuine, competitive alternative to Google, whose dominance in pay-per-click Internet advertising is now combined with DoubleClick’s dominance in advert serving services. Giving content creators and advertisers a realistic alternative to Google would ultimately lead to reduced costs and greater consumer choice.
By contrast, a Google/Yahoo! tie-up, or even limited outsourcing of advert placement by Yahoo! to Google, such as that announced by Yahoo! last week in the US, would radically reduce competition, while generating no significant “efficiencies” to benefit advertisers and consumers. Any combination of the two would likely violate EU antitrust rules, with an outsourcing deal that sidelines Yahoo! as a competitor allocating approximate 90% of search advertising to Google, virtually ending prospects for competition. Even more importantly from an antitrust point of view, locking Yahoo!’s search query share and online traffic into Google’s ad platform would ensure that no one could reach the scale necessary to mount a credible competitive alternative.
Whether Microsoft succeeds in combining with Yahoo! is crucial for the future of the market for online advertising: such a merger would enhance choice for content creators, advertisers and consumers, creating a much-needed alternative to Google in both search- and non-search advertising.
