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Google's Gmail ads hit the mark
The ads in the margins of Gmail messages will improve the profit margins of the AdSense program.
September 20, 2004: 2:38 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - Being a member of the tech media has its advantages sometimes. We get a first look at new gadgets and are able to spend time talking with inventors and businesspeople who are helping to shape the world of tomorrow.

Early this summer, my being part of the tech media meant I received an early invite to sign up for a Google (GOOG: Research, Estimates) Gmail account.

For a couple of weeks, that held a ridiculous amount of sway. Though I wasn't early enough to get a truly choice address, I've been able to poke around the service for a while. I started paying attention to the ads that ran next to my e-mail messages.

Ad relevance

What I saw astounded me. I don't know about you, but I find the relevancy of the keyword advertising Google and others display next to search results pretty spotty.

However, the ads that appeared next to my e-mails were startlingly relevant. In an e-mail exchange with an editor in which I asked about an NDA (short for "nondisclosure agreement," something tech journalists sign regularly), ads for standard-form nondisclosure agreements appeared next to my message.

A lengthy e-mail exchange with another editor that included several replies and mentioned a variety of topics was coupled with an ad that nailed the gist of the conversation. These are but two examples of several I encountered.

Based on my nonscientific but reasonably thorough research (combing through the ads in the 143 messages in my Gmail inbox and then comparing them with the results of several dozen searches at Google.com), I believe that the algorithm used by Gmail to determine relevancy and ad placement is superior to that used in the company's AdWords program.

Gmail to the rescue?

As such, I'm going to make a prediction: After it officially launches, Gmail will significantly improve Google's revenue and profit prospects. I think the click-through rates for ads served in Gmail will be significantly higher than for normal AdWords, and advertisers will pay more to be included in e-mail ads.

Advertisers can already choose between the AdWords program, which consists solely of keyword text ads, and Google's AdSense program, which is a distributed keyword advertising program, in which Google runs ads on other users' Web sites. The Gmail ads are serviced by the AdSense program.

AdSense has been somewhat of a laggard for the company, driving down its operating margins, according to its July S-1 filing. Google says the service carries lower margins than AdWords because of the higher fees paid out to members who run the ads on their sites and the costs of managing the service.

A rollout of Gmail could change all that. The Gmail ads would help increase revenue while lowering the overall costs of the AdSense program, since the company could automatically serve ads with the millions of pieces of e-mail it moves, rather than overseeing ads on thousands of additional member sites. The Gmail ads also have another important benefit.

"Google is the leader in search, and it's hard for them to find new inventory to serve," says Nate Elliott, an analyst with Jupiter Media. "Gmail is potentially a new source of revenue and inventory for them."

Positive feedback

Gmail is already seeing healthy traffic, thanks to its generous "invite a friend to Gmail" feature. According to Nielsen/NetRatings, Gmail is already the seventh most popular e-mail service on the Internet, with 980,000 unique users in August. (Mind you, it's been around for five months.)

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Because the service is still in beta testing, Google representatives were hesitant to speak about how it's going, the reaction from advertisers, and the differences between the company's algorithms for Gmail ads and AdWords.

A spokesperson would say only, "We have received positive feedback from both users and advertisers about the Gmail service. We're still in the testing and development phase."

Allow me, in closing, to delve into some squishy psychology for a moment: People feel a personal connection to their inboxes. Ads that are served in an inbox and related to an e-mail message forge a closer bond with a user than those generated from one of the countless queries conducted through a search engine.

Google is on to something big here.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.