Google's new ad play
The search giant is moving beyond Web sites to place ads in magazines and on TV.
NEW YORK (FORTUNE) - The Google the world knows best occupies a spacious corporate campus in Mountain View, Calif., complete with a volleyball court and plenty of lava lamps. What's less well known is that the search giant also maintains an East Coast stronghold.
In a gleaming high-rise in Midtown Manhattan, steps from Madison Avenue, Google has quietly built a 550-person outpost that is already outgrowing its own lava-lamp-decorated space. To get to the massage room or the refrigerator with 20 types of free soft drinks -- Mocha Frappuccino, anyone? -- you have to weave your way through hundreds of cubicles where eager young reps work the phones. What are they up to?
It turns out that Google's aggressive assault on the competition -- elbowing Microsoft aside to nail a deal with AOL, launching a video-download service a la Apple --isn't confined to the tech world.
"Google is hell-bent," says one top ad industry CEO, "on trying to turn the media markets upside down in every way it can." And what those cubicle dwellers are up to is selling ads. Lots of them. Google (up $0.02 to $436.47, Research)'s stock price, as well as Wall Street's jaw-dropper targets of $550 (from Bear Stearns) and $600 (Piper Jaffray), is anchored in the company's booming ad business, which already accounts for the bulk of its $5.25 billion in annual revenues. But the company's plan is far more ambitious than just ads for search; it's moving into placing ads for marketers on other Web sites, into magazines, and soon even on video and television.
"People have branded Google as search," says Tim Armstrong, vice president for advertising sales, who runs the New York operation--and spearheaded the deal with Time Warner (parent of CNNMoney.com and FORTUNE's publisher) to invest $1 billion for 5 percent of AOL. "But we also have the world's largest online content network that we serve ads into."
That system, called AdSense, allows Google to place ads on sites of participating Web publishers and position them adjacent to content that its software determines to be relevant. If a user clicks on one of the ads, Google is paid by the advertiser and shares the revenues with the site owner. AdSense accounts for a large (though undisclosed) portion of company revenues, and Armstrong and other executives say a similar approach can potentially be applied to other types of media.
Google is "agnostic about what advertising is," Armstrong explains. It is already testing the placement of ads for companies such as inksite.com in magazines like Budget Living and Maximum PC. It could offer the same type of broad media-buying service to larger marketers. Says Marissa Mayer, who oversees Google's search products: "It's just natural for us to expand where Google ads run. If we have image or video ads, we will be looking for places on or off the Web to run them."
Not everyone in the ad world is concerned about Google's thrust into agency work. Rishad Tobaccowala, a top strategist at Starcom Mediavest, a media planning and buying firm that purchases $35 billion worth of advertising each year for clients, finds the Google Print program for magazines amateurish and says his clients consider the concept "ridiculous."
He pooh-poohs the Google threat. In fact, he thinks the search giant is overreaching. "It wasn't until ten years after Microsoft went public that it was seen as a threat by a lot of its partners," says Tobaccowala. "It's taken Google less than a year."
But bet against it at your own peril. As that ad industry CEO cautions, "I would not be complacent. It's dangerous to say Google will never take us all over."