Internet Outsider: Will Radio, TV, and Print Save Google's Growth Rate? No.

Will Radio, TV, and Print Save Google's Growth Rate? No.

To hear people talk about Google's moves into offline media, you would think the company is on the verge of capturing all the profit in the media industry. It isn't. And not just because Google's success in its offline efforts is far from guaranteed.

The important point is that Google's radio, TV, and print initiatives are the offline equivalent of its AdSense product, not AdWords. Why is this important? Because , for every dollar of advertising spent on AdSense, Google captures only a tiny fraction of the profit that it captures for every dollar spent on AdWords. When an advertiser buys a $1 per-click AdWord keyword, Google generates $1 of revenue and about 60-70 cents of operating profit (very rough numbers). When an advertiser buys a $1 per click AdSense keyword, meanwhile, Google generates $1 of GROSS revenue but only about 40 cents of net revenue--and only about 10-20 cents of operating profit.

Google's revenue and profit share of offline advertising placements, moreover, is probably even less per dollar of gross revenue than it is for AdSense. Why? First, because Google has nowhere near the leverage in offline media that it does online. Second, Google's targeting and optimization systems are not as sophisticated offline as they are online (and won't be for the foreseeable future). Third, because a public company in a similar ad sales and placement business suggests that the margins in the automated radio and TV placement business are downright horrible, at least with limited scale.

A small company called SWMX, which just reported its Q4 results, is making good headway in generating radio and TV placement revenue through electronic marketplaces (Q4 revenue grew 58% year over year). The company is very small--only $16 million in placements and $2.5 million in revenue in 2006--but the early margin picture is not encouraging for those banking on Google's offline initiatives to save its long-term growth rate.

SWMX generated about a 50% gross margin (on net revenue) in 2006. The gross margin on its hypothetical GROSS revenue, meanwhile--the revenue stream that would be equivalent to Google's gross revenue for AdSense--was only about 10%. Again, this 10% gross margin per dollar of advertising compares to the 90% gross margin per dollar of advertising that Google generates on AdWords and the 40ish% gross margin on AdSense. SWMX's operating margin, meanwhile, is even less encouraging: The company lost $9 million last year on $2.5 million of revenue.

Would Google's offline margins be better than SWMX's? Yes, probably. Would they come close to matching the already (relatively) low margins that the company generates from AdSense? Probably not.

So how much TV, Radio, and Print spending would Google have to capture to, say, double its current operating profit? (Assuming no further growth of the online businesses, which obviously should continue to grow quite nicely). Google generated about $3.5 billion of operating profit last year. To generate this much from an offline TV, radio, and print placement business, assuming a generous 10% operating margin (very generous, I think), Google would have to place $35 billion of gross advertising. This compares to about $4 billion it generated from its wildly successful online ad rep/placement business, AdSense, in 2006.

The conclusion? It seems safe to say that, even if everything goes perfectly, it will be a while before Google's offline initiatives contribute significantly to the company's bottom line.

Posted by Henry Blodget on March 29, 2007 at 09:17 AM | Permalink

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Comments

Your back of the napkin analysis is more insightful than the bull from wall street. It shows the enormous challenges this company faces in branching out from ad words/ad sense. People don't realize they are paying 140 billion for 3.5 billion in OP maybe 5 in the next couple of years. Henry Kravis, Schwarzman, etc. laugh at the simple minded retail investor. They pay 8x ebitda max for companies and make fortune while we gladly pay 15x sales.

Posted by:Bud B | March 29, 2007 at 11:27 AM

Cliff notes please. Henry cmon bro we're not going to read all that shit. Bro you know better.

Posted by:King Troll | March 29, 2007 at 02:25 PM

Henry,
Please name any company in history which has extremely high margins
on ALL its products?
I read your comments and often wonder if you and others are
nit-picking Google, Inc., as a sport. This patter sounds like ESPN's SportsCenter.
If Google did not attempt to offer items like Gmail, Maps, AdSense,
YouTube, spreadsheets, would you not be criticizing them for
sitting on the success of AdWords and other search products?

Posted by:Robert | March 29, 2007 at 03:53 PM

Google could possibly redefine offline media. Google phone, YouTube etc, etc Seems to me they in the driver's seat to define what offline media WILL BE in addition to its ability to overnight(maybe a slight exaggeration) from incubation stage, to take the lead and 32.1% by latest estimates of total online advertising.
One could credit its execution department with the $$$ infusion of investment bankers to SELL the greatest concoction to ever hit the internet space/search. "Just GOOGLE it!"

Whose statements would you believe more, the above or a paid advertisement that reads goes as follows... (true excerpt)

Dizzyland!

Interestingly, the timely Walt Disney remake of "Aladdin and the King of Thieves" seems more than a coincidence and its production likely directed by the national security state apparatus to further strengthen the unconscious association and belief in Aladdin's(bin Laden's) unstoppable powers. Files made public as a result of the Freedom of Information Act revealed Walt Disney
to be a covert government agent, one who was likely fronting for the military in creating various mind control experiments. These experiments include Disneyland, "Happiest Place on Earth" an artificial environment featuring "Main Street USA," a superficial, cardboard cutout of America and American values intended to both condition and study American susceptibility to pacification...

I thought the idea that "W" called himself GOD and that Jesus Christ told him to invade Iraq was the WILDEST CONSPIRACY THEORY...

Dizzyland's the GREATEST!!

yhoo/goog search "invest_mavin"
World's Greatest Detective!

Posted by:P- | March 30, 2007 at 01:12 AM

yeah,maybe you are right .but products can not produce the same profits.

i come from china,maybe we can make friends .i like google very much /my msn:ipkgoogle@hotmail.com.expect you !

Posted by:david luo | March 30, 2007 at 01:53 AM

http://www.nytimes.com/2007/03/29/technology/29google.html?em&ex=1175400000&en=ab0c439ed9522224&ei=5087%0A

Interesting article in the New York Times on Google's foray into radio advertising

Posted by:Victor | March 30, 2007 at 03:39 PM

very very
nice thankss...

Posted by:evden eve nakliyat | March 30, 2007 at 06:14 PM