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Google vs. Facebook: Ad Wars

Posted on Thursday, Apr 19th 2012

According to researcher eMarketer, online ad spending in the U.S. will grow 23.3% this year to $39.5 billion. Double-digit growth is projected to continue till 2014, when online ad spending in the country is projected to reach $52.8 billion. The researcher estimates that by 2016, online ad spend will account for $62 billion. The ad spending boom is already stirring up an ad war among online giants.

Google’s Financials
Google’s (NASDAQ:GOOG) Q1 revenues grew 24% over the year to $8.14 billion, marginally shy of the market’s expected revenues of $8.15 billion. EPS of $10.08 was significantly ahead of the Street’s target of $9.65. Revenues from Google sites grew 24% over the year, while revenues from partner sites were up 20%. Over the year, paid clicks grew 39%, with cost per click falling 12% during the same period driven by the company’s push in mobile advertising. In a move that was not welcomed by analysts, Google announced plans for a two-for-one split of their stock.

Among other operating metrics, Google+, their social network service, continued to add users and reported more than 170 million registered users. But keeping users engaged remained a challenge. According to market data, U.S. users of Google+ spent an average 3.3 minutes on the network in January, compared with Facebook’s user average of more than seven hours. Google is working to improve this and recently redid the site so that it is now simpler to navigate and has a page similar to the Facebook profile page.

Chrome and Android also showed strength, with Chrome reporting more than 200 million users and Android activations growing to 850,000 a day. YouTube too saw more than 800 million monthly users uploading more than an hour of video per second.

Within advertising, the display business is operating at an annual run rate of more than $5 billion. eMarketer estimates that Google will account for 16.5% of the U.S. market for display ads this year. Their growth is expected to continue to the next year, when their market share will surpass Facebook’s as Google goes on to claim 20% of the U.S. display ad market. Display advertising has become a two-horse race, with Google and Facebook together expected to account for a third of online display revenues. U.S. online display ad revenues are projected to grow from $12.4 billion last year to $21.91 billion by 2014. Google’s share has been on the rise since they acquired AdMob in 2010. eMarketer expects Facebook’s growth to slow down based on their S-1 filing, which reflected a lower than expected growth rate in 2011, especially in the fourth quarter.

Google’s Advertising Growth
Google’s mobile business is strong and now accounts for more than 90% of mobile searches in the country. Last year, Google’s mobile ad revenues were a mere 5% of their total revenues. However, by the end of the year, mobile revenue shares had grown to 12%. For Q1, analysts believe that mobile advertising accounted for 14% of revenues and will grow to 25% by the end of this year.

They are also focusing on video advertising and plan to roll out a streamlined advertising program for YouTube. The program will be known as AdWords for Video and will be launched next month to help small businesses create self-service video campaigns. The new system will help Google do away with the sales reps who were needed earlier to manage ads for the businesses.

Google Launches Google Play
This quarter, Google announced the launch of Google Play, a service that lets users access their media content, books, apps, and games from the web or from their Android device wirelessly and with no synchronization required. Play is integrated with their other offerings so that users of Google+ can see recommendations from friends.

Google’s Acquisitions
As part of their acquisition spree, Google recently acquired TxVia to help build the Google Wallet offering. TxVia is a mobile payments technology company with core offering that include a payments platform that supports prepaid cards, reloadable cards, and gift cards. Their platform currently manages more than 100 million accounts, and by acquiring TxVia Google will be able to scale Wallet to beyond NFC-enabled mobile payments.

Google’s Battle with Oracle
But besides their strong moves, Google has also been in the news lately for their battle with Oracle. Oracle and Google are fighting it out in one of the biggest tech lawsuits to date pertaining to IP rights. Oracle is suing Google and claiming an estimated $1 billion in compensation. Oracle claims that Google’s Android system infringes intellectual property rights relating to Java and through the 37 application programming interfaces, Google has let developers write Java-compatible code by giving Android away free, thus undermining Oracle’s capability to license Java to mobile phone makers. The trial began this week and is expected to last eight weeks.

Google’s stock is trading at $607.45, with a market capitalization of $197.5 billion. It touched a 52-week high of $670.25 in January 2012. They have not yet announced the date for the stock split. The split will create a new class of non-voting shares, thus maintaining the voting powers of the existing shareholders. At present, their holding structure keeps 66% of their voting rights with co-founders Larry Page and Sergey Brin and executive chairman Eric Schmidt. The market is not pleased with this decision because of this “two-tier” system that retains the company’s control with its founders.

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