Google’s AdSense Revenues Vulnerable

How much is AdSense’s share in Google’s business? To find an answer we scanned Google’s balance sheet and cash-flow statement for the past year including those of the last quarter (Q2-06/2007). Predictably, there is no indication of AdSense’s figures.

Analysts however maintain that the figure hovers between 37%-44%. A somewhat clearer picture emerges in the April 21st-27th issue of The Economist where it is revealed that AdSense adds about 10-20% to Google’s profit margin, while the share of AdWords is a phenomenal 60%. (Note the Economist figures are of profit margins, not revenues.)

However, going by analysts’ estimates of revenue share, the perplexing question is, how can Google possibly earn from AdSense as much as about 40% of its revenues since after all it has to share the AdSense spoils with millions of web publishers?

No one knows how the revenue is split between Google and Publishers, and Google has so far kept absolutely quiet on the topic, much to the annoyance of numerous customers. Yesterday, Google lost a major customer, Digg, with over 17 Million unique visitors a month. I believe, they will lose many, many more in the next 18 months, as competitors like Microsoft, Yahoo, Ask, Time Warner, NBC, etc. get their acts together around their Ad Network strategies. Clearly, AdSense is Google’s weakest link, and if indeed it is ~40% of revenues, this should hurt at least a bit, even though AdWords will continue its triumphant run.

Google, btw, does not send AdSense payables to publishers unless it crosses a threshold amount of $100. While for popular websites this is not a problem since they earn several times that amount every month, this is not the case with millions of small websites who have to toil hard (in some cases for years) to actually lay hands on their AdSense earnings.

According to an estimate, this withheld AdSense payment was about USD 370 million at the close of fiscal year 2006. Now that is a decent sum of cash – about 3.5% of its 2006 total revenue – which in all likelihood must have grown more by now. Of course, it still isn’t revenue, since it will eventually have to be paid out. Nonetheless, it is a lot of cash cushion that can come quite handy.

So far, Google’s AdSense program has had virtually no competition. Further, such is its reach and inventory, that despite the fears that there is a glut in online publishing and an apparent text-ad blindness is making people overlook text ads, the fact remains that web publishers are still putting faith on it to earn cash by displaying AdSense ads on their websites. They have little choice.

How much does it cost Google to display AdSense ads? Apparently not much since AdSense is nothing but an additional option exercised by AdWords advertisers. This means, that as long as AdWords ads are flowing in, there perhaps is no significant cost involved to sell AdSense Ads.

Recently Google has effected 2 changes in AdSense. First, it has started what it calls AdSense Referral Beta in which after clicking on an AdSense ad only when a visitor takes a definite action as desired by AdWords advertiser will Google share revenue with the website owner.

The second is that Google has agreed to provide its advertisers a list of content sites where their ads are displayed and also the corresponding CTR figures. Both are aimed at ensuring that its advertisers do not shy away from AdSense as feared likely by Google watchers.

However, the fallacy in Google’s thought process is that in skewing their offering too much in favor of advertisers, they will lose the Publishers, especially the big ones who generate most of their revenues.

According to a PwC analysis, world over, Internet will remain the fastest-growing advertising medium, with a projected 18.3% CAGR, reaching $73 billion in 2011. By that time online advertising will comprise 14% of the global advertising market. An estimate has it that online brand advertising growth, at a 20% CAGR from 2006-2010, will exceed online search advertising growth over the same period.

Publishers will realize that they have a much more lucrative opportunity in monetizing their content via non-AdSense channels that do an effective job of procuring high-CPM advertisers in search of strong brand advertising venues.