• by The Riff , January 17, 2007

AND NOW A FEW ADWORDS FROM OUR SPONSORS -- It's time once again to talk about the 800 pound gorilla in the room. Actually, make that the $10.8 billion gorilla. It's been a while since we've written anything about Google, but we were just eye-balling some numbers that surprised even us. They were quite large, and they happened to be pasted into Google's income statement.

Under the line for revenues, Google registered $2.7 billion during the third quarter of 2006, the last it's reported to date. Even if we assume that its revenues don't continue to grow - a bad assumption since they have done so every quarter since it began reporting as a publicly traded company - that would make Google a $10.8 billion annual advertising company.

That's a big number by any ad industry standards. It's more than any of the major television networks take in, and it's probably more than any other ad-supported media company takes in, with the exception of maybe Time Warner and possibly News Corp. It's big for sure. But let's narrow the universe a little more and look at Google's revenues in the context of the total online advertising marketplace. Despite what you've been hearing about Google's expansion into offline media, virtually all of its revenues still come from online advertisers. A fair amount of that comes from Google's highly successful paid search business, but a considerable portion comes from its AdWords program.

So how big is Google in the online advertising marketplace. Well there are certainly lots of estimates floating around out there, but if we take the most industry accepted source - the Interactive Advertising Bureau/PriceWaterhouseCoopers Internet Advertising Report - total Internet ad revenues are currently trending at about $16 billion annually. Do the math, and you'll see that Google now takes in nearly 68 cents for every advertising dollar sold by the online ad industry.

What's really amazing about that number isn't its size. It's where Google is getting it from. Relatively little of it is coming from traditional advertisers and agencies. Martin Sorrell, the chairman-CEO of WPP Group, the biggest buyer of media in the world, and Google's No. 1 customer, recently disclosed that his agencies spend only $150 million annually on Google. In other word's, Google's biggest customer represents only about 1.4% of its total revenues. That means that the ad industry's other biggies - Omnicom, Interpublic, Publicis, Aegis and Havas - each contribute something less than 1.4%, and that Madison Avenue represents something less than a tenth of Google's business.

So where's Google's rapidly growing advertising business coming from? Everywhere. Surprised? You shouldn't be. Madison Avenue acts big, but when it comes to the rest of the advertising industry, it's actually quite small. Exactly how much smaller is hard to say, but if you look at the most publicly accepted estimates Universal McCann's calculations for U.S. and worldwide ad spending, and Advertising Age's and RECMA's estimates for the major ad agencies' advertising billings, the six big agency holding companies represent less than half the business. The rest comes from everywhere else. The brilliance of Google's business model, is that it draws not so much from Madison Avenue, but from the everywhere elses of the ad world. In fact, it appears to actually be creating some of them.

How many may be impossible to say without actually hacking into Google's ad management systems, but at least one authority estimates that Google's AdWords program is directly responsible for spawning 10,000 new small businesses. And that's not simply a boon to the advertising economy. That's a boon to overall economic growth, says Bryan Todd, co-author of the "Ultimate Guide to Google AdWords: How to Access 100 Million People in 10 Minutes."

Okay, so it's not the kind of title that's likely to end up on your nightstand reading list, but it is a title worth reading if you want to understand some of the new economics of the new advertising economy, and precisely what Google's role is in it.

Some of the 10,000 companies Todd encountered while researching his book included work-at-home moms, small entrepreneurs, sales people hankering to launch their own businesses on the side, and even nonprofits like churches and charities.

Significantly, Todd says Google has given these individuals the power to compete on the same scale with Madison Avenue's biggest. Ouch!

"After working with hundreds of small business owners, we've seen again and again that by following the right principles, anyone can compete," he asserts, recalling the example of Joe Spratley.

Spratley, the former employee of a $50 million company, went out on his own and after using Google's AdWords program for a while, received an email from his former boss - now his competitor - who was worried that Spratley was cutting into his action. Spratley's only source of advertising, says Todd, was "Google AdWords on the Web."

Todd adds that, according to Google's own estimates, 90% of its advertisers are businesses with fewer than ten employees - not exactly the kind of clients WPP's Sorrell is likely to court, but just the kind that are transforming our economy.