Can Google Go Glossy?

It was a babystep that sent tremors through the media

establishment. Seeking ways to expand its advertising juggernaut beyond the

Internet, Google-this fall purchased about a dozen pages of ad space from

niche publications such as PC Magazine and Budget Living. Google then divvied up

the space and sold it in small pieces, often four to seven per page, to its

network of several hundred thousand advertisers-most of whom can't afford

pricey magazine ads on their own. Now Google says the trial program, dubbed

Google Publication Ads, is taking off, with hundreds of publications inquiring

about it. The company is expanding the trial from four publications to scores of

them, likely to include both niche and general interest titles.

STOP THE PRESSES TrimYourDebt's Blackhurst was disappointed

However, a closer look at Google's foray into magazine ads

suggests it could be in for a tough slog. Sure, plenty of publishers are

clamoring to snare ad dollars from Google. But a BusinessWeek analysis of Google's

pilot, including interviews with 10 advertisers and two publishers, indicates

that advertisers haven't warmed to the program so far. Only one of 10

advertisers interviewed by BusinessWeek said their print ad performed well

enough to recoup the money it cost. And eight of the 10 were unhappy enough with

the results that they say they're unlikely to do further print advertising

with Google.

The lackluster results came despite deep discounts in

magazine ad rates. Some ad pages were sold by Google for as little as

one-quarter of the listed ad rates at these magazines, according to information

provided by participating advertisers. It raises the question: If most marketers

are reluctant to re-up, despite Google and the magazines forgoing profits, can

this endeavor become a moneymaker for all the parties involved?

Certainly, Google has proven itself a versatile, innovative

company and it could modify its approach in magazines to boost its chances at

success. Still, the early feedback should be worrisome for Google. Its Internet

ad business is going gangbusters, with 2005 profits expected to climb fourfold,

to $1.6 bn. But with its stock at a stratospheric $400 per share, giving it a

market valuation of $120 bn, many investors are betting Google can expand beyond

the online text ads that constitute 98% of its sales-into splashy online image

ads, as well as new mediums such as radio, TV, and print.

Good on Paper



On the surface, print ads make a lot of sense for Google. Magazine ads are

expected to generate about $22 bn in the US this year, compared with the $13 bn

anticipated for online ads, according to researcher eMarketer. Plus, Google

boasts relationships with hundreds of thousands of small advertisers. By selling

bite-size chunks of these ad pages, it hopes to draw in thousands of marketers

who otherwise couldn't afford magazine ads. Google's ultimate goal: to

extend its position as the nexus between advertisers, publishers, and customers

beyond the Internet. Says Timothy Armstrong, Google's vice-president of

advertising sales: "Advertisers are always looking for more places to show

profitable ads."

But Google faces a couple of daunting hurdles in print ads.

Foremost, most magazine ads aren't geared toward direct marketers, which

constitute the bulk of Google's advertisers. Take TrimYourDebt.com, an online

business that sells tools to individuals to reduce credit-card and other debt.

TrimYourDebt's goal is to send users to its Web site, something it has done

profitably by purchasing text ads next to Google searches for terms such as

"debt consolidation."

But when TrimYourDebt tried Google's print ads, it found

the approach far less profitable. Indeed, Google's core strength-algorithms

that link the appropriate ads with each search query or page of online content-is

much more difficult to apply offline. After buying a small portion of an ad page

in Budget Living's November issue for approximately $3,000, responses trickled

in a couple of weeks later. TrimYourDebt declared the trial a disappointment,

estimating it would generate less than one-tenth as many leads as a similarly

priced online campaign. "The whole power of the Web is to bring targeted

visitors to your site," says Jennifer Blackhurst, co-founder of

TrimYourDebt. "The print ad hasn't done this, so it didn't justify the

cost."

Google's other major problem: It can't simply lower the

asking price on print ads, as it can online, to the point where they make sense

for marketers. On the Web, Google lets advertisers bid against each other for

placement alongside search results. Since it costs Google essentially nothing to

give each surfer results to their query, it can afford to let advertisers bid a

few pennies for every time their ad gets a click. But producing and distributing

magazines can be expensive, so publishers can't sell ads for pennies.

There's another hitch. Magazine publishers display ad

prices on rate cards and typically give large marketers discounts from those

rates. Publishers are reluctant to provide Google with bigger discounts than its

best advertisers for fear of seeing rates collapse.

Google is already getting some of the cheapest possible ad

rates, according to two participating publishers. For instance, Google has

purchased several one-page ads from PC Magazine for approximately $20,000

apiece, according to a source familiar with the transactions. That's about

one-quarter of the price listed on the magazine's rate card-and below the

level where PC Magazine makes a profit, says the source.

Even with such discounts, Google appears to be reselling ad

spots without making money itself. For PC Magazine's October 18 issue, Google

resold a one-page ad to seven advertisers. BusinessWeek reached four of those,

who paid an average of $2,750. Assuming that average for all seven advertisers,

Google generated $19,250 for the ad, leaving scant room for profits since its

cost was about $20,000.

Still, Google isn't backing away from the market.

Co-founder Sergey Brin lauded the ad program during Google's third-quarter

conference call in October. And ad-sales chief Armstrong says Google is working

hard to improve its performance. "We view this as a long-term R&D

project," says Armstrong, who wouldn't comment on specifics about

pricing. "We're not as concerned with profitability right now as we are

with finding value for publishers, advertisers, and customers."

Google certainly has the cash and patience to sustain a

lengthy effort to penetrate the magazine advertising arena. But based on this

assessment of Google's initial foray, don't expect it to replicate its

online successes anytime soon.

By Ben Elgin