Online Ads Give Google Huge Gain in Profit

Google Inc. chief executive Eric E. Schmidt says continuing as America Online's search engine of choice is crucial.
Google Inc. chief executive Eric E. Schmidt says continuing as America Online's search engine of choice is crucial. (By David Paul Morris -- Getty Images)
By David A. Vise
Washington Post Staff Writer
Friday, October 21, 2005

Google Inc. yesterday reported a 700 percent increase in third-quarter profit, as a growing number of Fortune 500 companies and other firms around the world shifted their ad spending from newspapers, magazines and television to the Internet.

Google's robust results and strong ad growth at its rival Yahoo Inc. illustrated that Internet advertising has come of age. The shift is so dramatic that Google's earnings -- largely ad-driven -- were more than 10 times the size of those reported earlier this week by the New York Times Co., and Google's sales were double the total revenue of the Times Co. In after-hours trading, Google's share price rose more than $20 to reach a new high above $330.

While Google reported third-quarter revenue of $1.6 billion and profit of $381.2 million, the New York Times Co. reported revenue of $791 million and profit of $23.1 million. In addition to the Times, the New York-based company publishes the Boston Globe and owns numerous television stations and other media properties.

"The engine driving our economic prosperity is this big sea change transitioning off-line [advertising] dollars to online," Google Vice President Jonathan J. Rosenberg said in a conference call with analysts. "You will see continued growth."

With regard to the emerging bidding war for Dulles-based America Online Inc., Eric E. Schmidt, Google's chief executive, said Google places enormous value on its continuing role as the search engine of choice on AOL. While declining to comment directly on the jockeying for America Online -- whose suitors also include Microsoft Corp. and Yahoo -- Schmidt left little doubt that Google is pursuing a deeper relationship with the Northern Virginia firm.

"AOL has been our longest and, in many ways, tightest partner for many, many years," Schmidt said during the conference call. "We have teams that collaborate on a wide variety of activities. There are a number of areas involving technology, advertising and video that are collaborative in nature. . . . We hope it will continue forever."

AOL's parent, Time Warner Corp., wants to keep a majority stake in AOL but is in talks with Google and the others about selling a minority interest in the firm for billions of dollars. Such a deal would give Google access to the more than 50 million users of America Online's instant messaging service, AIM, the largest online messaging system, which would extend its reach.

In the third quarter, Google earned $381.2 million ($1.32 a share), compared with $52 million (19 cents) in the third quarter last year. Revenue rose from $805.9 million to $1.6 billion.

Google's business strategy in many ways resembles the approach pursued in the early days of network television by ABC, CBS and NBC. Just as the television networks let people watch their programming free, Google lets computer users freely use its search engine to find information and products on the Internet.

While the television networks profited from selling a combination of national ads and those it distributed to affiliated stations around the country, Google makes money from ads on its own Web site,, and from the ads it sells for thousands of online affiliates.

One striking difference between Google and the television networks is that Google's ads are more targeted. While national television advertising is aimed at a mass audience, ads on Google are displayed in small text boxes alongside search results, and are based search topics.

Another difference is that television advertisers pay for 30- and 60-second spots based on the size of the potential audience. On Google, advertisers pay only when individual computer users click on their ads.

That means Google's revenue in the quarter is based on billions of clicks on ads by computer users. One threat to Google's business model is known as click fraud, which occurs when a person or automated software clicks repeatedly on an ad to drive up revenue, without any intention of viewing the ads. Google also faces other opposition. On Wednesday, five major New York-based book publishers filed a lawsuit against Google seeking to stop the company from digitizing millions of library books and making them freely searchable online, alleging that a blatant violation of copyright law.

Google Co-President Larry Page said the practice is legal and "will ultimately help authors and publishers sell more books and be good for users everywhere."

© 2005 The Washington Post Company