Google's unstoppable revenue rampage

As expected, Google's fourth-quarter results were another positive set of numbers for a company that hasn't disappointed investors in recent memory. In fact, Google is now at a position where it is reporting results that seemingly defy the state of the industry they operate in – advertising.

Take a look at the quarter. Google properties (Search, YouTube) were up 18 per cent year-on-year to $8.64 billion, Network (external sites Google sells and takes a percentage of revenue) up 19 per cent year-on-year to $3.43 billion and 'other' (Google Apps for Enterprise, DoubleClick) up 102 per cent to $829 million. Add $1.5 billion in Motorola revenue and Google had a $14.4 billion quarter. The wider global advertising industry at the same time grew at around 2 per cent; with digital advertising growing at approximately 13 per cent. eMarketer forecast that for 2012, Google would account for 41.3 per cent of total digital advertising revenue in the United States.

Ad revenue increases the size that Google is seeing in mature categories such as search, and display advertising are impressive. Compared to listed competitors such as Yahoo!, Facebook and AOL, Google's growth is off the charts. Yahoo year-on-year has been flat in terms of revenue – the third quarter of 2012 saw it generate $1.2 billion in revenue. AOL fared marginally better – its ad revenue was up 7 per cent year-on-year in the same period, increasing to $340 million. Facebook reported $1.2 billion in ad revenue for the third quarter, up 32 per cent year-on-year.

Take away growth and look purely at revenue – Google is generating 10 times the ad revenue of Yahoo! and the same for Facebook. And it is generating more than 30 times the ad revenue of AOL. Its third-party display ad network alone is now generating close to three times the revenue of Yahoo's entire business – search, owned and operated and network. And it's doing this without any radical cost increases in sales and marketing or product development.

The staggering part of all this is the growth potential Google has to still exploit is enormous. Most focus around Google results tends to revolve around paid search cost per click and traffic acquisition costs, with the consensus often being that paid search cost per click revenue will start to flatten out or decrease and that traffic acquisition costs need to be monitored closely to ensure they don't increase faster than revenue. Really – most traffic acquisition costs are payments made to content partners for ad revenue sold. There is no reason to think they will escalate beyond the 24-25 per cent they've been steady at, as they are on the majority inherently tied to network ad revenue. Cost per click revenue may see the odd decrease, but the beauty of the auction model is that in most instances having more bidders increases bids, which increases revenue.

The two key areas to watch in the future of Google revolve around two battlegrounds: video and display advertising. In YouTube Google controls the majority of digital video advertising inventory, and YouTube has the potential and the scale to become the digital equivalent of a free-to-air TV network – as it offers advertisers similar scale and similar formats, with stronger targeting. Considering this, and considering the rise and rise of digital video, it is not completely feasible that YouTube could be a $10 billion business for Google within two to three years – which would make YouTube the second biggest web property by revenue after Google.com, especially if it remains unchallenged in the area. What's more, Google has managed, so far, to avoid significant upfront investment in video content; its content comes from third parties who cover these costs themselves.

Display advertising as an industry has changed significantly over the past few years and will continue to evolve well into 2013. The main change is the rise of programmatic trading, which lessens the reliance on human sales staff to process and generate sales, and places inventory into a real time auction platform which is controlled via computers. Programmatic trading continues to grow – by the end of 2013 a large portion of ‘spots and dots' display inventory will be traded via automated platforms – and data and user information will be the secret sauce that ensures strong yields. Google is strong in both areas – it has made solid investments into real time bidding and ad automation, and its information on users (and the volume of users) means in terms of user intelligence and information it is the market leader.

With both of these areas set to enjoy 30-35 per cent annual growth for the next three to five years, and search unlikely to drop below 12-15 per cent annual growth for the same period, Google is well positioned on its journey to top $100 billion in annual revenues. Think about it – Google is virtually unchallenged in its key areas of business. It has the majority of the lucrative search category to itself; with YouTube it has become the default place for video and dwarves the competition in terms of inventory and traffic; DoubleClick has no competition in most areas it operates in, in particular publisher side ad technology; and Android is fast becoming the default overseas program for mobile or tablet devices made by people other than Apple.

For all the talk of technology disruption, who is really challenging Google? Or are we in a situation where Google has such control over online advertising that they are now impossible to beat? Don't get me wrong, I don't paint Google as an anti-competitive monster. Far from it. It's just that many of its competitors seem to keep handing them the keys to their advertising castles. With such dominance in paid search, display advertising, ad technology, online video, maps, analytics, data and mobile – and such passive challengers in these key areas – the current growth trajectory of Google shows no signs of stopping.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital.