- Google will allow users to pay a monthly fee for an ad-free experience, and pass on the same to websites.
- There is increased competition from Facebook and others in the advertising space.
- If users are willing to pay, and Google decides to take a cut, this could be a potential revenue source.
Even as Google (GOOG) faces growing competition in the advertising space from the likes of Facebook (FB), the company has come up with what seems like another potential source of revenue in the years to come. Those familiar with the Google revenue model, know that the company earns bulk of its revenue from advertising, or serving ads. Google Q3 revenue from ads accounted for about 89% of total Google revenue. Now with the launch of the ‘Contibutor by Google’ initiative, the search giant may have in the pipeline, a new way to monetize users who don’t want to see ads. All in all, the move is a smart one for Google, for multiple reasons and could aid Google revenue growth if the company does enter revenue sharing agreements with participating sites.
What Is ‘Contributor By Google’?
The description on the ‘Contributor by Google’ page says:
“Today’s internet is mostly funded by advertising. But what if there were a way to directly support the people who create the sites you visit each day?”
Under the program, users or readers get to choose a monthly contribution ranging from $1 to $3 per month. When users visit sites that are participating in the program, their contribution goes to those sites. For now, Google has listed some popular sites like Mashable, wikiHow among others, as “a few of the partners joining us in this experiment.”
Not Serving Ads Could Earn Google Revenue
‘Contributor By Google’ is what Google describes as “An experiment in additional ways to fund the web”. So why could this be Google’s new means to fund itself? The reason is simple. It’s unlikely that Google will take up such a charitable cause at the cost of its largest revenue source, which is, serving ads.
Google earns bulk of its revenue from serving ads. While Google generates about 77% of its ad revenue on its owned and operated sites, about 23% of Google ad revenue is generated on partner sites, or the Google ad network. Google passes on a major chunk of this revenue to publishers who serve ads placed by Google, but retains a portion for itself.
There’s currently no official word on whether Google will retain a part of the ‘Contributor by Google’ payments. But, if Google is going to compromise on revenue it could earn by serving ads, one would imagine that it would want to generate revenue for ‘not serving ads’. Further, if Google does make a revenue stream out of this ‘experiment’, it will help the company in the face of increasing competition in the advertising space.
Increased Competition From Facebook, Amazon And Yahoo
Even though digital ad spends are expected to expand in monetary terms, ad-revenue is bound to get shared, irrespective of the proportion it is shared in. What used to be largely Google’s domain is now turning into a competitive space, with the emergence of competition from the likes of Facebook, Amazon (AMZN) and Twitter (TWTR).
With its burgeoning user base and a powerful eco-system of popular apps, Facebook has gained popularity with advertisers. Additionally, the Amazon ad network expansion is expected to help the e-retail giant place ads on third party sites, a move that’s aimed at competing with Google’s ad-network. However, as things stand, Facebook is probably a bigger threat to Google than Amazon.
A recent report by eMarketer shows how Facebook mobile advertising market share is growing at a fast clip, while Google’s mobile advertising revenue share has declined, and is expected to continue declining.
Based on a report by ad exchanger, Facebook display advertising market share in the US is higher than that of Google’s, and the gap is expected to expand further going forward. Even in the online video advertising space, Facebook’s acquisition of LiveRail, a video RTB (Real Time Bidding System) has given it an opportunity to compete with YouTube. Given that Facebook is catching up with YouTube in terms of unique video viewers in the US, one would acknowledge their growing strength.
Not surprisingly, Facebook has also harbored ambitions of running its own ad-network of partner sites.
To better leverage the knowledge it has gathered about its users and their preferences, Facebook acquired Atlas, an ad buying platform, from Microsoft. Atlas helps advertisers buy ad spaces on Facebook’s partner sites (publishers), and is direct competition to the Google Ad network.
Further, initiatives like Facebook At Work, the professional networking platform which is reportedly being developed by Facebook, could also aid Facebook ad revenue growth.
The comfort factor for Google is that none of these competitors currently threaten Google’s position in the search market. So, Google ad revenue on its own and owned sites (77% of total ad revenue) is not directly at risk. Advertisers and publishers wouldn’t want to take Google search ads out of the equation anytime soon. However, the Google ad network is probably a tad more vulnerable as advertisers and publishers might also want to leverage Facebook’s knowledge of users.
Mozilla’s decision to use Yahoo search as its default search engine instead of Google, is probably not a big worry for Google, given Firefox’s declining market share in the online browser market. That said, while most Firefox users might just manually choose their preferred search engine, there tends to be an inertia. Though the impact may be minimal, this could benefit Yahoo. Further, all eyes are now on Yahoo’s next move, given the big cash pile it is sitting on post the Alibaba IPO.
To sum up, the ‘Contributor by Google experiment’ could be a useful source of revenue for Google going forward, as competition builds up the advertising space. The move also allows Google to directly monetize users who don’t want to see ads. In the normal course, such users would probably use ad-blocking browser tools, resulting in Google completely losing the monetization potential for that user.
Further, ad-revenues tend to be seasonal, and linked to macro-economic sentiment. The ‘pay for ad-free experience’ could convert some of its seasonal revenue into a more reliable subscription like model, which keeps coming in through the year. Of course, that’s if people actually do pay Google for ‘not serving ads’, and Google actually decides to retain a cut.