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Is Google losing its footing? - February 25, 2008

Having climbed about as far up the flagpole as is possible, Google is increasingly finding its backside exposed to the slings and arrows of the envious, the innovative and the skeptical. Silicon Alley Insider has been fronting an analysis by a "digital industry insider," who argues to SAI's Henry Blodgett that Google is far more exposed to downside risk from the slumping U.S. economy than it lets on. Blodgett's source, how reportedly works at an Internet advertising company, estimates that 50% of Google's AdWords customers could see severe drops in spending over the next couple of quarters, resulting in a marked slowdown in Google's overall revenue growth.

Blodgett finds his source's logic "compelling," particularly compared with Google's own, somewhat tortured explanation for missing its numbers in the third and fourth quarters.

This morning, Michael Arrington of TechCrunch checks in with a report that Fox Interactive Media is "rumored to be in negotiations with Microsoft take Google’s place as the MySpace advertising partner." In its Jan. 31 Q4 earnings call, you'll recall, Sergey Brin blamed Google's miss in part on a "huge amount of social networking inventory...[that] varies quite a bit in how it all monetizes, based on a number of factors, some of which we understand, some of which we don’t."

That was widely read as an admission that Google's deal with News Corp. to serve ads on MySpace, which includes a provision guaranteeing News Corp. at least $900 million in revenue, is not working out as hoped for Google.

And, of course, Google itself flipped out over Microsoft's attempt to acquire Yahoo! and create a stronger competitor in the market for search-based text advertising, Google's bread and butter.

Google's exposure to risk may extend beyond competitive threats and secular market trends, however, into an area where it has long seemed invulnerable: technology.

Last week, Google unveiled the public beta version of its AdSense for video platform, allowing advertisers to insert overlays or text ads into online videos based on search-based key words. Although the announcement generated plenty of headlines for Google, it also served to highlight its relatively weak position in video search technology--an increasingly important capability as online video publishers look to monetize their content.

Google's overlay and text-ad insertion system, however, is no great advance over existing targeted video advertising platforms, such as VideoEgg, which has been around since 2005.

More critically, Google's video search engine is still text-based, relying on user-applied tags and other metadata to identify the subject of a piece of video. Other, more sophisticated approaches to video search are already available, however, such as Blinkx's proprietary system, which allow for far-more refined targeting of ads in videos and are free of biases inherent to user- or distributor-created metadata.

Blinkx's technology actually "watches" online video to identify its content directly, rather than relying on tags. According to Blinkx founder Suranga Chandratillake, knowing the actual content of the video allows for the placement of overlays or other ad formats more precisely within the video, at the point most relevant to the advertiser. Such precise targeting has allowed Blinx to generate $60 CPMs from its direct ad sales, well above the industry average.

Blinx's annual revenue at this point, of course, would be no more than a rounding error compared to Google's. The Googleplex has plenty of engineers and plenty of resources to throw at developing its video search technology. But right now, it's behind the technology curve in what is likely to be the next generation of search. Given how effectively Google itself has used its superior text-based search technology to crush the competition, that's not a good place for it to be.

"Google succeeded because its search engine simply worked better than anyone else's, so everybody used it," Chandratillake told Media Wonk. "We think we have the best technology for video search."
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