When Google opened its new London headquarters last year, it tried to import some of the Silicon Valley magic that had transformed the company from a geeky internet search firm into one of the world’s biggest media companies.
Google founders Larry Page and Sergey Brin invited the straitlaced Brits to help themselves to sweets, admire the lava lamps and, of course, lounge in the Google-branded bean bags that adorn the new office in Victoria.
But Googlers — as the company’s employees call themselves — may not have too much time to wallow in the squashy seats.
Just a few minutes’ stroll from their chic new British headquarters, Microsoft is fitting out new offices of its own. The five-storey building will be home to 850 staff working for Microsoft’s fast-growing online division, which has Google firmly in its sights.
Facing what some believe is the biggest threat in its 30-year history, Microsoft, led by chief executive Steve Ballmer, is hitting back at Google by developing a new range of internet-based services under the Live banner.
The new services are vital if Microsoft is to win its share of the multi-billion-pound online advertising market, which has mushroomed as a new generation of young consumers shuns television, radio and newspapers in favour of the internet.
This week, Microsoft will fire a new salvo at Google with the launch in Britain of Adcenter — a software platform that will allow advertisers to target specific groups of consumers.
Internet advertising is now big business. In the UK advertisers spent £1.3 billion online last year, up 65% on the previous year. Based on current trends, the Internet Advertising Bureau expects revenue generated from internet advertising to exceed £2 billion this year — overtaking display advertising in Britain’s national newspapers.
Most of the £1.3 billion spent by advertisers was directed at search-engine advertising, which allows companies to target consumers as they research a holiday or look for a plumber.
In Britain seven out of ten of us use Google, and when we trawl the internet for, say, a used car, the search engine delivers the results and alongside them displays about a dozen “sponsored links” from companies that have paid to appear on the page. Each time a consumer clicks on one of these links, Google gets a fee.
According to Sapna Satagopan, an analyst at Jupiter Research, the rate paid per click varies widely. In America, compensation lawyers are believed to have set the record for the highest fee — reportedly bidding up to $100 (£52) a click to list alongside information on mesothelioma, a lung cancer caused by exposure to asbestos.
Nikesh Arora, vice-president for Google Europe, said: “It is hard to target individuals in a cinema audience of 600 watching Spiderman. But on the internet you can not only target an individual looking to buy a Spiderman game, you can interact with him.”
In Britain the cost per click is lower, said Jim Brigden, managing director of The Search Works, a specialist advertising agency that advises the likes of Lloyds TSB, Carphone Ware- house and Lastminute.com. “Typically, you will pay 30p a click,” said Brigden, although advertisers have reportedly paid up to £10 per click for more popular search terms, such as unsecured loans and data-recovery services.
The Search Works is one of a number of British agencies that have road tested Microsoft’s Adcenter, which allows advertisers to use the information Microsoft holds on its users to target specific groups.
With 10m registered users of MSN instant messaging and 8.8m registered users of MSN Hotmail, Microsoft knows an awful lot about many of those using MSN.co.uk or Live.co.uk to search the internet — including their age, sex, where they live and in some cases even how much they earn.
“A small business, for example, will be able to target a geographic area,” said Sharon Bayley, general manager of online services in Britain.
Bayley said the evidence from America — where Adcenter was launched earlier this year — suggests that targeting produces better results for advertisers, with Adcenter delivering 75% better conversion rates. “You get much better quality click-throughs,” she said.
And if advertisers and ad agencies want to understand what makes consumers tick, they can use more than a decade of MSN data to research exactly what specific consumers look for on the internet.
BRITAIN’s media bosses and advertisers would love to know what makes Gerard McVeigh tick. An 18-year-old who plans to begin a university course in the autumn, McVeigh is the consumer of the future.
He rarely buys a newspaper and, like millions of other young Britons, spends almost as much time surfing the net and texting friends as he does watching television.
Charlie Makin, chief strategy officer at the media buyer BLM, believes that loyalty to media brands is disappearing.
“Historically media owners have been quite lazy and they are now paying the price. Today people are far more selective. They are still looking for entertainment but they are rejecting poor programming,” said Makin.
Cilla Snowball, chairman of Abbott Mead Vickers BBDO, Britain’s biggest ad agency, said: “The media landscape is changing. The challenge is to create compelling ideas.”
This shift has forced even huge companies like Procter & Gamble — the consumer group whose brands include Pringles and Gillette — to change the way they advertise.
“The trend at P&G over the past 10 years has been to spend proportionately less on television advertising and more on other media,” said Bernard Balderston, director of media at Procter & Gamble, a bellwether of advertising spending. “Fifteen years ago, 95% of P&G’s advertising budget was spent on television, now that figure is roughly 80%.
“We need to be more flexible about where we spend our marketing money. Our problem — the problem of most advertisers — is that people are leading different lives. They have far more control than they used to over the advertising messages they receive. They have become less comfortable with advertising intrusion, the world has moved to a ‘pull’ environment (where consumers dictate what ads they watch) from the ‘push’ one we grew up with.”
“Old media” companies are also having to adjust to this new world and figure out how to engage with younger consumers.
IPC Media, the British magazines arm of the American giant Time Warner, announced last week that it is to close Family Circle, a goldmine of lifestyle tips for women and a staple of the country’s consumer magazine industry for four decades. “Times have moved on,” said IPC.
But the old media should not be written off. Theresa Wise, media partner at Accenture, argues that despite fragmentation at the margins, traditional media still have a future.
“For the new media companies, the challenges are different — there is rapid growth, but only a few of them are going to make any money. Television will remain the dominant advertising medium, at least for the next five years, because it is still the only direct route to a mass-market audience.”
Jim Marshall, group chairman of Starcom Mediavest, one of Britain’s biggest buyers of media space for advertisers, also offers hope to media barons struggling under the onslaught of the new media.
“Something new will always come along. When television first appeared, people said cinema would be the casualty. The challenge is how the different media interface. The old-media companies have not done enough so far. They need to act — and fast.”
The pace of change is accelerating all the time. A report published last week by the media industry regulator, Ofcom, revealed that 16 to 24-year-olds are increasingly shunning television, radio and newspapers in favour of participation in “online communities” such as MySpace, which was acquired last year by News Corporation, ultimate owner of The Sunday Times.
The figures make stark reading. More than a quarter of 15 to 24-year-olds read newspapers less than in the past because they are spending so much time online, while the average 16 to 24-year-old watches television for an hour less each day than the rest of the viewing public.
Against such an evolving backdrop, established media firms face a real challenge. Their business models rely heavily on advertising revenues and now they are pitched against new, nimble competitors that offer companies the opportunity to target their advertising much more precisely.
But far from allowing themselves to be capsized by this storm, Britain’s media giants are attempting a fightback of sorts. In the past year, the owners of both the Daily Mirror and the Daily Mail have spent tens of millions of pounds snapping up companies specialising in online recruitment in an effort to replace the money haemorrhaging from their print titles.
WHILE traditional media try to catch up, Google’s dominance just keeps growing. Such is the popularity of the internet search engine that “to Google” is now part of everyday language.
Quarterly financial figures published by Google last month demonstrated the sheer power and momentum of the company. Compared with a year ago, profits soared 110% to $721m in the three months to June and group revenue was up 77% to $2.46 billion.
But not everyone believes that Google’s lead is unassailable. The success of Google — which has increased its share price almost fourfold since it floated in 2004 to value the company at $113 billion — has spawned a new generation of start-ups, hoping to be the next big thing in the search sector.
Hundreds of millions have been invested by venture capitalists and entrepreneurs, including Ron Conway, one of the earliest investors in Google.
These start-ups are experimenting not only with new ways of searching but also with ways to interact with surfers. “Search is in its infancy today. It’s at 10% of its potential,” Conway told the American magazine Business Week. Microsoft’s Bayley agrees. “Search is still quite clunky. It is not a quality experience.”
But the battle — for the time being at least — appears to be between Microsoft and Google. Last month, Yahoo admitted that the launch of its new advertising technology, codenamed Project Panama, had been delayed. Its shares plunged 13% on the news, the biggest ever one-day fall, wiping $6 billion from the value of the company.
But advertisers are also looking at other ways of targeting the new generation. In May, Microsoft acquired Massive, a technology company that specialises in weaving ads into computer games — it puts them on billboards, posters and so on in a game.
The battle for the hearts and minds of the likes of Gerard McVeigh is becoming increasingly sophisticated.
Click fraud costs advertisers $800m a year
THE huge growth in online advertising has led to an increase in ‘click fraud’, writes Tom Steer.
Under the ‘pay-per-click’ model, advertisers are charged if a surfer clicks on a link. But, according to some observers, at least one in ten clicks can be fraudulent.
The clicks can be aimed at depleting the marketing budget of a competitor — with click farms able to generate hundreds an hour automatically.
Some Google affiliate websites have been known to click on ads to earn the commission paid by Google.
Last month Click Forensics, a monitoring service, claimed that bogus clicks had increased to 14.1%. The data were based on the experiences of 1,300 online advertisers. The fraud cost advertisers $800m.
Estimating the size of the problem is not easy — consultants have an obvious incentive to exaggerate its extent.
Nevertheless, preventing click fraud is crucial for the search companies to maintain investor confidence. Google, Microsoft and Yahoo all devote substantial resources to detecting and curbing it.
Advertisers are not charged for fraudulent clicks where they are detected, and can obtain refunds for those they discover themselves. But Google and others have been criticised for not being more open about how they judge whether a click is genuine.
Sharon Bayley, general manager of online services in the UK, claims the industry is working together to tackle click fraud. ‘We can now track each individual click,’ she said.
Last month, an Arkansas judge approved a $90m class-action settlement after a group of advertisers claimed that Google had allowed third parties to drive up fees by fraudulent use of the system.
Under the deal, Google paid $90m, including $30m of legal costs and $60m in customer credits.
