Internet search engine Google Inc. (NASDAQ/GOOG) had a market-cap of $140 billion, but the stock has retrenched in the recent months after some issues were raised about the company’s growth rate and dependence on the advertising revenues.
The reality is Google currently derives the majority of its revenues from advertisements. Given that this area generally moves in trends, you know that companies such as Google will hit rough spots. Google had been riding on the coattails of a strong rebound in Internet advertising, but we know that there will be periods of slower soft advertising growth.
The Newspaper National Network just released a report that showed unique visitors to newspaper Web sites had surged 21% in the period from January to December 2005. But while this is good, the problem according to the Newspaper National Network was that advertising sales continued to be difficult. The Newspaper National Network suggested that a solution to counter this weakness must be found. This trend will clearly place new pressures on online web sites that depend largely on advertising dollars to run their sites.
During the Internet boom days in the late 90s and early 2000, web sites were popping up everywhere. Advertisers at that time were wiling to throw money for banner and other online advertising. But that was then and the situation within the industry has dramatically changed.
Studies have found that the clickthrough rate for banners and other forms of online advertising were quite low. Subsequently, we saw a shift towards “pay per click systems” such as the model that Google uses. While it has worked for Google, it is not foolproof to an advertising slowdown.
The problem is with the low click rates and the reality the sector may be slowing. Companies that generate the majority of its revenues from advertising will continue to be under pressure.