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Facebook Poses Serious Threat to Google

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So what should Google do to fight back? Attack mobile search, a place where no clear leader exists and Google has underperformed to date. Per the report, 15 percent of Google’s search traffic comes from mobile, yet just 3 percent of its revenue is derived from mobile searches. Meanwhile, there are 233 million mobile phone users in the U.S., according to the report, and just 18 percent of those are smartphones—a category that is growing rapidly. Smartphone users are three times as likely to browse the Web via their phones, according to comScore.
 
“We’re bullish on [Google’s] ad growth…but it will be very hard for them to grow fast in this market [as in recent years],” said Khan. “Mobile could offset some of their challenges.”
 
Display will also provide Google with a boost in 2011, predicted Khan. In fact, the analyst sees display advertising growing 13 percent this year, at the same rate as search.
 
While the display ad space has suffered from a prolonged inventory glut over the past several years, which has placed downward pressure on CPMs, “we think we’ve turned the corner,” said Khan. Why? Advertisers are gravitating to more brand sponsorships and more data-driven targeted ads.
 
Overall, J.P. Morgan forecasts that advertisers will spend $18.7 billion on search ads in 2011 and $10.2 billion on display ads. One company that has to worry about threats to its search and display business: Yahoo, which faces “tremendous risk” in 2011, said Khan.
 
Besides social and mobile, Khan identified the TV marketplace as an area facing tremendous change in 2011—particularly as consumers embrace more direct means of accessing premium content—or as Khan termed it “over the top” video consumption, with Netflix being the prime example.
 
Instead of fighting the trend, Khan urged content producers and distributors to partner with the Netflixes of the world, or launch competing services, because consumers are increasingly disloyal to the current cable model. J.P. Morgan found in its research that nearly a quarter of pay TV subscribers would consider cord cutting.
 
Another trend to watch for in 2011 is the mergers and acquisitions market for digital. Per Khan, Microsoft and Apple alone have $150 billion in cash that could be used for acquisitions.
 
Lastly, Khan pointed to local online advertising as a sector to watch this year. While overall local advertising represents a healthy $82 billion market, just 15 percent of those dollars went to the Web, according to Veronis Suhler Stevenson.