When Google looks at advertising, it sees what CEO Eric Schmidt told author John Battelle is the "last bastion of unaccountable spending in corporate America." Having made big strides to change that on the Web, Google is turning its attention to the wider advertising world, betting it can make it more efficient and accountable through technology.
Google last week made its most important step in this effort, agreeing to buy radio ad-buying network dMarc Broadcasting in a $102 million deal that could be worth $1.2 billion, based on dMarc reaching performance targets. In addition to its entry into the radio business, Google is experimenting with the purchase and placement of newspaper and magazine ads, and it is also considering brokering TV ads, according to Google executives.
By moving to set up a one -stop shop for interactive and traditional media buying, Google is betting that all media in the near future will become more like the Internet: data-driven, measurable and targeted. Some say if it succeeds, Google could change how media is bought, measured and even created.
The linchpin of Google's plan is AdWords, the auction system it devised in 2000 to decide which ads are best shown to which searchers on the Web. Google executives believe AdWords is the best solution for delivering relevant ads and eliminating waste by determining ad placement based on media context, bid price and user interaction.
"We're really looking to extend the measurable advertising we brought to the Internet with AdWords to other media," said Josh McFarland, a business project manager at Google.
The keys to bringing the AdWords model to radio lie in the two pillars of the system: the auction and the performance-based pricing. Google said it would integrate dMarc's 500-station network with AdWords, allowing Google's more than 200,000 advertisers to place radio and Internet ads from a single system. Executives said it was too early to commit to using the auction model for radio ads, but industry observers said an auction based on station demographics and geography is likely.
Likewise, Google executives left open the question of how the radio ads would be priced, which could include a call-based version of the cost-per-click pricing through which Google sells most of its search ads. "We're agnostic as to how an advertiser wants to buy," said Patrick Keane, head of ad sales strategy at Google.
In radio, Google found an ideal market to make its first widescale move to see if its Internet system can work in other media, according to Keane, thanks to radio's inefficient buying process involving thousands of stations. Radio is also suffering slow growth, which would make it more likely to try new ad models. From 2003 to 2004, radio ad spending grew just 2.5 percent to $20.1 billion, according to the Radio Advertising Bureau. Spending in 2005 was estimated at mostly flat.
Chad Steelberg, CEO of dMarc, said the company saw similarities between the radio industry and the Web. In February 2005, with a base of radio stations using its technology to manage the ad process, dMarc launched an ad network, to place spots, that has grown to 500 stations and is adding 50 more per month. It allows advertisers an automated system for placing radio spots in many markets.
Google's not alone in its hope that all advertising will become more automated and measurable. Microsoft has MSN adCenter, which allows advertisers to run campaigns on everything from the Web to mobile devices to Internet protocol TV. Earlier this month, Microsoft opened a research lab in Beijing with 50 scientists devoted to bringing its software expertise to bear on the ad industry. While its initial focus is online, Microsoft sees opportunities in what is now considered traditional media, said David Jakubowski, general manager of adCenter.
"You have a reallocation of some of the smartest brains of the world refocused on advertising platforms of the future," he said.
Such moves could lead to a radically different ad industry, according to Fredrick Marckini, CEO of Aegis Group's iProspect search marketing agency. "Marketing will become ridiculously measurable," he said.
If Google's vision of a more automated ad industry comes to pass, the role of agencies is likely to change, according to Jeff Lanctot, vp of media at aQuantive's Avenue A/Razorfish, putting a premium on agencies deeply involved in analytics and the complexities of bid-based marketplaces rather than qualitative analysis of media. "That turns the traditional buy-sell model on its ear," he said. "It's not so much a relationship-driven negotiation."
Yet some agency executives warn that what works on the Web won't necessarily work with traditional media, particularly TV. "There's only so far Google can go with this model," said Greg Smith, evp of media insights, planning and analysis at Aegis Group's Carat Fusion. And media placement remains part art, part science, adds Denise Garcia, an equities analyst covering Google for WR Hambrecht: "It's not the three-martini lunch anymore, but it's close."
Google executives assert its development of a better way of delivering, managing and measuring advertising is not necessarily a threat to ad agencies. Keane said Google is focused on serving its advertising customers, whether it is through a direct sales approach or through an agency. "As much as we have great machines and technology, there's a human component [to advertising] that won't be replaced," he said.
The dMarc acquisition also points to an evolution of the role of creative in the ad process. Its dynamic ad insertion lets advertisers tailor custom messages for audiences in much the same way as they do online.
Google executives have spoken of improving ad creative to make it more relevant in all media. In an interview this fall with Adweek, Google vp of advertising sales Tim Armstrong sketched out a future AdWords system in which advertisers would input their product attributes and bid price for their marketing objective. Google would then spread their creative across several types of media, in hundreds or thousands of locations, using its sophisticated targeting system. Rather than advertise 500 key products, a retailer like Best Buy could advertise 5,000, thanks to customers receiving personalized messages.
"There's a new art in advertising," said Keane, "and that's media-buying."