Why Google Is Buying AdMob

If approved, the deal will give the search engine a big head start in cell-phone advertising

In a move likely to give a big boost to the mobile-phone ad market, Google announced on Nov. 9 that it’s buying AdMob, a provider of mobile ad technologies, for $750 million in stock.

If approved, the acquisition would provide Google (GOOG) with a key set of technologies to expand its advertising business beyond search-related text ads that make up the bulk of revenue. “Google could have built this itself, but this gives them a head start,” says mobile analyst Greg Sterling of Sterling Market Intelligence. “It will thrust Google into the forefront of mobile display ads.” Google has already pushed into the wireless market by backing the development of Android, an operating system used in smartphones such as Motorola’s (MOT) new Droid, carried by Verizon Wireless.

Google’s third-largest acquisition to date, AdMob would give its new owner the ability to serve display ads, the pictorial banners that are the chief revenue source for most Web sites, to cell phones and other mobile devices. Google last June introduced a program called AdSense for Mobile in a bid to land display ads on mobile phones, akin to its AdSense program, which places ads on conventional Web sites.

Ads in Mobile Apps

But Sterling said AdSense for Mobile was still “fairly undeveloped.” By contrast, he says, AdMob has richer advertising formats, especially ads inside mobile apps. These mini-programs have become enormously popular, and developers have concocted more than 100,000 of them for the iPhone. Software programmers are rushing to create apps for other smartphones, including those from Palm (PALM) and Research In Motion’s (RIMM) BlackBerry. Some 12,000 are available for Android. Ads are seen as the key revenue driver for many of these apps.

At least one analyst compares AdMob to DoubleClick, a company purchased by Google for $3.2 billion last year. DoubleClick serves as a go-between for advertisers and Web sites. “To us, AdMob looks in some ways to be a DoubleClick for the mobile Web,” Broadpoint.AmTech analyst Ben Schachter said in a note to clients. “It should help not only to provide more relationships with mobile ad publishers and buyers, but also to provide a tested technology platform for monetization of mobile inventory and the delivery, tracking, and reporting of mobile ad campaigns.”

Acquiring the team at AdMob, which employs about 140 people, was as important as the technology in accelerating Google’s mobile display ad efforts, Google executives said in an interview. “We got a chance to get an unbelievable engineering team,” says Vic Gundotra, a Google vice-president for engineering. Susan Wojcicki, Google’s vice-president for product management, added that AdMob founder Omar Hamoui is “really a visionary in this space.”

Google CEO Eric Schmidt said recently that the search giant planned to make about an acquisition a month, mostly small purchases, while making a large acquisition every year or two. AdMob is seen as one of the large acquisitions, though the money involved is small next to Google’s nearly $178 billion market capitalization. Besides DoubleClick, Google has paid more only for video sharing site YouTube, which it bought for $1.65 billion in 2006.

Blue-Chip Customers

AdMob’s growth has attracted attention, though the privately held company doesn’t reveal revenues. Collins Stewart (CLST.L) analyst Sandeep Aggarwal estimates it grosses $50 million to $75 million and, after payments to partners, has $20 million in net revenues. BusinessWeek recently featured AdMob as one of 50 companies that could be the next Google.Even more recently, a BusinessWeek story mentioned AdMob as a possible acquisition for Google.

Founded in January 2006, AdMob has some blue-chip customers such as Ford (F), Procter & Gamble (PG), and Coca-Cola (KO). It has raised $47.2 million in funding from Sequoia Capital, Accel Partners, DFJ Growth Fund, and Northgate Capital. AdMob claims on its Web site to have served more than 125 billion ad impressions.

Analyst Schachter said he was surprised Google decided to buy the technology rather than build it from scratch, given the nascent nature of mobile ads. He also said he would prefer Google pay cash from its $22 billion war chest to avoid share dilution. Google’s shares rose 2.07% Nov. 9, outpacing the Nasdaq’s 1.97% increase.

Google’s acquisition could trigger more consolidation among mobile ad firms, which include JumpTap, Quattro Wireless, and Millennial, as well as Time Warner unit AOL’s Advertising.com mobile network. “This really validates the enormous potential for mobile advertising,” says Paran Johar, JumpTap’s chief marketing officer. He says JumpTap aims to differentiate itself on its access to anonymous user data from carriers such as AT&T (T) and Sprint (S), which will allow for more precise ad targeting.

U.S. Regulatory Review

For its part, Google clearly is seeking to blunt anticipated objections to the company’s ever-growing power in online advertising, dedicating another Web page to the issue of competition. Google said AdMob is “just one of more than a dozen mobile ad networks in the U.S. that have proliferated in recent years.” Google said it expects a regulatory review in the U.S., but not in Europe, because the mobile ad market is so small there.

Google also noted how small the entire mobile ad market is to date. It notes that eMarketer estimates mobile ads brought in $416 million in 2009, compared with almost $24 billion for online advertising overall, $51 billion for television ads, and $38 billion for newspaper ads. Still, Google’s entry not only will be seen as the biggest force in mobile advertising, but it will signal that ads on cell phones could be the next big opportunity in online advertising.

By Robert D. Hof

Hof is BusinessWeek‘s Silicon Valley bureau chief.


Comments are closed.