NYTimes writes about the challenge posed by Google to traditional ad agencies:
Advertisers are finding they can attract buyers relatively cheaply without a blaring message and an expensive Madison Avenue agency to create it. On Google, most ads are simply a few words of text set to the right of the main search results.
“In the old days, advertisers had to chase buyers,” said George F. Colony, the chief executive of Forrester Research. “Now the buyers chase them.”
Such ads are not necessarily going to stop major companies from trying to reach a mass audience through television advertising or pursue a more narrowly aimed campaign by placing displays in newspapers and magazines. But they are extremely useful for a wide variety of companies in marketing their wares.
A Peruvian tour operator, for example, can inexpensively reach people looking for information on Machu Picchu; a music store can advertise next to the results from a search for information on the latest Norah Jones record.
In the first quarter, Google’s operating profit was $155 million, or 40 percent of its total revenue of $390 million. That was a greater operating profit than Yahoo’s, and a far higher profit margin. Yahoo’s operating profit was $132 million, 17 percent of its revenue of $758 million. And Google is growing at twice the pace of Yahoo.
Only a few years ago, when Internet companies were falling to earth like a flock of scorched Icaruses, online advertising was written off as little more than tiny, ineffectual billboards.
But in the last few years, Web sites have created bigger, more interactive advertising formats and marketers have learned how to use them. As a result, the growth of online advertising has taken off again, becoming a particularly attractive medium for reaching people, especially those young adults long craved by marketers, who are watching television less and less.
This is one of the best businesses I have ever seen,” said Steve Berkowitz, the chief executive of Ask Jeeves, a smaller search engine. “It is like a cash machine.”
For advertisers, search engines improve on traditional advertising in another way: they have to pay only when an Internet searcher clicks on an ad, so there is no money wasted on people with little interest in the product or service.
“When I put my ad on a search engine,” said Christopher G. McCann, the president of 1-800flowers.com, “I am putting my message where the consumer is looking for one of my products.”
Moreover, advertisers, to some extent, determine their own prices through an auction process in which those willing to pay the most are listed higher than others.