Safa Rashtchy, an analyst with investment bank Piper Jaffray, is perhaps the best-known Wall Street commentator on the contemporary search business. Before Google's initial public offering (which required the formerly private company to finally disclose its financials in public filings), many have been speculating that Google's 2003 revenues were going to be revealed as coming in around $300 million. When Rashtchy, follwed by a few others, began to peg the number at something closer to $800-900 million, it looked like something big was in the making at Google; and it indeed was. The actual 2003 revenue number blew away even Rashtchy's bold estimate: it was $1.46 billion.
Rashtchy's recent projections for the paid search sector as a whole are worth ntoing. At the October 2004 ad:tech conference in New York, he predicted that total paid search spending will rise to $13.5 billion by 2007 and $23.2 billion by 2010, enjoying rapid growth from its humble beginnings (only $369 million as recently as 2001). He noted that these figures were approximately twice his firm's estimates made only a year earlier. The rapid growth of the sector has caugh even the closet observers off gaurd.
According to esimates by Hoover's (a research company that maintains a database of information on 40,000 public and private companies), Google's revenues as a private company grew from a mere $50 million in 2000 to $125 million in 2002. The real 2002 number was actually a lot better than the outsiders' estimates: according to public filings, it came in at $439 million! Calculations of typical AdWords account sizes multiplied by a reasonable estimate of the number of active Google AdWords accounts gave careful obervers good reason to believe that Google's 2003 revenues were in excess of $1 billion, not $300 million or less that was commonly estimated by the news media.
Two major events caused Google's revenues to explode to their current levels (in excess of $800 million in the third quarter of 2004 alone). First, the shift from an unsuccessful flat-rate 'cost-per-thousand-impressions' (CPM-based) ad program to a dynamic pay-per-click auction model. This attracted new interest in Google's ad program, leading to a rapid upatke of the AdWords program and bidding wars for traffic tied to popular keywords.
Second, Google expanded its reach to begin placing text listings near relevant content on partner websites through its AdSense program in summer 2003. The AdSense program grew at a breakneck pace. Of the approximately $2.12 billion in advertising revenues earned by Google in the first three quarters of 2004, just about half of that was generated by ads served on non-Google-owned sites. In addition to 'content' ads, the third-party revenues come from search network partners like Ask and AOL Search.
Another big part of the story for 2004 was the many content publishers who began displaying the AdWords ads, making Google a force to be reckoned with as an advertising network, with larger ambitions sure to be lurking not far under the surface. With 98% of its revenues generated from advertising, this 'search company' could be referred to as an 'ad-serving company'.
Yahoo, too, depends heavily on its search advertising revenues, though less than Google. According to public filings, Yahoo's Overtire division (pay-per-click ads_ is responsible for as much as 40% of Yahoo's advertising revenues, and this may well increase to 50%. But Yahoo, burned in the dot-com meltdown, has diversified to fee-based services (such as paid content, premium email, games, and so on), so it isn't completely dependent on advertisers. If Google's wise, it will begin to diversify its revenue base as well