The reason why Google (Nasdaq:GOOG) is responding so strongly to the possible merger of Microsoft (Nasdaq:MSFT) and Yahoo! (Nasdaq:YHOO) is it underscores the underlying weakness it faces in growing their ad revenue.
It's nothing new concerning the question of where Google goes next, as many of us have seen the declining rate of growth in their text ads, and know the party will eventually come to an end; referring to the growth of the past.
The combination of Yahoo and Microsoft would account for over 25 percent of the display and animated ad market, which will would be a significant blow to Google, as they would become the place to go for advertisers.
"Even though Google may be looking forward and seeing this world where they own online advertising, at this point they're really only owning one flavor," said Jon Gibs, vice president at the research firm Nielsen Online in New York. "They really are going to be facing quite a giant in the other part of the display ad universe."
As of November, Google only had 1 percent of the display ad market in the U.S., while Yahoo led with 19 percent and Microsoft was third with 6.7 percent.
Most think that display ads will become as profitable as text ads, and display ads are definitely growing faster at this time, with expectations it'll increase by 60 percent to $13.7 billion in 2011.
As far as Google goes, it has never been if this would happen, only a matter of when. The internet search market is maturing, and text ads along with it. With Google continually saying they're not going to become a content company, display ads are the way to growth for them. The bid by Microsoft for Yahoo, and the response of investors to it, shows they also know the days of the past growth are over.
It shows the strength and weakness of the Google model. The strength is its growing dominance in the text ad business, but the weakness in that they have nothing else going for them. Forays into traditional media advertising haven't done much, so that's not anything they can rely on.
The reason Microsoft's going after Yahoo, is because display ads are its strength, built around their content, and its the place where online advertising is going, as far as growth goes.
Another reason this is bad for Google, is they have yet to prove they can do anything else but text ads based on searches. With the money and time they've had to do it, that doesn't bode well for them.
None of this is to say Google is going to suddenly disappear, just that the weakness of their business model is exposed even more by the events happening around them. That's why their response was so strong to the Microsoft bid.
Google should be able to gain a little more of the display ad share in the years ahead, but they may find themselves in the same place Yahoo and Microsoft have been with them in search, never being able to quite make any strong inroads into the display ad market.
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