Topping Out? Google Is a Growth Company But In a Stagnant Industry

If to “Google” (GOOG) is a verb, the company must have created an entire industry – Internet search advertising -- and its sales and stock-price growth certainly suggest that it is so.

But viewed another way, advertising is advertising regardless of where it appears or how consumers find it. And if it’s a no-or-slow-growth industry, Google is instead a voracious market share devourer, but one that could run up against growth constraints in the near future.

GOOG Chart

GOOG data by YCharts

Like the overall economy, advertising’s rebound since 2008 has been restrained. In fact, Ad Age reported last June that total U.S. advertising spending for its 100 Leading National Advertisers only returned to its pre-recessionary levels in 2011.

Nor do the coming years promise unbridled growth. Total U.S. advertising spending will rise by 4.3% in 2012 and continue to inch up in low single-digits through 2015, predicts Zenith Optimedia. Robust spending in Internet and mobile advertising will do little to change the industry’s generally lackluster performance. In other words, companies might be spending more on digital than traditional advertising, but their overall ad budgets remain relatively stagnant.

Google’s gains have been directly as a result of advertising sales declines at old media companies, like Time Warner’s (TWX) magazines, and especially at newspaper chains like New York Times (NYT) and Gannett (GCI).

NYT Revenue TTM Chart

NYT Revenue TTM data by YCharts

And thus, during the first six months of 2012, Felix Richter of Statista calculates, Google produced $20.8 billion in ad revenue, whereas the entire U.S. print media industry brought in a little over $19 billion.

True, huge ad buyers like Priceline (PCLN) – it spent $919.2 million on online ads in 2011, buying search terms like “Hong Kong hotel” – are new companies. But such firms have also mowed down traditional competitors – travel agents, say – that were in past years inclined to buy print ads.

Google also already dominates digital’s most promising advertising medium, mobile ads – estimated by Publicis Group’s ZenithOptimedia to explode by 58% in 2012. “The largest chunk of mobile advertising is made up by search and Google dominates search,” says Richter of Statista. That’s why Richter expects Google’s mobile-based ad revenues to reach over $6 billion by 2014.

That growth, too, comes largely from advertisers diverting dollars away from traditional media and toward mobile applications. So to contemplate Google’s growth potential, one needs to think of what additional traditional media ad dollars are out there to cannibalize.

Print media will have less market share left to give. Newspapers’ global market share is expected to decline from 20% this year to below 16% by 2015. Magazine’s share will decline from 9% to 7% in the same time period, according to Zenith Optimedia. True, those could conceivably both fall to 0%, but there are some signs that print is stabilizing or at least slowing its decline.

That leaves Google with the daunting prospect of nibbling away at the #1 category: Television, which holds 40% of the ad market. Taking market share from TV may prove especially tough. It has fragmented in recent years, with the proliferation of cable channels, and now offers a stunning variety of programming, much of it very compelling to its targeted audience. The TV business is vulnerable to the trend of consumers watching shows on demand, and blasting through the ads. But especially for sellers of mass-market brands, like Procter & Gamble (PG), Anheuser-Busch Inbev (BUD) and General Motors (GM), TV remains an attractive place to advertise.

Google will no doubt nibble away at TV’s share, too, but obliterating television the way it did print seems less likely. Google, its stock having fallen over profit margins concerns, is priced reasonably, its PE ratio at about 22, for a company still growing rapidly. It's the longer-term growth that's in question.

Amy Kover, a contributing editor at YCharts, is a former staff writer at Fortune magazine, and has covered banking, investing and technology. Her writing has also appeared in the New York Times, Real Simple, Women’s Health, Smart Money, and TV Guide. She can be reached at editor@ycharts.com.

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