Adsense Secret Advices

Google, which is primarily known for its search advertising business, is also trying to grow its display advertising business. Google has hundreds of partnerships with other websites, and its partner advertising product is known as ‘AdSense’. AdSense is an agreement involving Google providing advertising services to its partners and then sharing revenues with them.

Google competes with Yahoo, Microsoft, AOL and Facebook in the search advertising as well as the display advertising market.

One catalyst to the display ad business is the social buying phenomenon with companies like Groupon, which buys ads through AdSense. We estimate that AdSense accounts for around 5% of our $603 price estimate for Google stock. Our price is close to the market price.

Social buying is one of the hottest online trends these days where people share great deals in a group. Groupon, along with LivingSocial, are the leading companies to catch up with this trend. Groupon partners with businesses to offer consumers incredible savings on products and services. Social deals create a win-win situation for both the consumers and the businesses. Consumers benefit from highly discounted deals while businesses benefit from a more focused and inexpensive advertising, and at the same time they increase their customer base.

However, the barriers to entry in this market are low, and players like Google, Yahoo, AOL and Facebook have jumped to tap into the growing social buying phenomenon — Google ‘Offers’ and Facebook ‘Deals’ are such examples. We touched upon this phenomenon, and how competition among these players has intensified, in our previous note titled “Yahoo Enters the Local Marketing Arena.”

We believe that the Groupon’s advertisement spend on AdSense is substantial. This can be determined from the fact that Groupon’s competitor LivingSocial spent $2.4 million on AdSense in June 2010 alone. [1] Moreover, LivingSocial has a much smaller reach than Groupon since it has a presence in far fewer countries and cities than Groupon. Additionally, Groupon’s attractive business model means that its ads carry higher user click through rates, as many users tend to click on the discounted offers. Hence Groupon’s ads create higher monetization opportunities for Google AdSense program.

We estimate that AdSense program’s revenue per page view could increase from around $1.70 per 1,000 page views in 2010 to around $2.20 by the end of Trefis forecast period. However, although Groupon’s advertising spend on AdSense seems substantial, the benefit to Google stock is limited since AdSense contributes little to Google’s stock value.