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As Google expands its lucrative ad network to new markets, industry watchers increasingly believe the search giant will buy its way into the nascent market for advertising inside video games.
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Google has reportedly looked at acquiring AdScape Media, a small company, founded in Ontario and now based in San Francisco, that specializes in so-called in-game ads. Google did not return calls seeking comment, and an AdScape spokeswoman declined to comment on the talks.
Though an industry insider who asked to remain anonymous said negotiations had stalled, such an acquisition would allow Google to take on old foe Microsoft, which last year acquired a similar but larger company called Massive. In-game ads, however, are one place where Microsoft would have a rare advertising advantage over Google thanks to thriving sales of its Xbox 360 gaming console and a long list of gaming titles.
“Google would be playing catch-up against some significant entrenched providers,” said Michael Goodman, a program manager at research firm Yankee Group Research. “The biggest challenge for them is they might see themselves closed out of the Xbox as a platform to serve ads to.”
In-game ads may sound like a niche, but it’s a growing one that reaches a choice demographic for advertisers. A recent Nielsen Entertainment study found that men aged 18 to 34 are spending more time playing video games (12.5 hours on average per week) and less time watching television (9.8 hours per week). About 6 million U.S. households have at least one “power gamer,” someone who spends as much as 20 hours per week and $50 per month on games, and there are more than 15 million active players of casual games, which are free ad-supported games such as Tetris or cards, said Michael Cai, director of broadband and gaming for Parks Associates.
“It’s not a pimply faced teenage kid playing video games in the basement anymore. It’s people with a lot of disposable income,” said Jeff Berg, content editor at the Interpublic Emerging Media Lab think tank. “It’s a natural space for Google to move into if they can do it effectively.”
The dollar value of this market isn’t nearly as small as many people would think. Parks Associates predicts that game advertising revenue will grow from $120 million in 2006 to $200 million this year and $300 million in 2008. Yankee Group forecasts in-game ad revenue to reach $732 million by 2010. Buying AdScape wouldn’t get Google a lot of new customers, but it would get the company technology, Goodman said. “Google already has significant relationships with advertisers, but they would have to build up relationships with game publishers,” he said.
“Google is the king of search ads, but they aren’t that dominant in brand advertising.”
–Michael Cai, director, Parks Associates
Over the last 18 months, the search giant has been rapidly moving into new ad markets such as print and radio, using its automated online ad-delivery system to provide a way for advertisers to reach new customers via offline mediums. Google purchased radio advertising provider dMarc Broadcasting for just over $100 million a year ago and has been conducting radio ad delivery tests.
While it’s hard to imagine virtual world games like World of Warcraft being a great advertising vehicle for Coke or Pepsi, plenty of games could be ideal, such as sporting titles.
“For example, we take Nike’s (ads) they’ve used for print or television and implement that straight into the games across our sports titles,” said Justin Townsend, chief executive of in-game advertising firm IGA Worldwide. The ad is delivered over the Internet and can be changed depending on which advertiser has purchased the ad rights, he said. The ads are targeted geographically, so players in Germany, for example, will see a German version of the ad. Because Google’s greatest success has been in contextually targeted ads rather than display ads, it might be better suited serving ads that appear alongside casual games, which are sold over the Web, Cai said.
“The question is whether Google is interested in getting into a new media form–gaming, and whether they are looking beyond search and trying to address a new ad business–display advertising,” he said. “Google is the king of search ads, but they aren’t that dominant in brand advertising.” But is the gaming industry ready for Google’s automated kind of advertising?
“It’s not clear,” said Jonathan Epstein, chief executive of Double Fusion, a competitor to AdScape, IGA and Massive. “It doesn’t mean it can’t get there, but when you look at how markets evolve it’s always the specialists that drive innovation and focus in the market.” Eva Woo, vice president of marketing at AdScape, said her company has a technology that allows advertisers to interact with consumers without interrupting the game, something that could appeal to Google. If a gamer opts in, AdScape’s Real World Virtual World Gateway will deliver messages via SMS or e-mail from the advertiser, Woo said.
When the game detects that a player has reached a certain level in the game or that a player is having problems getting beyond an obstacle in the game, for example, the advertiser could offer hints, rewards or coupons. “We’ve been developing this (advertising) technology for five years,” she said. “We have one patent issued and 15 patents pending.”
A risk for Google, of course, is getting shut out of Microsoft’s growing Xbox market, and the question remains whether gamers will rebel against publishers who allow advertisers into their gaming worlds.
“Male gamers playing core games don’t mind ads if they help make the gaming experience more realistic rather than disrupting their gaming activity,” Cai said.
By Paul Sloan, Business 2.0 Magazine editor-at-large
Homemade instructional videos like SalsaBootCamp are booming online – and almost anyone can cash in.
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When Evan Margolin launched SalsaBootCamp to sell instructional video clips online, everyone he knew told him it was a crazy idea. Why would people offer up their credit cards to him – a dance teacher known only to his students in San Francisco – when they could watch thousands of dance videos for free on sites like YouTube?
Yet aspiring salsa dancers have signed up in droves, even as Margolin has raised the monthly subscription price from $9 to $37. Four months after its launch, SalsaBootCamp.com is making $20,000 a month.
“If I wasn’t watching the money roll in,” Margolin says, “I wouldn’t believe it myself.”
Big media companies have largely stopped selling subscriptions for their online content, opting instead to build traffic and cram their sites with ads. Yet the subscription model has become a shrewd way for smaller players to make money, especially among the super-niche sites of the Net. There are subscription sites for everything from online soccer lessons for kids to becoming a personal fitness trainer.
Making a go at this, in fact, takes zero technical knowledge and not much up-front money. The key requirement is having a subject about which you can offer some know-how, so you can create a service that people will willingly pay for month after month.
Margolin, 36, found his niche a decade ago, when his big brother dragged him to a salsa club. He eventually became a dance teacher, although his main income has come from various Internet marketing jobs. Margolin says he had toyed with the idea of creating a subscription dance site off and on since 2001 but never did it because the technology wasn’t good enough: The video was cumbersome and slow.
Then last summer one of his students began recording the dance class on a camera phone, burning it to a CD, and asking him to post it on a website. “I thought, ‘Damn, maybe the time is right,’” Margolin says.
So he got started. A number of online software tools now exist to run a subscription business, and Margolin chose one called Membergate. It costs a few thousand dollars, but it handles everything: video support, hosting, payment methods, and so on. He then paid a student $11 an hour to videotape his dance moves. The quality is raw; no fancy film-editing software needed here.
Next, Margolin spent $1,000 or so to give the site some useful Web cred, which he says people too often mistakenly scrimp on.
He posted the Better Business Bureau’s online seal, allowing users to file complaints, and the TRUSTe seal, which verifies that an e-commerce site is secure. He also added testimonials from students. Some are written comments; others are video clips – cheesy-looking interviews attesting to Margolin’s skills. “Hokey works if it’s real,” the instructor says.(If you’re starting from scratch, Margolin suggests, offer your product for free at first and ask people who like it to post comments.)
After a few weeks, the site was ready to go. Margolin drove traffic by buying paid search ads on Google (Charts) and Yahoo (Charts) and by spreading the word in online dance communities. “If you’re really passionate about the topic,” he says, “you’ll know most of the resources to turn to.”
He currently has 1,000 members and is adding a few every day. The trick now is to keep it up: keep marketing, keep adding content. It’s not a do-nothing path to riches. But if you can land even a few hundred subscribers, you can make some sweet, and profitable, moves.
Two of YouTube‘s founders stand to divide shares of stock now valued at around $650 million, Web search leader Google Inc. said in a regulatory filing Wednesday detailing the payout from its $1.65 billion acquisition.
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Chad Hurley, chief executive of the online video sharing phenomenon YouTube, received 694,087 shares of Google (Charts) common stock worth around $326 million, according to the Securities and Exchange Commission filing.
Co-founder Steve Chen received Google common stock valued at a similar amount, including 625,366 shares directly owned and another 68,721 shares held in a trust.
Sequoia Capital, the sole venture capital backer of YouTube, stands to receive around $442 million in Google shares based on the $470.01 closing price of the Web search leader Wednesday.
At least two dozen YouTube employees received lesser share amounts. For example, Julie Supan, YouTube’s principal spokeswoman, received 10,308 shares worth around $4.8 million.
Most of the remaining shares were divided up among dozens of limited partner investors in Sequoia Capital.
These include a who’s who of the endowments of Harvard, Yale, Brown, Columbia, Oxford and other elite colleges, and the investment vehicles of the families behind the Getty (Charts), Hewlett-Packard (Charts) and Intel (Charts) fortunes, among other beneficiaries.
The third co-founder, Jawed Karim, received stock valued at around $64.6 million. After starting the company in early 2005, he backed out and returned to Stanford University to work on a graduate degree in computer science.
Google, of Mountain View, Calif., acquired YouTube, which is now located in Brisbane, near San Francisco, in November of last year.
YouTube enjoyed explosive growth during 2006 among viewers eager to watch short-form comic sketches created by other users. But its also has faced mounting legal threats from big media companies angry that the site has become a popular means of pirating their television shows.
Google had said at the time of the deal’s closing three months ago that one-eighth of the equity, or around $200 million, would be held in escrow as security on unspecified indemnification obligations.
Last week, Viacom Inc. (Charts) , owner of MTV Networks and several popular comedy programs often pirated by YouTube fans, demanded that the Google unit take down some 100,000 video clips of Viacom programming.
Originally posted by Reuters.
In a sign of the growing tension between old-line media and the new Internet behemoths, Viacom, the parent company of MTV and Comedy Central, demanded yesterday that YouTube, the video-sharing Web site owned by Google, remove more than 100,000 clips of its programming.
Viacom, along with other major media companies, including the News Corporation and NBC Universal, has become increasingly frustrated with YouTube as it has amassed a vast library of copyrighted clips, placed on the site by its users. While such companies regularly ask YouTube to remove their material, Viacom’s demand, which it disclosed in a statement circulated by e-mail message, was the most militant and public move of its kind so far. As it has with the similar request from other companies, Google removed the Viacom clips from the YouTube site yesterday.
The dispute underscored the tense dance that major media companies are doing with Google, which bought YouTube for $1.65 billion last October. Google hopes to strike deals that will give it the rights to mainstream programming and also wipe away its potential liability for any violations of copyright law by YouTube so far. Despite intense negotiations in recent months, Google has not been able to announce any such deals with media companies. YouTube is supported by advertising, but in most cases it does not share that revenue with copyright holders. Viacom is particularly unhappy because so many of its shows, like “The Daily Show With Jon Stewart,” a YouTube favorite, appeal to the young audiences who visit the site.
“We cannot continue to let them profit from our programming,” Philippe P. Dauman, Viacom’s chief executive, said in an interview. Mr. Dauman said that Viacom had been in discussions with Google for months, but that Google kept delaying and did not make what Viacom saw as a serious offer. David Eun, a vice president for content partnerships at Google, said that his company had been “very serious” about the talks, but that the companies could not agree on financial terms. “We put in a lot of time to figure out what would be a mutually beneficial deal,” he said. A Viacom spokesman said the company had repeatedly asked YouTube to filter out its programming automatically, but that Google had not responded.
“They choose not to filter out copyrighted content, ” said the spokesman, Carl D. Folta. He added that the company apparently had the technology to filter out pornography and hateful material, which is rarely seen on YouTube. Chad Hurley, the co-founder and chief executive of YouTube, said the company was still working on its filtering technology. He said it had agreed to use it to identify and possibly remove copyrighted material from Warner Music, and it would discuss a similar arrangement with Viacom as part of a broader deal. Mr. Folta said he found that stand unacceptable. “They are saying we will only protect your content if you do a deal with us — if not, we will steal it.”
Whether YouTube is stealing content by serving up clips of copyrighted programs is very much up for debate. Like most big Internet companies, Google claims it is protected by the Digital Millennium Copyright Act, so long as it removes material whenever a copyright owner requests it. John G. Palfrey Jr. , the executive director of the Berkman Center for Internet and Society at Harvard Law School, said Google may well be able to use this defense, but “I don’t think the law is entirely clear.” And if Google loses, “the damages could get astronomically high,” he said. Viacom’s move comes at a time when it and other media companies have contemplated creating a service to rival YouTube. There have been on-again, off-again negotiations among a variety of companies, including the News Corporation, NBC Universal and the Walt Disney Company.
Meanwhile, Viacom’s cable networks are increasingly putting clips from their programs on their own Web sites and selling advertising on them. In the face of uncertainty, media companies have taken different approaches to YouTube. For the last year, NBC Universal has demanded that site remove most clips of its material, other than a small set provided by NBC itself. Others, like CBS, have largely let their content remain on YouTube. CBS has struck a deal to provide some clips to YouTube and share in the advertising revenue associated with it. It was not clear yesterday how Viacom’s demand might affect the rest of the industry and whether other media companies would follow suit.
Andrew Butcher, a spokesman for the News Corporation, which owns the Fox television network and the social networking site MySpace, said his company supported Viacom’s move. “They’ve got every right to protect their content in whatever way they deem appropriate,” Mr. Butcher said. “So far we’ve been dealing with YouTube and others on a case-by-case basis.” Reports have been circulating in the industry that Google had offered to pay $100 million a year for the use of Viacom’s programming. Mr. Dauman of Viacom denied there had been a deal on the table. He said Viacom “never had any kind of an agreement with Google that it could say yes to,” adding: “There was not enough to be a detailed offer. They have shown no sense of urgency to enter into an agreement with anyone.” Some analysts said the removal demand was simply a business tactic on Viacom’s part.
“This is a negotiating strategy to get paid, and I think both sides need a middle ground,” said Michael Nathanson, a media analyst at Sanford C. Bernstein & Company. “Both sides have clear needs in this negotiation. What they are arguing about is price.” Viacom’s demand was “a risk worth taking,” Mr. Nathanson said. He and others pointed out that the music industry was once afraid to take a similarly aggressive stance when their music appeared on the Napster music-sharing service. “If content is available free and it is tolerated, it erodes your core business,” Mr. Nathanson said. But others said the move could hurt Viacom if young YouTube users become angry when they upload clips to the site and realize that Viacom is insisting that they be removed. Yesterday Google tried to position Viacom’s move as hostile toward YouTube users. “The biggest feeling we have right now is regret that Viacom may miss out on the chance to interact with the YouTube community,” Mr. Eun said.
The effort to integrate old and new media has made some inroads. Just a few months ago, Viacom and Google were cozying up so successfully that Viacom struck a deal to have Google distribute clips from its shows on its Google Video service. The deal included an arrangement where the two companies would share revenue from adjacent advertising. Mr. Dauman yesterday characterized that deal as an “experiment.”
Richard Siklos contributed reporting.
By Elinor Mills
Google‘s fourth-quarter revenue rose 67 percent and profit nearly tripled on continued strength in its cash cow paid searc business.
Handily beating analysts estimates, net earnings for the quarter ended December 31 were $1.03 billion, or $3.29 a share, including one-time items such as stock-based compensation, compared with $372 million, or $1.22 a share, during the same quarter in 2005. Excluding those items, earnings were $997 million, or $3.18 a share. Total revenue for the quarter rose 67 percent to $3.2 billion, compared to $1.92 billion a year ago. Excluding traffic acquisition costs, or commission paid to content partners, revenue was $2.23 billion.
Analysts polled by Thomson Financial were expecting Google to post earnings per share of $2.92 excluding items, and revenue of $2.19 billion, excluding traffic acquisition costs. Paid search represents nearly all of Google’s revenue. The company is expanding its advertising platform beyond the Web into radio and print.
“We paid over $3 billion in 2006 to our partners and this is a figure that we expect is going to increase as we ramp up our video, radio and print programs,” founder Sergey Brin said in a conference call with analysts. Asked about whether the company plans to help companies advertise on television, Chief Executive Eric Schmidt said: “We have already said that we are experimenting with traditional television advertising…There are many reasons to believe that the targeting technology we have invented can apply well, that advertisers will pay much higher rates for ads that are targeted.”
As for YouTube, Google suspects content creators will take advantage of the direct link to fans that the video-sharing site provides, said Schmidt. “We can connect the copyright owner with the user,” he said. “We’re pushing for a model where the people who produce the content get some revenue back.” In addition, Google is working on audio and video fingerprinting technologies to protect copyright holders, he said.
When it comes to search, paid clicks on ads on Google’s network and its publisher partners’ Web sites grew more than 60 percent in the aggregate, according to Chief Financial Officer George Reyes. While things look rosy for Google, its largest search rival posted more modest fourth quarter results. Last week, Yahoo’s earnings were down more than 60 percent from a year ago.
Web traffic to Google grew 24 percent in the fourth quarter from the same period a year earlier and Google accounts for more than half of all Web searches, according to Nielsen/NetRatings. The company is expected to capture two-thirds of the search advertising revenue this year, according to eMarketer.
Google shares, which closed at $501.50, dropped as much as 2 percent in after-hours trading after the company failed to make so-called “whisper numbers” on the street that were slightly higher than the estimates that they beat. The stock has risen nearly 18 percent over the past year, about the same amount that Yahoo’s has fallen.
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