Surge in Profit Reflects Google's Widening Lead

By Sara Kehaulani Goo
Washington Post Staff Writer
Friday, October 20, 2006

Eight-year-old Google Inc. flexed its growing Internet muscles yesterday, reporting a 92 percent surge in third-quarter earnings compared with a year ago and widening its lead in online advertising.

Google said profit jumped to $733 million for the three-month period ended Sept. 30. Revenue totaled $2.69 billion, up 70 percent. The stock closed up 2 percent at $426.06 yesterday on the Nasdaq stock market.

Google's report contrasted with lackluster results this week from rival Yahoo Inc., which appears to be falling behind as Google uses its growing clout to make acquisitions and secure ad-distribution deals with Web sites. Google said last week that it had agreed to buy online video service YouTube Inc. for $1.65 billion in stock. It also recently partnered with to show ads and provide search functions on the popular social networking site.

"We've seen impressive growth in partnering," Google chief executive Eric E. Schmidt said in a call with analysts. "We've laid the groundwork for many more coming. We are at the early stages for something likely to be a very transformational industry."

Schmidt expressed optimism about the company's plans to continue to expand beyond text search into areas previously dominated by Yahoo, such as graphical or "display" advertising, as well as online video, a relatively new category that is expected to take off.

Helping fuel the company's growth are the many deals allowing Google to place its Web search boxes and text ads on thousands of other sites, which receive a share of the resulting ad revenue.

Citing the MySpace deal, Ben Schachter, an analyst with UBS, said Google has smartly used the strategy of "trying to be partner with large media sites, rather than competing with them."

Google's success comes as advertisers large and small increasingly are turning to the Web to reach new audiences. Online advertising revenue is expected to reach $17 billion this year, according to the Interactive Advertising Bureau, an industry trade group.

Google now powers half of all U.S. Internet searches, according to data released yesterday by Nielsen-NetRatings. It also receives one of every four dollars spent on Internet advertising, according to eMarketer, a New York firm that tracks Internet marketing trends. Google's ad share is smaller than its search share in part because Google shares ad revenue with sites that use its search service.

All the top Web search services have been growing, but Google has been outpacing the others. Yahoo now claims 23 percent of Internet searches, while Microsoft Corp.'s MSN searches account for 9 percent of the market.

Yahoo still leads in brokering graphical ad deals on the Web, but Google recently has been pushing into that business as well.

With the pending YouTube acquisition, Google executives said they see online video as an exciting growth opportunity for advertisers. The firm recently launched "click-to-play" ads, which prompt Internet users to click on a video commercial to watch it.

Company co-founder Sergey Brin said, for example, that a local bakery could provide an instructional video of how it bakes its bread. "I think there are many new opportunities here," he said.

Staff writer Yuki Noguchi contributed to this report.

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