Google didn't buy in - a stubbornness that proved brilliant. Six years later, those skinny little text-based ads are a huge moneymaker, accounting for more than $600 million in revenue last year, according to Forrester Research. And Google, once simply the world's best search engine, is fast reinventing itself as an advertising company.
At the heart of the new Google is AdWords, a self-service ad server that uses relevance-ranking algorithms similar to the ones that make the search engine so effective. Advertisers tell Google how much they want to spend, then "buy" pertinent keywords. When users type in a matching term, the ad appears near the search results under the heading "Sponsored Links." Each time a user clicks on the ad, Google subtracts the cost-per-click from the advertiser's account. When the account's daily budget is met, Google stops displaying the ad.
So far the system has proven easy to use and remarkably effective. Roughly 15 percent of ads displayed adjacent to Google searches (at the company's own Web site and on Google-powered sites like Yahoo! and AOL) result in clickthroughs - more than 10 times the click rate of the average banner ad. These clickthroughs are the golden leads of online commerce. One Dow Chemical business group reported 25 percent of its traffic comes through Google. Designer Hospital Gowns, a health care industry Web site, boosted sales 20 percent in six months.
AdWords has worked so well that last year Google began offering the system to other sites as a way for them to provide targeted ads. The new service, AdSense, places ads on Web sites of all stripes, from ABC.com and The New York Times on the Web to quirky blogs like Bananathing!