Image source: Google.
Google is by far the biggest digital advertising company in the world, taking about $3 out of every $10 spent on online advertising in 2016. The Alphabet (GOOG +0.36%) (GOOGL +0.20%) subsidiary's ability to attract visitors and to monetize its search engine is at the core of its ad revenue. Recently, however, a growing percentage of its revenue is coming from YouTube -- which is evident in the impact on its average ad price.
But after YouTube, investors may be wondering where Google's next growth spurt will come from. In fact, you might already be using a product analysts at Baird believe will generate $5 billion in revenue for Google by 2020.
Google Maps could be the next big growth driver of Google's ad revenue.
Maps monetization strategy
Google CEO Sundar Pichai believes Maps is closely tied with local search on mobile. Indeed, a lot of searches for a nearby establishment are actually better suited for Maps, and Google will redirect users to the app when appropriate.
When it comes to placing ads or otherwise monetizing local searches and Maps, it's really about "enhancing the local search experience," Pichai told analysts on the company's third-quarter earnings call. "I think you'll continue to see us pursue it that way. And over time, to the extent there are opportunities to create value within the application itself, we'll pursue that as well," he added.
Google already allows businesses to buy Promoted Pins, which display businesses such as restaurants or gas stations along their routes. That's useful on long road trips, where you'll need to stop at those types of locations. It could also move into local restaurant and business advertising for when users search for generic places such as "Mexican food" or "grocery store."
That would put Google in even closer competition with local search players such as Yelp (YELP +4.89%), which has complained about unfair tactics from Google in the past. In particular, it complained about Google's favoring of Google+ and Zagat reviews (Google owns Zagat) in organic search results even for searches using the keyword "yelp."
Yelp generated $580 million in local ad revenue over the previous four quarters. With over 10 times the traffic (Maps has 1 billion global users), the opportunity is even bigger for Maps.
Strategic partnerships and co-opting services
Another way Google is able to add value to Maps while monetizing it at the same time is through strategic partnerships. One example is including Uber and other taxi services in its app, along with estimates as to how much a ride will cost. Alphabet's investment arm, Google Capital, owns a stake in Uber. Google could also integrate services such as food delivery or reservations into Maps to both enhance and monetize the product.
Importantly, Google is working on all of these services itself. It's already testing a ride-sharing service built on top of Waze in the Bay Area and Tel Aviv. If it can feed enough users into Uber or some other service, it might be able to launch its own service and rapidly reach scale. What's more, the data it collects from referring users to Uber or other services can inform the features and rollout of new products.
Going forward, investors should look for Google to move into more partnerships or launch its own services within Google Maps. The move effectively diversifies beyond advertising while providing additional utility to the app. Meanwhile, analysts at Morgan Stanley believe its advertisements could generate an additional $1.5 billion for Google next year. But to get to $5 billion, as Baird analysts predict, it might take a little bit more than ads.
