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This Test Could Lead to Tons of Revenue for Google Inc.

By Adam Levy - Sep 3, 2015 at 7:44AM

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Google is testing video ads in search results.

Source: Google

Digital video advertising is getting a lot of attention, as just about every social-media company makes a push toward the format. Theoretically, videos could return better results than standard links and photos, resulting in higher average ad prices. That's true for any display advertiser.

But Google (GOOG -5.14%) (GOOGL -4.95%) wants to get in on the digital-video ad boom itself. And while it has YouTube, which generated an estimated $4 billion in advertising (between videos, banners, and search ads), a much larger portion of its revenue comes from its search ads. That's why Google is reportedly testing video ads in search results.

Not the first to do it
Microsoft (MSFT -0.40%) currently offers an ad format it calls Rich Ads In Search for Bing, which allows advertisers to embed a video with their standard text ad. Users can click on the video, and it drops down and starts playing without leaving the search-results page.

Microsoft says Rich Ads provide higher conversion rates for advertisers. As a result, market forces ought to drive the price higher for Rich Ads over standard Bing Search ads.

If Google can show similar results with its video-search ads, it could be in line for a significant boost in ad revenue. Google commands nearly two-thirds of the U.S. search market, and it's even higher globally. Last year, the company made around $40 billion from search advertising globally, but it's been facing pressure as more searches move to mobile.

The timing is right
Just about every ad-supported company is making a push for more video. Facebook (FB -7.62%) has been putting more and more videos in users' News Feeds for about a year now, and says its users collectively watch 4 billion videos per day. It's currently in the midst of working with businesses to produce more video advertisements to capitalize on videos' increasing popularity.

A recent report from IHS found that digital video ad spend doubled from 2011 to 2014 to $11.2 billion, and it's expected to grow 23% in 2015 to reach $13.8 billion. By 2017, the research firm estimates that online video ad spend will top $19 billion.

In other words, a lot of money and new video content is about to hit the Internet, and it's going to go where the eyeballs are. For two-thirds of the U.S., that's Google's search-engine results page, so it's in Google's best interest to offer them a chance to show videos.

Mobile remains a challenge
As mentioned, a shift to mobile is deteriorating Google's average ad price in its search results. Management recently said that about 50% of U.S. search queries are coming from mobile.

Displaying videos in line with regular search ads has worked for Microsoft on desktop searches, but the experience is somewhat clunky on mobile. Microsoft admits so, and it says it's working on refining Rich Ads to create a better video experience, especially on mobile.

Figuring out video ads on mobile search could provide significant relief to Google's declining ad prices. It certainly won't be as easy as figuring it out on desktop, where there's a lot more screen real estate to make things work.

If Google figures out how to insert video ads into its search results, it could be a huge catalyst for revenue growth. It won't come all at once, as it will take time for advertisers to adopt the new format. But with the ad dollars flowing into digital video over the next few years and the significant number of eyeballs Google has, it could spur several years of positive ad-price increases on Google's main moneymaker.

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