Why Google's Ad Budget May Be Approaching the Threshold of Lameness

Last Updated Nov 17, 2010 9:24 AM EST

A note in Google (GOOG)'s Q3 2010 earnings report says it increased its sales and advertising budget by $496 million in 2010, to $1.4 billion or 9.1 percent of its revenues. Those numbers may continue to rise, Google says, as it expands its operations.

On a financial basis this is not a cause for concern -- Google could probably buy every resident of Mountain View, Calif., a Rolls Royce and it wouldn't affect the the company's fiscal health. But on a strategic basis it's worrying: Generally, lame companies peg their ad budget as a percentage of revenues, often in the 10 percent area, as opposed to thinking about what they actually need to achieve specific goals from year to year.

Google is also now wielding one of the larger advertising and sales budgets on the planet: It's set to top $2 billion in promotion and customer service spending by year's end. That puts Google in the unique position of being one of the largest providers of advertising media as well as one of the largest advertisers. It also means that Google's promotional spending is of a similar scale to its legendary R&D spending ($2.1 billion so far this year).

Yet Google competes in a business where brand promotion is almost irrelevant. In the digital world, success is almost entirely dependent on strategy and viral appeal. Microsoft (MSFT)'s Bing search engine is a perfect example: When it launched the product, Microsoft spent $100 million on ads introducing it to consumers. That barely made a dent in Google's share of search requests. However, Microsoft recently did a deal to integrate Bing with Facebook. That deal will deliver millions more search requests to Bing than ad agency JWT's campaign ever did.

The danger Google faces is that as it grows so massive -- it now has 23,331 employees, up from 19,665 the year before -- its marketing management could become less nimble, less entrepreneurial and more sclerotic. (Google specifically mentions failure to integrate new employees into its company culture as one of the risks it faces, in its 10-Q.) Rather than making strategic decisions (such as which deals to do or which products to push) it might end up with its ad budget on a ratchet pegged to revenues.

Lame companies do this. It's easier for the CFO to calculate his or her projections that way. To do it the hard way -- the proper way -- the chief marketer has to sit down with the CEO and the CFO and price out every initiative. At lame companies, management doesn't have the time for that, so they auto-peg the ad budget. At dynamic companies, they know it's one of the more important decisions of the year.

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Image by Flickr user yodelanecdotal, CC.