Google Korea Struggles for Relevance

By Kim Tong-hyung
Staff Reporter

Google usually dominates the world of search like an oversized kid on the playground, but somehow in South Korea, it finds itself a minnow. Now, after losing its biggest advertising client to a rival company, the U.S. Internet giant may see its Korea business shaken to its core.

In a regulatory filing on Tuesday, Daum (www.daum.net), the country's second-most popular Web site after Naver (www.naver.com), said it decided not to renew its cost per click (CPC) advertising contract with Google Korea and will instead partner with the Yahoo!-backed Overture starting in November.

CPC is a performance-based model where the advertiser pays a fee for every click on its advertisement. The majority of text advertisements sold by search engines are based on the CPC model.

Controlling the pay-per-click advertising placement on Web sites and search engines has been a significant business model for Google and Overture.

Daum's departure is certainly devastating news for Google Korea, which will struggle to replace the 60 billion won (about $50.5 million) hole in annual revenue.

Although Google and Yahoo! have been struggling to compete with local portals such as Naver and Daum in the search market, the American companies have been enjoying a duopoly in online advertising services here.

However, with Overture, a Yahoo! subsidiary, adding Daum to a client list that already includes Naver, Nate (www.nate.com), Paran (www.paran.com) and Yahoo!Korea, the advertising competition now looks more lopsided than a Pyongyang election.

``Improving our market share in advertising will be critical for our business, so we will begin using Overture's advertising service starting in November, a lot earlier than what we had previously expected,'' said a Daum official.

``We are finally seeing the results of our investment to improve our search service, which now controls about 24 percent of search traffic, more than a double of the 10 percent level we managed last year. The partnership with Overture will allow us to leverage the improved quality of our search service to the advertising market, by enhancing the relevance between search words and advertisements, which will help improve our position in the Internet industry.''

Industry watchers believe that switching to Overture will boost Daum's CPC advertisement revenue by 30 billion won, which is equivalent to about 10 percent of the company's annual sales.

Despite a 46 percent increase in search queries year-on-year, Daum suffered a decline in advertising revenue during the first quarter. Company officials have been saying that its contract with Google partially explains the drop off. Although Daum officials decline to elaborate, it is said that the three-year contract was structured in a way that Google takes a larger share of the advertisement sales in the final year, which is 2009.

``Currently, Daum charges around 6 to 7 won per click to its advertisers, lower than the 9 to 10 won NHN collects from Naver's advertisers,'' said an industry analyst.

``It is plausible to think that Daum switching to Overture for CPC services will result in a price increase of around 30 to 50 percent. Of course, the most immediate change for Daum is that Overture will allow it to access a much wider pool of advertisers.''

Google Korea has been putting in significant effort to improve its position in the Korean market, introducing waves of localized Web services and even acquiring a local blog operator to launch a blogging platform attentive to Korean Internet users.

Despite the efforts, Google's shares in the search currently remain in the 2 percent level.

Google said it will try to overcome the damage to its CPC business by finding more advertisers for its Ad Sense text advertisement services, looking to target small-and-medium businesses and bloggers.

Google is also hoping that the increased use of ``smart'' phones, which enable Web browsing and multimedia play atop of voice, and the lowering data rates for mobile Internet usage will give the company an edge when Internet services go fully mobile.

``We have more than 10,000 blogs and small Web sites that use Ad Sense, which opens the possibility of target advertisements, and we will find ways to further use the YouTube video services to leverage our advertisement business,'' said a Google Korea spokesman.

``The departure of Daum surely hurts in the short term, but we are committed long-term in the Korean market.''

thkim@koreatimes.co.kr

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