They must be dancing in the halls at the Googleplex. Their Q1 2005 results [premium site]were spectacular, exceeding analysts' expectation. As a result, their stock price is up to almost $216 per share (as of noontime on Friday, 4/22). Over at nearby Yahoo! headquarters there must be some puzzlement about why their stock price isn't on a similar trajectory, despite having released results that also exceeded expectations just the day before (Yahoo!'s stock price is at approx. $34.5 at noontime on 4/22/05, down more than a dollar from the day before).

Both companies are benefiting from the strong growth in online advertising, and both companies had first quarter revenues that were remarkably similar (Google $1.26 billion; Yahoo! 1.2 billion). There are, of course, many similarities in the two companies' businesses. First and foremost, they compete with each other for search traffic and online advertising dollars. In analyst webcasts this week, both companies stressed growth in non-US markets as major objectives. And executives from both companies pointed to an increased focus on winning a larger share of the budgets of the largest advertisers. Terry Semel put it this way(paraphrased): currently about 2-4% of big advertisers' budgets are spent on online advertising; consumers spend about 14% of their time online; therefore the share of ad dollars is obviously going to continue to move online to place messages where customers will see them. Google also said that their direct sales force is focused on increasing penetration in Fortune 1000 companies to win their ad dollars.

The impact on the traditional advertising industry will be dramatic as more dollars are directed online. Both Google and Yahoo! are offering a wider range of online ad options and increasing the level of service they provide to big advertisers. Increasingly, ad agencies have to demonstrate their expertise in creating online and cross-media campaigns. Watch for more acquisitions of SEM companies by the big agencies. And, watch for more intermediaries to emerge that can facilitate full-service online branding, search optimization, and ecommerce programs for large companies.

At the same time, there is lots of upside for smaller players in the online advertising space. The skyrocketing stock price for Google in part reflects heady enthusiasm for online advertising in general. Yahoo! has a more diversified revenue model that includes a variety of paid content, which may explain why, in the short-term, it's share price isn't tracking with Google's. Shore will continue to track the performance of these two leaders in search and online advertising to see how their results compare in the future.