Google and Yahoo exceeding expectations for their third-quarter revenue, buoyed in part by each company?s mobile initiatives, is a sign that the worst of the recession may be over for the advertising market.

Yahoo reported revenues of $1.575 billion for the quarter that ended Sept. 30, a decrease of 12 percent from the third quarter of 2008 and slightly above the second quarter of this year. Google fared better?it reported revenues of $5.94 billion for the third quarter, an increase of 7 percent compared to the third quarter of last year.

?Both companies beat consensus estimates for their third-quarter revenue, which is good and a bit surprising,? said Andrew Frank, New York-based vice president of research at Gartner. ?Both companies represented the view that we may be past the worst of the recession as far as advertising goes.

?There are plenty of reasons to be cautious about that assessment, but signs point to the stabilization of the advertising and especially the search market,? he said. ?That?s good news for emerging sectors like mobile advertising, since as marketing spending goes up, newer channels like mobile will have an advantage in that people are unlikely to ramp up spending in the same way and with the same ratios as before.

?It tends to favor emerging channels when there?s a slow down and things come back, all promising signs for the mobile advertising sector.?

As has been the historical condition with Google and Yahoo, Google continues to dominate the search market, while Yahoo continues to have a strong presence in display advertising.

However, the two companies? third-quarter results show that search advertising has proven to be more valuable than display advertising.

Mr. Frank said that search seems to be pretty stable, although it could conceivably be reaching some plateau, whereas display continues to be very volatile and there are questions about how much brand money it can attract and how far away those big investments are.

Google saw its ratio of owned and operated sites rise in the third quarter, whereas Yahoo saw a rise in its affiliate market revenue.

Mr. Frank said that is the opposite of each company?s stated strategy. Google has said it wants to focus on search and third-party placements, while Yahoo has said it wants to focus on its owned and operated assets.

?It?s ironic that the reverse seemed to be true during the third quarter,? he said.

While both Google and Yahoo are innovating and have a variety of products and services in the mobile space, there is room for improvement in both cases.

?Mobile is hugely important to both of them, and while to date they have done some interesting things, I don?t think either company has come up with a compelling solution to the mobile advertising experience that seems like it is worthy of the size of the opportunity,? Mr. Frank said. ?Both have a ways to go before they catch up to the huge opportunity that mobile offers.

?I?d like to see better integration between the mobile and online experience?both mobile experiences are rather disconnected,? he said. ?They don?t seem to be doing a great job of integrating those experiences and integrating advertising opportunities, which a dual-screen environment seems to imply.

?They still see the two channels as somewhat distinct from a user standpoint, and while there are clear differences, I think there needs to be more continuity.?

Mobile advertising generates revenue
Both Google and Yahoo declined to specify what percentage of their revenues is generated by their mobile initiatives.

?We don?t break out mobile revenue, and while it is small as a percentage of the company?s total revenue currently, we expect more usage and monetization to shift to mobile longer term,? said Dana Lengkeek, spokeswoman for Yahoo, Sunnyvale, CA. ?Mobile is a key priority for Yahoo.

?We are well positioned and have increased the reach of our mobile homepage, providing a rich experience across more than 1,900 different mobile devices?a fivefold increase from its April 2009 debut,? she said.

?We?re continuing to be at the forefront of innovating mobile advertising and creating compelling mobile experiences for consumers and marketers.?

While it is unclear whether search or display advertising will be the primary driver of the mobile ecosystem, what is clear is that mobile is central to both companies? overall strategies.

"Smartphones with full browsers like the iPhone, Android and Palm Pre are are accelerating the growth of mobile search and our ad units targeted to high-end phones,? said Eric Obenzinger, spokesman for Google, Mountain View, CA.

?In fact, Google saw over 30 percent growth quarter-over-quarter in mobile search, which is contributing to the emergence of a Web-based mobile ad ecosystem," he said.

Analyst's take
Martin Olausson, director of digital media strategies at Strategy Analytics, offered his perspective on Google and Yahoo's third-quarter results:

"Yahoo has now showed stable revenues at about $1.6 billion for the last three quarters, which suggests a stabilization of revenue generation. However, we have not yet seen any signs that Yahoo is about to rebound to the $1.8 billion level of quarterly revenues of 2008.

"Yahoo's biggest problem at the moment is that it's losing ground both on search (vis-a-vis Google) and on share of total traffic (vis-a-vis Facebook and YouTube). Thus, to 'make it big' on mobile will become increasingly important both to Yahoo's strategy and its bottom line.
 
"Google, meanwhile, seems to have bottomed out and is now back on a steady growth trajectory. Google has managed to grow revenue by $1.8 billion in the last year in spite of the economy (in comparison, Yahoo has lost about $700 million in revenue in the last year compared to the previous year).

"This also means that Google continues to increase its market share to 38 percent of global online advertising spend (up from 34 percent from a year ago).

"As such, mobile advertising is of less importance to Google than for Yahoo for two main reasons: (1) Google is, unlike Yahoo, still growing quickly online and (2) as more and more mobile traffic moves off-portal, Google stands to reap the benefits almost by default, also unlike Yahoo. 

"In terms of the state of the economy and brand advertisers? level of confidence, we believe that both the fact that Yahoo's revenue is stabilizing and the fact that Google's revenue growth is accelerating are signs that both the economy and confidence is now recovering."