From Issue #190February 2010
Doc Searls is Senior Editor of Linux Journal
I think Google has changed the way many people expect marketing and ad campaigns to work. The feedback we get from tools like Google analytics is very valuable. Sometimes more than showing the ad itself.
Google does more than give "eyeballs" to content, it gives the content "publishers" knowledge back. 10 years ago, who could imaging a scout leader from up-north using search engine data to enhance the scout meetings? It's happening right now.
Facebook is a different. How do you get user feedback from Facebook? Or twitter? Or bing? I don't know, so I don't produce conten for them, I just occasionally throw a link on them
What if Google won't be challenged until content publishers truly makes pages designed for Facebook (or twitter or whatever)?
I'm searching myself for these answers.
You have outdone yourself here!
Am I missing something here, or am I incorrect in looking at Google's steps into mobile devices, IP (broadband access project), and other non-ad revenue generating steps a way of breaking that ad revenue model this article bashes?
I believe Google very much wants to diversify its revenue sources, and hopes to find what they call "second and third order effects" from opening new categories. But they aren't there yet. Meanwhile they, and we, remain exposed.
Doc Searls is Senior Editor of Linux Journal
Even if the current management is lily-white and has the best interests of us all as their primary goal, sooner or later they die and someone less utopian takes their place.
Even if the current management is lily-white and has the best interests of us all as their primary goal, some of their employees will be evil and will subvert systems to their own advantage.
Sooner or later, Google has to be broken up. Sooner or later we all have to recognize that there is such a thing as "too big to be good for us" in ALL industries - banking, agriculture, technology and everything else.
I hope we recognize that sooner rather than later.
Television and radio maintained successful almost purely advertising based business models for roughly a century, print even longer. Is their success and product all voodoo? Maybe, but many companies have bloomed or collapsed based upon advertising decisions.
Yes, advertising may refocus upon the two traditional separate goals of indirect sales via brand recognition and familiarity vs. direct sales (historically some guy with a sign, coupons, etc.). I don't see google lagging behind this potential market split though.
Android is in-fact a lovely trick for breaking into the carriers low level walled gardens, perhaps unnecessarily given that the Blackberry and the iTunes App Store are the only successful & non-shitty walled gardens in history. Android's app store may provide a sound secondary revenue stream that justifies the ongoing development costs, especially once Android has enough intrinsic demand that Google can stop paying the carriers anything.
I'd also imagine that google's backbone investment will become profitable eventually, which might perpetuate free search all by itself.
Google largest threat comes from facebook style high level walled gardens. Buzz and Wave are targeted more towards breaking facebook's back, but yes google is playing catch up here.
Google has between 15-20 data centers. The construction cost for each one is around $500m. That's close to $10b. The annual operation costs (and Doc is totally right) is the massive energy for these: around $3b per year.
Google has a one-trick pony by the tail. The ONLY thing that makes money is their advertising.
Google has 10,000 Ivy League graduates with 4.3 GPAs, and not a single one of them, none, has figured out a way to make money. Oh, yes, they make a little bit here and a little bit there, but the data centers cost $3b/yr to operate. A profitable idea needs to generate $5-10 billion per year to be meaningful, and Google hasn't figured that out.
Google did not invent Adwords. They copied it from another company (and later paid close to $1b to settle the lawsuit).
Doc Searls is right: if the one-trick pony runs off to join another circus, Google will come down very fast and very hard (it's that $3b in operations costs...)
Someone suggested above that users could pay $5/yr to get Google's services. Nearly every Google idea is a modified clone of other tools, which are free elsewhere. Why would anyone pay?
And if they did pay, it'd be much more than $5 per year. $3b for the datacenters, another $1-2b for operations costs...
Google's mortal threats are from two sides: Microsoft has the resources and money to "go to the mattresses" and wage a war of attrition against Google. They can cut into Google's revenues and let Google die of its own weight.
The other threat is Facebook. FB is changing the way people use the web. They're not browsing around, searching, etc. They log into FB and stay there. No need for Google. If they use FB's search box, well, that's now powered by Bing. 400m FB users are using Bing.
Can Google disappear? Remember Excite? Remember AltaVista? Remember a whole slew of search engines, all had once been #1, with valuation in the billions. All gone.
Search is not a viable business. Google earns maybe $50-100m per year in licensing the search engine. But that costs $3b/yr to operate. Search is a very poor business.
I've never understood why AdWords exists (AdSense is more logical):
* If I don't trust the search engine to be accurate, I won't use it and so won't see the ads.
* If I do trust the search engine (and the logic behind the ranking of the results), why would I want to click on a paid link instead of the search results?
If any website should never have ads, it is a good search engine.
Also, I'd be interested to hear people's opinion on ad blocking software. What if Microsoft or Mozilla implemented the functionality of say Adblock Plus as standard? They have little to lose from doing so, but Google does.
Adwords exists because it works and makes money. There is also no shortage of pleased advertisers. This does not mean there is no better way for supply to find demand (and vice versa). Adwords is not free from obsolescence. It's interesting to me that we can speak so well and long about "disruptive technologies", yet rarely wonder about what will disrupt Adwords, Adsense or advertising itself. These technologies will come. I'm working on some myself.
By "If any website should never have ads, it is a good search engine", do you mean perfect search would mean no advertising? It's a provocative thought.
As for blocking software, I use Adblock Plus on Firefox and am quite happy with it. To those who say I'm thwarting a site's ability to make money, I say I'd love for sites to make money some other way. That's why I'm working on EmanciPay. And I welcome help with that. :-)
PS: To clarify, I was just thinking about ads on the search engine itself. However, now you have got me thinking about perfect search eliminating advertising completely. I doubt that would ever happen, but it's an interesting idea.
Yes, I think that perfect (or even just good enough) search makes it illogical to click on a paid ad. Clearly people still do, to the benefit of Google and the advertisers as you said.
EmanciPay sounds like a great idea, hopefully enabling a more direct relationship between website and viewers. My skills are in a completely different part of the computer industry, so I'm not sure what I can do to help, except to wish you all the best with making it a reality!
Who cares? google is as evil as they come. Stop relying on their garbage that they "give" to you out the goodness of their hearts. They sell ads for crying out loud.
"Advertising is a bubble. If that's a true statement, Google is a bubble too."
I am infallible. If that's a true statement, I must be right about being infallible.
Advertising has been here for as long as goods and services were exchanged for money, and it will stay here for as long as money exists. Hell, if there's any sort of money-less exchange of goods and services between the people, the advertising will exist. The "bubble" will burst only when we go back to stone age-like natural estate.
Meanwhile, even as most businesses slashed their advertising budget to the record lows, Google was returning strong secular earnings growth.
The article is not worth the hard drive sectors that it is stored on.
This article is not a brief against advertising. We've had bubbles in tulip bulbs, railroads, uranium, stocks, housing prices and dot-com stocks, yet all of those are still around.
As for Google, I hope they continue to grow and thrive. I also stand by my statement that Google is not a tree that grows to the sky. No company is.
Very interesting piece. Now:
1) The study to which you refer was on display ads. Not adwords.
2) The study measured clicks. The document (linked below) clearly states that lower clickthru rates are not an appropriate metric. Several studies have shown that display ads impact attitude. Mere exposure will shape affect. No one has ever clicked on a magazine spread, a TV spot. That doesn't mean these investments are worthless.
3) 2009 has seen a modest reduction in Internet Ad spending, due to the recession. The impact of the recession on interactive advertising has been much less severe than what has happened elsewhere, particularly in the print media. Most analysts bet their shirts that interactive advertising will increase (to the expense of traditional media, while the overall advertising budgets will remain quite stable, print media being the most vulnerable).
So I wouldn't worry that Google might not have the means for its wants. I *might* fear that they are too strong a competitor for Motorola, Nokia or Apple. Or, to put it differently, that Google has an unfair advantage because they can fund their mobile ventures with an enormous cashflow generated by their advertising revenues.
But it is much too early to tell. Android has a very low share of the handset market. The Nexus One has been a very very slow seller according to what we are told.
@Bill -- Google's adSense is display ads. It accounts for a very significant fraction of their revenues. I would venture 40%+ .
I agree fully with almost all the above, and wish to add that there is a radically different model being worked on. It is the CCN (Content Centric Network) model of the internet. A group of 20 or so at PARC are well along -- years into it. See Van Jacobson's YouTube videos, and several articles on the Internet about CCN (including my own submission to W3C on the subject). Essentially, it will solve the security and scalability issues of data movement that have prevented the direct sale of data. This will be good news for individuals as well as companies. Secure sales of information from person to person; easy delivery of popular items without servers clogging; etc. This will allow transition to a world information economy where an individual can make and sell their own information (science reports, music, writing, videos) directly to others anywhere on the globe securely, without undue overhead, and on any scale without needing special servers. It will allow Google, and anyone, to get into the direct sale of information business without the well-known distortions that advertising-supported information is prone to.
From PARC's CCN page:
"We recently released an early version of open source infrastructure software and protocol specifications for our "Content-Centric Networking (CCN)" architecture. Our goal is to enable experimentation in the network research community and establish a foundation of open core protocols for content networking. We are also beginning to work with clients to explore new business solutions enabled by the CCN approach. [video about CCN]
This looks like very interesting stuff. Thanks for bringing it up.
Not clear how much development (much less adoption) traction it has yet. Any clues there (that don't turn up in an ordinary Google search)?
For every dollar Google will lose in some kind of hypothetical DoubleClick/display bubble-burst, there is still a dollar (or more) to be earned through gradual growth in search ads by small players who would not have advertised.
I found an attorney (a 1-person firm) through a Google Search (normal search, not paid ad) last year; he said that the $1000/month he spends on advertising on Google has really created a painfully obvious ROI. Now, this is all hearsay; I cannot vouch for whether this conflates the actual source of online referral. But there has to be many cases like this where small businesses can make it easier for consumers to find them.
As a former newspaper industry exile, I agree that display advertising in all its forms is garbage, a lie, and rarely has ROI, but this does not rule out the utility of all advertising.
Doc, you have said that the end of advertising is not advertising, which may well be true, but there are still places where advertising makes things easier. I cannot simply rely on social (such as friend recommendations for a plumber coming from facebook or tweets) or even the best-laid plans of mice, men, and VRM, sometimes I need to just find something. Search advertising is a necessary, but not sufficient, part of the ecosystem of getting me what I need.
Nowhere in this piece did I say advertising was bad, ineffective or doomed. I said it was a bubble, that we were too dependent on one company's infrastructure and the near-single source of revenue supporting it.
Saying in 2005 that housing was a bubble would not have been an argument against the usefulness of housing. It would have been a way of pointing out a structural problem in the economy.
I believe we have a structural problem in the economy built on the Internet. That's my main point here.
Although I feel uneasy at times to think that all that Google provides is paid for only through their advertising business, I think they have enough information on their hands to turn it into sources of revenue.
If you have a Google account, Google knows what you search for, what emails you send, what videos you watch, who your friends are, what you like surfing, where you are from, etc. Now with Android picking up steam and the introduction of Buzz, they've taken another solid step in accumulating even more information.
Google's USP has been the amount of information that they have about Internet users and insight into their usage patterns. If we look at the acquisitions they have made and the businesses they have entered, it is clear that at each step, they've ensured that their hold on the information is only strengthened.
Another conscious move they are making is to establish the Internet as an increasingly reliable platform. Plus, integrate all that a person would want to do on the Internet into a common area, which is easily accessible and easy to use. With Android, they've opened up the possibility of making all this available in the most personal and common device in use today: the cell phone.
What can they do with this level of information about the life on the Internet? I can't say. But there seems to be very little that they wont't be able to do.
You know, I don't mind paying for the services that Google provides. Let's say $5/month for a user name with access to all services that I'm used to. Sure it will produce an out-cry and major headlines in every newspaper and internet blog, and few million people will walk-away from Google but let's be realistic, most people would pay for the quality of services that Google provides eventhough it was free at some point. That has to creat enough supplemental revenue to keep them going.
Perhaps, but the moment Google start charging for services, it might loose it's need to innovate, look at Yahoo Mail for example, they started that too early off.
Google is the first real "Information Engineering Company."
It is fundamental to understand Google in this context to see where they are going.
Information is the most valuable commodity. It won't go bust like oil.
"He who controls the Spice controls the universe"
Right now, nobody can touch Google on the quality and efficiency of its search.
There are real competitors, of course. But not when you look at the BIG plans, and BIG picture. (that may soon change though..)
This is their mission.
Some will fear it.
Some will embrace it.
Some counter the unofficial motto "Don't be Evil" with cynicism.
But I prefer cautious optimism.
It is an incredible public resource they have provided to the consumer, and for FREE!
So, if you say advertising will decline, its like saying internet searching will decline, or YouTube viewing will decline. How much are you willing to bet on that?
I don't see that happening in the near future.
Doc, I'm trying to think of a way to put this that won't sound disrespectful, but I can't so I'll be blunt: You don't know what advertising is.
Advertising isn't simply about letting Buyer A know that Seller B has goods for sale at price X. It's not simply about reducing friction in markets. If that were all it was, the only type of advertising anyone would ever do is classifieds.
Instead, advertising is about the creation of demand through a variety of means. These include creating awareness of a brand, associating a brand with a lifestyle, showing products in context to demonstrate they're capable of achieving something, and much much more.
Where I think you're right is that the click-driven model of advertising where Google makes most of its money won't be as much of an engine of growth in ad revenue in the future. But I'm sure Google is as aware of this as anyone else: after all, they have full access to the data.
Google is really an advertising agency/channel with a technology company attached. As such, I don't expect them to be unaware of how advertising works, and which forms of ad will be growth areas in the future.
First, for what it's worth, I co-founded and served as the creative director for Hodskins Simone & Searls, which was for many years one of the top technology advertising agencies in Silicon Valley. I know a few things about the business.
I also know the business has changed, and that Google has changed it most dramatically. They have made it accountable, and effective in ways that could barely be imagined back when I was in the business. I consider all this a Good Thing.
But the main point of my column is not about what advertising is or how it works, but about exposure. Google has a very high degree of dependence on one source of revenue, and most of us using the Net have a high -- and increasing -- degree of dependence on Google as a provider of free infrastructure.
I think this is a cause for concern, and worth talking about.
Toward that purpose, I suggest it is not helpful to regard Google as "an advertising agency/channel with a technology company attached". That's not how its founders, its engineers or even its advertising people regard the company.
That Google has an awareness of its vulnerabilities is beyond doubt. I hope they diversify. I also hope that other companies, business models and forms of infrastructure come along, to take some of the burden off Google.
The "don't be evil" line was never a slogan or a tagline. Still, I know plenty of people at Google, and I am sure they try a lot harder than most companies to do the Right Thing.
That said, I also think the morals of the matter are a bit of a red herring.
The real issue is a tree that does not grow to the sky, and our dependency on it. There is, as the first commenter put it, a "peak oil" consideration here. Advertising is not only the fuel for an awful lot of business, but the source of funding for much of what has become de facto infrastructure. Search, mail, maps, docs... the list goes on and on. It's wonderful that Google provides us with all this. It won't be so wonderful if they can no longer afford to do that.
As for the "huge value" and how it can be "tapped", I'm not sure what's the funding model there. Sell the data to companies that can do better guesswork than Google? Doesn't make sense. Maybe you can help me there.
There is a misconception, I believe, about the advantage of personal data in corporate hands: that if a company knows enough about us, it can send us near-perfect messages about what we want or might want. I think this is a huge stretch.
Look at Amazon. They may be the best of the breed at this kind of thing, and they still often suck at it.
If you want to see where I think the big market hole still remains, take a look at The Intention Economy, which I wrote in 2006.( It's also the title of the book I'm writing in 2010.)
You're so close to what I think is the fundamental problem that Google faces and that is energy. As you point out, Google's advertising revenues are its main source of income and they are also a massive consumer of energy. What is often missed is that this means, in fact, they are dependent on energy twice over: Once to power their data centres and again, to 'power' a consumer economy, which it draws advertising revenues from.
A report was issued in the UK yesterday by the Task Force for Peak Oil, led by Richard Branson (Virgin), together with five other UK companies, including Scottish and Southern Energy company (it's also worth noting that when they issued their first report in 2008, Yahoo! was a member of the group). The WSJ warned their readers today, of the significance of their report.
The Task Force report is notable because it makes clear and timely connections between the consumption of oil and economic growth: they are more or less coupled. The report warns (as do many other reliable examples) of an oil supply crunch by 2015 and the economic consequences:
"The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well. As we reach maximum oil extraction rates, the era of cheap oil is behind us. We must plan for a world in which oil prices are likely to be both higher and more volatile and where oil price shocks have the potential to destabilise economic, political and social activity. Virtually every sector of our economy is still dependent on oil."
Energy is Google's biggest problem. They can attempt to address their supply problem by investing in alternative fuels (and in fact recently set up their own energy utility company and are investing heavily in energy related research). However, they can't directly address the problem of declining advertising revenues caused by a repeated economic contraction related to declining oil supplies.
There are many different predictions about how declining oil supplies will bear out in different sectors of society. Traditional economics suggests that scarcity will raise the price which will lower the demand. However, because there is no adequate replacement for oil, certainly not in the time-frame required and on such scale, the usual 'demand destruction' theory doesn't bear out when it comes to oil consumption. Economic growth remains too tightly coupled to it.
I would argue, that Google is too tightly coupled to oil to continue to provide the scale of service that it does. Like you, that's my bet.
Clearly Google's data centers require a lot of energy. I have no idea whether the energy they consume is fossil fuel, nuclear, hydro or whatever, though I'm sure it's some combination. In any case they at least appear to be mindful of the issues.
They might even agree with me that humanity is, from the perspective of the planet, a ravenous plague. Though I doubt they'd go that far. Few do.
In any case, my main concern is not with Google's dependence on fossil fuel, but with our dependence on Google.
Yes, I agree that they probably consume a mix of fuels. My emphasis on oil is because it underwrites all other industrial forms of energy. To extract and transport coal, we use oil, likewise with gas. The price of both electricity and gas follows the price of oil; more recently coal, too.
Even solar, wind and nuclear require the input of oil in the production of their infrastructure. Google are indeed mindful of the issues, but they (we all do!), still face the issues of receiving lower net energy values for the non-fossil fuels they are investing in, the time lag it takes to shift from one energy source to another, and the dependence on oil of other forms of fuel.
So, generally speaking, as oil production declines and gets more expensive, so will the production of other major fuels. This is a cost that all of us, but especially major energy consumers like Google, will have to bear.
On the other hand, as I mentioned, the inflationary and recessionary effects of this suggest that consumers will have less money to spend on non-essential goods and services, which will hit Google's advertising revenues and, as you argue, will hit their customers.
Personally, I'm inclined to agree with oil Geologist, Colin Campbell about the effect of this:
“I think we are facing an oil price shock, 100 or 200 dollars a barrel, an economic recession that cuts demand, and I will not be at all surprised if a fall in demand would make the price collapse again. So we might be back to 20 or 30 dollars a barrel next year perhaps. And so you have a price shock, a recession, a recovery, hits again the falling capacity limit, another price shock. And so I think that in the next few years, we have a sequence of vicious circles and gradually the reality of the situation will filter through. We are on for a very volatile few years with enormous economic consequences.” (2006 quote)
The FT writer thinks he's "on the money", too (see comments).
You cite the fact that display advertising is declining as supporting your concern about google. But google isn't in the display advertising business, they're in the search advertising business.
And I suspect they're not the victim but the cause of the decline in display advertising.
Stepping back they may not even in the business of advertising, but in introducing buyers to sellers in a really efficient way. I sure hope there's a long term market for *that* service.
In fact Google is not only in the display advertising business, but expecting it to grow dramatically. They are also, of course, in the search advertising business. And in the business of placing ads all over the Web.
Google's innovations in advertising have changed the entire business, mostly for the better. They made advertising accountable, available to many more advertisers, and have otherwise improved many parts of what had been, until they came along, a fairly complacent and stodgy category. (Trust me, I worked in advertising for much of my long adult life.) But it's a big stretch to say their job is "introducing buyers to sellers in a really efficient way". Most of advertising is still sellers throwing messages at buyers, and hardly "efficient." Not when the ratio of "impressions" to click-throughs still run in the lottery range. And who's "impressed" with something they ignore?
Advertising will never go away. Nor is it a bad thing. For many it's a good thing. But, as I said, better ways to route demand to supply will be found. Right now advertising is mostly one way: from supply to demand. There is a limit to what can be done with that. Improving a pain in the ass doesn't make it a kiss.
I am sure Google is well aware of the limitations of the advertising model. The question is, how far can they expand their business beyond what for now is a cash cow? For all our sakes, I hope that's a good distance, because we are highly dependent on Google, and in more ways, every day. Meanwhile, I stand by my original statement. Advertising is a bubble. There is a huge amount of speculative money chasing faith that advertising is the end-all business model, and will grow forever. It won't.
I think the big challenge for Google is to grow beyond their culture of simply being smart, and figure out a way to be thoughtful about what they are doing, why they are doing it, and how it can fit in with the rest of the world.
They suffer from the misfortune of being extremely successful in significant part by accident. I've never heard an argument made that suggests they planned their financial success. They had a good technical idea, implemented it extremely well and managed to create a great source of revenue.
In what I've seen from them other than search, they appear to hoping the pattern can repeat. Unfortunately, too often the technical idea has not really matched with a market opportunity -- so the implementation may have been "google-like" in technical quality, but found no market. Having created something new once, they have a predisposition to try to do it again. But that is really, really hard to do once, nearly impossible to do twice.
They are lucky to be able to fund some pretty big, bold bets, but I don't think that is enough to be sure of another big win.
I remember visiting Google early in the last decade (maybe just before I wrote this), when I was introduced to the small team (Linux geeks, as I recall) that had come up with the company's advertising system. I am sure that was not planned. But it was both thoughtful and smart.
The thoughtful thing for them to do now is not just look for other revenue sources, but for better ways than advertising for connecting demand with supply. Advertising isn't enough. That means there is a market hole in need of filling. I have my own ideas about how to do that. There should be others. Meanwhile they remain exposed, and so do we.
> Think of advertising as oil and Google as one big emirate. What
> happens when the oil runs out?
In a scenario where advertising "runs out" Google will be among the least of anyone's worries.
Obviously he doesn't mean that all advertising runs out. A decline in advertising, as naturally occurs in all industries, will hit Google hard. All of their growth, projects, etc... are founded entirely on advertising. When a company stops hitting growth targets, it starts doing things differently. We should be prepared for the day when all of these free services we enjoy so much start taking on a different cast.
Exactly. Well put.
Hi Doc, I share this same concern. I had a gut reaction to people declaring that Google would "never be evil". I wrote a post with a similar impulse on my blog a while back. What happens when the ad revenue runs out (or fails to sustain the same growth trajectory)? The idea that a corporate entity won't tap the huge value it's amassed by being an integral part of our lives and infrastructure is naive I think.
I know a lot of people at Google, and I know first-hand how hard they try to be helpful and constructive. Their largesse toward their marketplaces, on the whole, is without equal in history, I believe.
But it's not always clear what the right thing to do is. Look at Google Books. On the one hand it's good that they're scanning all these books. On the other, there are some players in that marketplace, including otherwise innocent authors, book publishers and libraries, who are at risk of getting paved under Google's chosen road to the future of reading and publishing.
And, in the midst, we are all dependent on Google's continued generosity, which is funded by one vulnerable source of highly profitable revenue.