Posted by: Billy Hollis on Wednesday, October 31, 2007 Over at Daily Pundit, they're having a discussion about Google, and why their share price just hit $700. One of the commenters doesn't understand Google's model, and asks: How does g**gle produce? Where does the profit come from? Is it advertising? I pay them nothing. I receive a free search engine and free email. Sounds like a bursting bubble.This is a reasonable question, because Google's business model was brilliant and unprecedented. And it's not just that they have a new model. It's also that all the old models suck. The comment thread over there covered the fact that Google has the technology to exquisitely target ads. Unmentioned is the fact that Yahoo and MSN are not too far behind. For any of those, keywords in web pages can tip off the engine so that it makes a pretty good guess about what kinds of ads you might be interested in seeing at the exact moment you are reading that page. This technology isn't perfect, but it's pretty darn good. Certainly I don't object to ads from Google, Yahoo, and MSN the way I do to the typical pop-up ads that get in my face from a lot of old media companies. But a $200 billion market cap for a company that does $10 billion in sales? That's where the "competition sucks" factor works heavily in Google's favor.* Old forms of advertising are in trouble. Big trouble. TV has long since maxed out the amount of commercial time it can insert, and people have found ways of dumping those ads, from DVRs to just buying the DVD. Never mind how irritating the ads are; it makes sense to take some extreme measures just to save massive amounts of time. Say I get Battlestar Galactica on DVD. Season 1 is about fifty bucks and has 756 minutes. If I watch that on TV, it inflates the viewing time over 50%, so that I'm losing about seven hours of my time - to save fifty bucks. More if I watch the episodes more than once. (Not to mention the increased conveniences of watching it whenever I want.) In our neighborhood, the going rate to avoid a 90 minute yard mowing is $50 bucks. Getting seven hours for the same price is a heck of a deal. The story on print advertising is even worse. It's dying so rapidly people don't even care any more. Magazines are being given away in a desperate attempt to keep the circulation numbers up. I got a flyer from Northwest Airlines that some frequent flyer miles that expire at the end of the year could be exchanged for various magazines - US News, Readers Digest, even Scientific American. No cash from me at all, and it's obvious that the magazines are paying Northwest rather than the other way around (because Northwest could just let the miles expire and be ahead). We all know about newspapers' sinking circulations. But did you know that about 10% of a typical newspaper's advertising revenue is from movie ads? Unfortunately for the newspapers, the primary market for movies is young people, and most of them would no more think of looking in a newspaper for movie listings that they would think to look in one of their textbooks. They use Fandango or other web resources to find out all about movie times and such. We're getting close to the day when the studios and theaters will quit spending that money because it isn't cost effective. I'll leave it to you to imagine what's going to happen to a lot of newspapers when that 10% of their revenue is lost almost overnight. Then add the fact that the Internet is the perfect advertising medium for many products. Want to know more? Just click on the link. That's over and above the technological advantage of being able to exquisitely target the ads. There's about $150 billion per year spent on advertising. It's going to be spent somewhere. Google's model doesn't have to be perfect - it just has to be better than the competition. And it is. (*- I have no idea if that market cap is sustainable. Google is exhibiting signs of strains from its fast growth. And their left-wing politics irritate me and others, and angering a large portion of your customer base isn't usually a very good idea. I'm just saying that it's the dominant player in a market segment that looks to eventually absorb most of the total money spent on advertising, and that's a big pot.) |
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