The Google Economy

I think there’s something more fundamental happening in Google’s rousing quarterly report than we’re seeing in the news reports about it (which are mostly eating crow over predictions to the contrary).

I think we’re seeing a new definition of “the economy.”

The old definition meant and measured the performance of big companies and their impact on each other. This was especially the case in media and advertising, which served only companies of a certain size because only large companies could afford to advertise in large outlets. But Google’s marketplace for advertisers of all sizes represents the small-is-the-new-big economy: no limit of small enterprises that can now add up to a critical mass. The fact that it is an auction marketplace also means that this economy is more fluid; it fills in voids.

So for example, when there’s an economic downturn that affects, say, travel, that will affect a magazine like Condé Nast Traveler; airlines and hotels of a certain size will advertise less and there aren’t new advertisers to fill in that void at Traveler’s price. But on Google, if American Airlines and the Ritz aren’t buying the keyword “Paris” this month, there are no end of advertisers who will step in to buy the word. The price of that keyword may decline. But in Google’s very broad economy, the prices of other keywords (e.g., “credit”) may rise.

And because this is a pay-per-performance marketplace and Google is motivated to continually improve relevance and performance, it is not a market driven by scarcity of space or audience. That makes it hard for old measures of the economy and media to figure it out. It doesn’t march to static metrics like fuel costs affecting prices and dollar conversions affecting passenger miles, all of which affect paid ad pages.

This is apparently what threw Comscore’s measurements into a tizzy as it tracked what it thought was a drop in clicks on Google ads while Google said it was tuning its ad placement to improve relevance and performance. There was another variable in there that old economic measures could not predict. Were we clicking less because we were poor and depressed or because Google tuned an algorithm? No way to know. After causing a storm with this measurements, Comscore tried to back up and say that it wasn’t necessarily saying that Google would earn less; the market didn’t listen and punished GOOG by 100 points but Thursday night it punished Comscore’s stock in retaliation.

This is also one of the many factors making old-style media — and, in some cases, economic — measurement inaccurate and irrelevant. I’ve been saying that measurement by sample is useless because you can’t possibly get a big enough sample to measure all the niches; Nielsen, Comscore, and the entire industry will fail in a small-is-the-new-big economy because they can never measure and add up all the smalls. They will also fail because measuring how big a media outlet is has become almost irrelevant: An advertiser buying in Condé Nast Traveler cares how many people read the magazine because the assumption is that everyone who sees the magazine sees that ad. But online, a sponsor buying ads at the magazine’s site, Concierge.com, cares only about the specific people who saw the ad when it was served on specific pages, and so the size of the overall site is largely irrelevant except as a filter to decide where to consider buying ads or as a bragging right for the site. (This is why, when I served on committees for the Audit Bureau of Circulations in the mid ’90s, we discovered that audits of total site audience were meaningless — nobody wanted to pay for them — and all sponsors wanted audited was the serving of their own ads.)

But the pity is that ad agencies and stock analysts, reporters, and stock buyers still pay attention to these outmoded measurements and the companies that push them. That’s why GOOG went down 100 points while the company’s revenue soared 30 percent. They were selling on the wrong measurements that led to the wrong assumptions. But mere methodology won’t help. Why?

The Google economy is just different.

(Disclosure and caveat: I bought GOOG at 512 and now don’t feel quite so stupid for it, but I did feel stupid in econ class.)

: LATER: The NY Times headline Friday morning said that “Google defies economy.” Perhaps that’s a typo. Should it be “Google defines economy”?

Comments

[Pulkit]

A refreshingly well researcherd article in a flood of idle chatter. But do you really think that google's market cap of 170 Billion is justified?

[ChandlerLutz]

Nice article and I agree with much of your analysis...but what about Google's valuation?? Trading at about 40 times earnings seem awfully rich to me. After all, for this company to triple the company is going have to create 340 billion dollars in market cap...It can happen, but it's unlikely to happen anytime soon

[Jeff Jarvis]

I look at it another way: Is there anything that will stop Google, anything standing in its way? I don't see it.

[fatcat]

I just think China,India and other large markets will get into the Goog business model in a big way. Why would they stand around and lose that kind potential? Especially given the cultural differences they could play on..

[mojobeta]

GOOG is rewriting tech history with their huge assembly of brainpower in Silicon Valley. Washington State is great if you like to sail and can tolerate the fog/rain but the happening place if you want to occasionally walk across the street, grab some options and double your base salary is the Valley. And GOOG is the clearing center. The other new leadership company is RIMM which is now the gold standard of PDAs despite Apple's successful branding of its pay for play iPod and iPhone. Serious, upwardly mobile grads are all migrating to the Blackberry. If you forget to turn off the phone which is in your pocket when you are granted an audience with your "Big Boss", you want to be sure that as you apologize for the disruption, that what emerges from your pocket is the same PDA your "Big Boss" has sitting on his desk and it better be a Blackberry.

[globalmacro]

I bought 660k of GOOG at an average price of 485 and I still feel stupid because I didn't buy more.

[odin]

Trying to understand the gist of this piece. Does economic environment no longer matter? Is it uncorrelated to ad revenues? I seem to remember hearing about how traditional metrics were irrelevant (eyeballs not revenues, they said) at another point long time ago.

Ultimately, demand for ads stems from the fact that people want to BUY things. The ultimate ROI for an ad is an actual sale. While new media is better at targetting ads to relevant audiences, its ads are infinitely less memorable than a glossy travel mag ad. Those ads sometimes _generate_ demand where previously there was none. Not to say old way is superior, but blindly worshipping new media and GOOG in particular doesnt seem wise.

The only point I'll make is that until there is some clarity about how much a click on GOOG leads to an actual sale and hence brings about permanent changes in marketing theories, I am not sure about the stickiness of these revenues and the growth forecasts on which GOOGs valuation is based.

Disappointed that there hasnt been much focus on the non-US contribution to GOOG's revenues.