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Friday, November 03, 2006

Is Google Leaving Money On The Table in an Ad-Only Model?

This is a very long post. It evolved significantly from last week to this week because we had to wait for some of the data to be seen.

Google (GOOG) has no doubt been a fantastic growth story. You can love it or love to hate it, but the truth is the truth. Almost every aspect of its business is free and ultimately ends up circumventing many middle-men and existing businesses out there. What I can't help thinking is trying to calculate how much money they are leaving on the table by not charging for some premium add-ons or up-sales.

I also had to wait for the rest of the online ad firms to report earnings and offer guidance to derive some real impacts there. Now we have seen what is happening there.

When I think about Google's dominance in Blogs, and now in Wiki's and video, and in advertising and media, and in search and browsing, and even in transactions, it just goes to show how fast a business climate in an online business segment can change.

There is no way to cover the entire gambit of the company, at least not without it being an endless work in progress. They have already shown that almost every area that can be online is fair game.

ON BLOG HOSTING

Before Pyra Labs sold to Google to make Blogger part of Google, it charged for some higher-capability services not available in the base configuration on Blogger. Most of its registered users were not paying users, but now it is all free.

If you use Blogger now, you will know that there are many times you wish Google would go back to a premium model where bloggers can pay a premium to have their site entry and more features added. There are numerous outages and many limitations that they could charge a premium for. I do not know if that would be 10,000 blogs, 100,000 blogs or how many that would actually pay a premium. But there would be added revenues, and it could lower some of their traffic acquisition costs. We would pay up, no doubt about it.

Google is leaving money on the table by keeping its blogosphere entirely free and by keeping it tierless. Many of us would pay for better up-time, better posting times, less drop-offs, and the like.

ON WIKI'S

This week it was announced that Google was also acquiring JotSpot, one of the more advanced Wiki hosts out there. Many people don't even know what a wiki is, but it is a nearly-live multi-user collaboration tool that is great for programmers and virtual companies to keep endless email chains down. JotSpot had premium packages available to those who were willing to pay for more users or more storage, but when these are once again allowed for new accounts they will become free services to wiki users. That is at least what the initial indications are.

There are other wiki hosts out there and these are not going to be able to operate on the ALL FREE model like Google is proposing. If you have a complicated wiki that is mission critical, you will definitely pay to keep that secure and to keep it running smoothly.

ON VIDEO

Google had its own Google Video service, but now we all know that the company is paying what will be $1.65 Billion to buy YouTube. The verdict may be out on just how much of the premium hosting will change to ad only, but it is likely that if YouTube acts as bogged down as Blogger does, that some on the video side will be willing to pay.

Now it is stripping out copyright protected items that it can, and has been signing license deals with all the large content owners.

ON PRINT AND ONLINE SUBSCRIBER PAID MODELS

Book publishers, newspapers, magazines, and the like have all faced a dropping off in subscribers because of the vast information available for free on the web. That isn't really Google's fault, but the free information is out there if you know where to look. Actually most of the online subscriber-only services can be compromised if you don't care about the law and if you don't mentally equate it to shoplifting.

People still pay for print. That won't change, not entirely anyhow. Please don't lambaste me for not going into details of the last two year onslaught that magazine and newspapers have endured, because that is a given.

The verdict is out how on how much Google can make selling print ads, and the company itself has signaled that.

ON WEB ADVERTISING

Online advertising companies have not really performed all that well after this last round of quarterly earnings.

Google (GOOG) shares are still up over 10% since before they reported earnings. The difference between GOOG and the online ad companies is that GOOG has a market cap of more than $140 Billion. ValueClick (VCLK) is one of the few stocks in the sector that did well. It gained 10% after exceeding estimates. Aquantive (AQNT) fell over 15% after meeting earnings targets, but revenue was a tad shy and revenue projections weren't above consensus. 24/7 Real Media (TFSM) posted a loss this week, and its shares are down over 10% from pre-earnings levels. Digitas (DTAS) reported a drop in earnings last week, but its shares are only off about 5% from pre-earnings levels.

Google's AdSense and AdWords is actually available through almost every online ad marketing firm out there. After all, why would Google try to block someone from adding to revenues. But it seems as though there could quite easily be a dark side to online ad firms taking people to Google. It actually doesn't take too long at all to figure out that as they get more and more Google directed traffic, the advertiser can just begin to cut the online ad firm middle-man out, and just deal with Google directly. They can either cut them out entirely, or they can just use the online ad firm on "for everything online BUT Google" model.

After noticing all of the weak ad numbers, I couldn't help but thinking of two things. All of these companies have a migrating client base that is slowly dropping some print ads and traditional media ads so that they can expand their web ad presence. Some of the middle-man ad money has to be going to Google directly by circumventing the online ad agencies. Almost every ad company is also certainly missing what was a huge ad base from online gambling services, and anyone who uses the web with regularity will probably acknowledge that the ad spending from online gambling spots has all but vaporized in US searches since the US ban on online gambling and arrest of foreign executives in the US that accepted US accounts.

Online ad middle-men are going to need to figure out a way to pay to play so to speak. On the surface it starts to look like the ad middle-man services are just bringing clients that Google can just deal directly with after a couple or a few quarters. The problem is that it is in Google's own corporate interest to try to get those who want to advertise to go directly to the company.

ON SEARCH & BROWSERS

Google search is by far the leader now in the US. MySpace and AOL have both partnered with Google for search features. Yahoo!, MSN, and other search providers have certainly felt the pain.

Now with Google's 1,100+ widget applications that can be added into a Google Homepage, it essentially acts as a Browser mask. This is entirely free. It sort of reminds me of the Browser war with Netscape against Windows Explorer back in the 1990's. Microsoft still has its hands tied in many aspects of its Browser, yet every other company is free to enter whatever they want.

RSS feeds can be added in directly on pages and directly to Browsers. That has probably thrashed many inspirations of emerging companies that had built RSS feeds aggregators that they were selling. How many apps could Google add in that they could charge for?

Also, no one seems to mind that Google saves every search of every user. That would make many cringe, but it hasn't had any impact on their business model.

ON RADIO

In January 2006 Google did acquire dMarc Broadcasting, which was an online advertising solutions provider for placing radio ads. They have also sold ads for PC Magazine and Maximum PC and have done a test of ad-vacancy placement for print ads with the Chicago Sun Times.

There were even some highly controversial rumors that Google may even try to acquire Clear Channel (CCU), although this may be a huge stretch. Even after taking the dMarc acquisition into account, this may not be the case.

ON FINANCIAL SITES

When Google launched Google Finance, it was directly trying to target Yahoo! Finance and a myriad of other subscriber services. Google hasn't gone as far as most of the subscriber services out there, but I can only think of how many Google loyalists would switch their lower-priced financial subscriber services over to Google if they ramped those efforts up.

ON PAYMENT AND SELLING

Google launched Google Base and Google Checkout to go after what it was hoping would simultaneously go after eBay, Craigslist and eBay's PayPal.

Now Google does get paid here for its transaction services. As long as there are banks and wiring fees, this area doesn't look like it can easily go free.

ON FREE SOFTWARE

Dare I even comment on Google's Apps and Google's online Office and document creation efforts?

Its Gmail and Google Calendar went right after every subscriber-based email service out there, and essentially after every dial-up user.

They even have all of the free site creation. Did that contribute to GoDaddy.com dropping an IPO? Has it hurt Web.com (WWWW)?

CONCLUSION

In some aspects of the Internet layout I can't help but think back to how Wired ran a story in April of 2005 titled "Why Google Is Like Wal-Mart" and how it compares the two slogans: Wal-Mart has the "Always low prices" slogan and Google has the "Don't be evil" slogan.

Having everything for free is similar to being the low price model out there. It certainly is if you are trying to compete, and much more true if they come into your market.

I won't endorse or really refute the article's intention, but with Google constantly maintaining an ALL FREE ON JUST ABOUT EVERY ASPECT they are certainly leaving money on the table. Now it will just take the multi-year waiting game to see if they get too big and too diverse, or if they end up either minimizing or neutralizing the thousands of online competitors in all of the areas they cover. It is also possible that all of the subscriber services could just end up being more me-too products that don't merit the effort. I would love to see some projections though across say 15 aspects of their business.

As Microsoft eventually ran into monopoly issues, I can't help but to think of the day that groups of online services in the US, Europe, and elsewhere start claiming that Google has neutralized their business models....and dare I say, that they monopolize.

Do not take this as a ominous prediction that the company will implode or become evil, because it isn't. In fact Google shares act like they want to continue going up as they grow larger and larger. The $470 handle makes it seem expensive on the surface, but on a valuation model they are actually not expensive for a mega-growth story.

I would still like to know how much more they could make if they offered some premium PAY-PER services for those willing to pay up for what others use only the base services freely.

Jon C. Ogg
November 3, 2006
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