Tuesday, December 13, 2005

Kill Google, Vol. 2

According to a NYT article, Bill Gates was asked last month, "Will you do to Google what you did to Netscape?":
Mr. Gates, the Microsoft co-founder and chairman, paused, looked down at his folded hands and smiled broadly, as if enjoying a private joke. "Nah," he replied, "we'll do something different."
And what would that something different be? The article goes on to suggest that it will be web services, but I think it will be going after Google's lifeblood, advertising.

Geeks like me think of Google as a search company, but most biz folks I talk to view Google as an advertising company. It is the ads that generate the revenue. It is the ads that allow everything else to happen.

The AdSense revenues -- revenues from ads placed on other sites -- may be particularly vulnerable to attack. This was 43% of Google's revenue in Q3 2005. With these ads, the owner of the site gets roughly 70% of the revenue from the ad. Google takes the other 30%.

It seems like Microsoft could do a fair amount of damage here by trying to drive the share the advertising engine takes in this deal to near zero. To do that, it just needs to launch its own AdSense-like product and be willing to set its take to its breakeven point.

There's some indications that Microsoft may be planning to do this. Bill Gates pointed out that Google makes a lot of money from advertising and then scolded Google for keeping all of the advertising money for itself. Nicholas Carr recently wrote that "the wide profit margins Google enjoys on internet advertising are unsustainable" and "competition, from Yahoo and Microsoft as well as others, can be expected to reduce the profits." And MSN just announced a pilot of an AdSense-like product called AdCenter.

However, there is a big assumption here, that other advertising engines can generate the same revenue as AdSense. As long as Google's clickthrough rates are roughly 30% higher, it will be impossible for anyone else to drive Google's share of the revenue to zero.

And that is Google's defense. Focus on relevance. If Google can maintain its lead on relevance, if it can maintain higher clickthrough rates, if it can continue to generate more revenue for sites using AdSense, it is not vulnerable.

See also "Kill Google, Vol. 1" where I focus on the dangers of from growing too fast and from failing to innovate quickly.

See also "Kill eBay, Vol. 1" and "Kill eBay, Vol. 2".

Update: After the March 2006 analyst day, Google posted slides that said in the notes:
AdSense margins will be squeezed in 2006 and beyond. Y! and MSN will do un-economic things to grow share.
Google expects Yahoo and Microsoft to attack them using this strategy.


Anonymous said...

Personally I think Google's algorithms are less important than the sheer size of its advertiser network. Matching is easy when you've got more to match with.

Niki Scevak has a good post (with some good comments) at


Andrew Goodman said...

Sure, but Yahoo already competes directly with Google on this front, and likely offers stronger revenue shares to core publishers. Both companies are going to give a lower share to the smaller publishers for very good reasons - basic business sense. Microsoft could undercut both, I suppose, but Yahoo's already doing a good job of sharing more with some publishers. MSFT is still coming in as #3 in that market, if they enter, and the longer they delay, the more publishers and advertisers get entrenched with the two leaders. So when it comes to "something else," I imagine Gates is thinking more grandly than that, to schemes involving the desktop, the pipeline, the code, and other ways of dominating a whole market by setting standards or owning important real estate. Coming in as #3 in ad serving is just pushing a couple of pawns around in the context of a bigger chess game... or what is a bigger chess game in Gates' mind, anyway.

JadedTLC said...

"...they delay, the more publishers and advertisers get entrenched with the two leaders..."

I really doubt this. I am a small publisher; and I'll use multiple ads, see which one pays better, and go with that one. I think I'm not alone in this. Publishers want money (even small ones).

I am also a strong supporter of free competition. And with MSN in the mix, there will only be room for more competitive growth. Google's too stuck in the dark ages. It's almost like they're pulling ideas out of a hat that was filled four years ago (GoogleTalk, GoogleBase, Hullo!). There's plenty of room for innovators and the relevance war has not yet been won.

Besides, one Enron-like error in spilling private information and they're gone.

Don said...

Actually, research has shown that MSN Search produces a higher CTR (clickthrough rate) on search ads than does Google. So if MSN's adCenter uses the same type of Darwinian algo as AdSense -- in which advertisers are rewarded with lower costs/higher positioning as they improve their ads' CTR -- they can enjoy great success even with a lower overall audience.

Where MS has a problem, however, is finding non-search content places to hang its search ads. Unfortunately, Google and Yahoo already seem to have much of the best places already taken, and MSN will have to come up with a pretty good deal and a better system than Google's AdSense to persuade current AdSense users to change over.

I'd say the deck is stacked against MS pretty heavily right now, given Google's 2-year head start. I think MS can be a thorn in the side of Google, but doubt they can dethrone Google from their current ad-king position.