Saturday, April 15, 2006

Kill Google, Vol. 3

In a comment to my previous post, Anil Dharni said:
If you want to be beat Google, would you like to throw more manpower to beat Google's search algorithms or would you rather try and change the search paradigm.
If I want to beat Google? I would throw everything I have got at an AdSense killer.

AdSense is now about half of Google's revenue and their future growth. Microsoft should strangle Google's air supply, their revenue stream.

Targeting ads well to content is hard. Google AdSense does not do a great job of it yet. Advertising should be useful, relevant, and interesting content -- information about products and services you want to hear about -- and it is not. There is a real opportunity here to do it better.

This is where I think Microsoft should focus the majority of its attention.

Microsoft should have its tech and R&D teams develop better targeting through personalization, segmentation, real-time optimization, and content analysis.

Microsoft should use its size to make deals that allow it to offer much deeper ad inventory (e.g. ads for individual products at Amazon or eBay, individual articles at a magazine, specific homes at a real estate broker, or specific video content from NBC).

Microsoft should use its market power to be the exclusive ad provider for large sites like major newspapers, big online magazines, and traffic giants like AOL or MySpace.

Microsoft should use its cash reserves to make being an advertising provider unprofitable for others, lowering ad broker revenue share to near 0%.

Microsoft should ruin AdSense, undermine it, destroy it. There should be no business in AdSense-like products for anyone.

Now, yes, experimenting with new tools, building MSN search, and doing R&D is a good idea. Microsoft may come up with a game changer, perhaps even one that Google and Yahoo cannot immediately copy.

But I think the strategy to win is different. If Microsoft wants to win, it should play to its strengths. It should not seek to change the game. It should seek to end the game.

See also my previous posts, "Kill Google, Vol. 2" and "Kill Google, Vol. 1".


Anonymous said...

So your Google intervew did not go well?

Anonymous said...

What I find interesting Greg is that Google already knows the scenario you are talking about. Google is not a company that just sits and gets rolled over. So, I think they probably have some plans to buffer against it. Raising 10 billion, building Google Base, testing offline ads.

Watch Google's move (not the Ajaxy stuff they release on the side), but watch where they are going after more revenue. They are extending their ad system offline - sure, not too successful so far, but they are going to get it right sooner or later. They have already successfully tested ads on mobile phones in Japan. And they are moving heavily into co-branding ventures (although the media is not following that much) - think Joga with Nike, home pages with dell, and comcast, google video deals. Honda and Volkswagon are planning on putting google earth in their cars - potentially more ad revenue. Google is trying to become the biggest advertising network, and if MS and Yahoo does not move fast, by the time they get it, Google will be way ahead.

I think Google Base, Google Local and Froogle are google's stealth mode products. I believe they already have a full scale plan there, but are still in testing. If they begin to notice their ad system threatened, they will push into those areas heavily.

Greg Linden said...

Thanks, OR. Right, I doubt anything I am saying here is new to Google.

In my earlier post, "Kill Google, Vol. 2", I noted that Google wrote in their analyst day notes that "AdSense margins will be squeezed in 2006 and beyond. Y! and MSN will do un-economic things to grow share."

Google seems to expect Microsoft to attack them using this strategy. But that doesn't mean that it isn't a good strategy.

Anonymous said...

I agree it is the best strategy. If it happens, how google responds will be one the most interesting studies in our lifetime. We already know MS can do it; what we don't know is if Google can survive it.

Anonymous said...

Oh great, so MS kills Google and then it will kick back and do nothing to innovate search, much like when they killed Netscape.

I want Google around, not because I like them, but because it keeps MS on their toes and forces everyone to build better product.

Anonymous said...

I don't understand how anyone in their right mind would prefer MS over Google. Why do you want to "Kill Google"? They're the best thing that has happened to the internet. Hands down. This is going to make me angry if there becomes a anti-google following. They're perfect. Gmail is far better than any, I repeat, AANNYY online email app, and it's STILL in Beta. Microsoft seems to take products out of Beta as soon as they can, and look what happens; bugs all over the place. Google's business plan is much, much, much stronger than Microsofts. Google till I die!!!

Anil said...

Interesting post and thanks for referring to my comment. I am not convinced that this is the best strategy and have laid out some of the reasons on my blog Would love to hear your thoughts.

I will also follow up with my ideas for undermining Google's advantage.

Anil Dharni

Mike Dierken said...

Did you see this post from Mark Cuban about Eurekster trying to deliver a search box and more relevant ads?
If Eurekster does the same with an adsense like product and pays back more money to site owners. Well then the better idea will make them rich and upset the search applecart. Which quickly explains why the rumor is that MicroSoft is interested in acquiring them. It will be fun to see what direction Eurekster goes business wise and product wise. Will they be caught up in a ”our search is better so use us” mantra. Or will they be smart and go for blood with a “our search is better and because of it, we pay you the site publisher much more money than the other guys” approach.

mb said...

Even if Microsoft could reduce Google's AdSense revenues to zero, it wouldn't hurt Google as much as you think.

From a financial standpoint, the relevant revenue number is the one *net* of traffic acquisition cost (the amount Google shares with content owners). On this basis, AdSense revenues were only $573 million in 2005, or less than 15% of Google's total net revenues.

That's because Google gives back about eighty cents of every dollar in revenue to the content owner. To count the whole dollar as revenue instead of the 20 cents Google keeps would be the same as eBay counting the total value of merchandise sold on its site instead of just the auction fees eBay charges.

(It's confusing because GAAP accounting rules require Google to count the whole dollar, while they require eBay to count only the auction fee. But economically and from a cash-flow standpoint, the important revenue number is the one ex-TAC.)

For Microsoft to beat Google at the AdSense game would require a lot more than giving the product away - a 100% revenue share wouldn't make publishers as much money as Google's 80% share, since Microsoft doesn't have the inventory of ads to sell or the techology to place them on the right sites. In short, Microsoft doesn't have AdWords, which is where Google gets the inventory of ads to sell.

So the *real* way to kill Google is to kill AdWords, not AdSense. AdWords generates 85% of Google's net revenue, and it provides the inventory for AdSense.

But to kill AdWords, Microsoft has an awful lot of difficult technology to develop, while Google continues to innovate at a higher clock speed than Microsoft. And just as network effects make eBay nearly invincible in the online market for physical goods, network effects make a very high barrier for entry into the market for keyword advertising that Google owns.

Google's certainly not invincible, and I'm looking forward to reading Anil's thoughts on the chinks in Google's armor. But going after AdSense will be a long, hard battle that even if won wouldn't do more than dent Google's cash flow.

Anonymous said...

Dude. It's the search results stupid. I agree MS could target AdSense, if they can do better. But's the search results. Period. People use Google because it finds more relevant links. I never click on ad or sponsored links unless I am looking to buy something, then I use Froogle.

Google is better at search. I use MS Live for maps. And because of privacy concerns I prefer Yahoo for other services such as email, IM, etc. Yahoo could kill Google if they switched from fee to ad-supporting services such as personals and music downloads. Myspace is killing Yahoo personals in ad dollars and iTunes is taking listening away.

Microsoft dropped the ball. Microsoft let Google and Apple use its OS to make a fool out of Gates. Google and Apple are laughing all the way to the bank.

Anonymous said...

Actually, the gross revenue number IS important from a cash-flow standpoint (though not from a revenue standpoint) because GOOG enjoys some of the float on that money (ie, they collect from advertisers faster than they pay their content partners), which allows them to have negative working capital--they don't pay their "vendors" until they themselves have been paid.

mb said...

Anon, you might have your numbers mixed up -- at 12/31/05, Google had $688 million in AR but only $116 million in AP. Days sales outstanding was at 41. Looks to me like Google is paying content sites faster than they collect from advertisers, so there's actually negative float.

But whether Google does or doesn't get couple hundred million in free working capital isn't relevant at all to the question at hand -- how to kill Google.

The point remains that even if Microsoft could kill AdSense, it wouldn't be more than a glancing blow. The real assets are the massive AdWords marketplace and search, both of which have very wide competitive moats around them.

Google is vulnerable on several fronts, but AdSense wouldn't be in my top five.

Miramar Mike said...

How about Google making Microsoft (and anyother PC fixated s/w companies) irrelevant by moving us to a completely on-line experience? All you then need is the browser and a connection - my non-MSFT mobile phone/PDA-thingy can do all that.

The big deal is being connected all the time at fast enough speeds AND having somewhere to stick everything such as your words, pictures, videos, email, calendar ... hmm, Google seem to to be expanding in that direction.

And once you're on-line all the time then reaching out to you and advertising is a lot easier and constant.

So maybe thinking of Microsoft as "irrelevant" (not really as they will fight all the way) might be the front that MSFT and others would fight back on - ie, try to be seen as "old hat" but come in with the new "life online" stuff whilst keeping the current PC-buying customers under their hold ...

Greg Linden said...

Hi, Mike. Yes, I think Google is trying to push for a network-based, thin client model.

That's an uphill battle, one many others have fought before and failed and one that plays right into Microsoft's strengths.

It also doesn't change my opinion of what Microsoft should do. While Google is off distracted trying to re-fight the thin client battle, I think Microsoft should counterattack against Google's revenue stream, undermining Google's ability to fight.

Anonymous said...

Microsoft could "kill" Google by putting out a search engine that people actually want to use, instead of one they accidently use as it is bundled with MSN.

This is another MSFT pipe dream of them even coming close to Google in terms of search. What do I use to find MSFT support documents on their very own site? Google.

Greg Linden said...

mb, I think you have a good point that AdWords is more profitable than AdSense.

However, I am not sure I agree with how you are trying to support that point. You are taking a revenue number before expenses for AdWords and comparing it to a revenue number after some expenses for AdSense. That's not appropriate.

A stronger argument would be to compare the margins of the two business lines. But, yes, I suspect that the margins likely are much better in AdWords than AdSense.

However, I also suspect the future of Google's revenue growth lies in off network advertising like AdSense, advertising on the web as a whole instead of advertising on Google properties. Removing AdSense would make Google a less attractive business and hurt Google's ability to innovate and execute.

This discussion is not so much about Google's current business, which is tiny compared to Microsoft, but Google's future and how Microsoft could cripple that future.

By the way, I assumed it was obvious, but some commenters seem to think I actually want Microsoft to destroy Google. That is not at all the case. I love Google. I have several friends and colleagues at Google.

This post was intended to explore and debate the future of the search war. It is important to consider how the search giants might move against each other and how the players might counter those moves.

The Mysterious Traveler said...

While I believe that Microsoft could easily devise a way to offer more accurate ad content, I'm just as sure it would then sabotage itself by making the ads as ugly as possible -- just the way it makes everything it touches garish and clunky.

Small businesses, especially, would still use Google AdSense because it enables them to host ads on their site without degrading appearance and usability.

mb said...

Greg, I'm interpreting your posts as thought experiments, not as anti-Google attacks. I too am a big believer in Google, and am not trying to get them killed!

As for counting AdSense revenue on a gross vs. net basis, before the IPO Google used to report on a net basis while Yahoo reported gross. A Wall Street Journal article (link below, sub req'd) said Google's rationale for reporting net was that "we are not the principal to transactions." In the same article, a Yahoo spokesperson says that they consider the net figure "of more transparent economic value to investors," even though Yahoo was required by accounting rules to report gross.

For your "kill Google" hypothesis, it would seem that the free cash flow generated from the AdSense business would be the most important measure of its importance to the business. But since Google doesn't break out cash flow by segment, the nearest proxy would be AdSense revenue ex-TAC, which can be calculated from the numbers they disclose.

From an economic (not an accounting) standpoint, I treat Google's AdSense business as a brokerage. Google makes a market to bring buyer and seller together, but Google isn't buying or selling ads for its own account. A stock broker counts the commission as revenue, not the value of the stock traded. eBay counts as revenue its listing and final value fees, not the value of merchandise traded. Similarly, many analysts look at Google's revenue ex-TAC for the same reason.

Greg, perhaps your most striking observation is that syndicated (AdSense) ads are more important to Google's future than ads on Google-owned sites. That's a concept I'd like to explore further.

My first reaction would be that in recent quarters revenue from syndication hasn't grown as fast as revenue from Google-owned sites, and it seems that Google's innovation is focused on extending Google-owned channels like Video, Calendar, WiFi and possibly Gdrive.

Unless Google changes course and emphasizes syndication over Google-owned sites, would ending AdSense really be a coup de grĂ¢ce for Google's competition?

How do you think Google's business will change in the future that makes syndication the more critical business?

WSJ link:

Google's quarterly financials:

Greg Linden said...

Good point, mb. AdSense growth has slowed noticeably in 2005, a big change from the 2004 numbers.

I think you have a point that I may be overstating the vulnerability by saying that Microsoft could "kill" Google or "end the game" by making AdSense less profitable.

But I think you push your argument too far when you say that losing AdSense would merely be a "dent" or a "glacing blow".

mb said...

Fair enough. Thanks for the thought-provoking post.

Anonymous said...

To kill AdSense MSFT needs a salesforce. And it needs to repplace GOOG in exclusive deals with big publishers. This could be good for content owners/producers of MSFT and GOOG try to out bid each other by offering more than 100 percent of revenues...

Anonymous said...

I think when the click fraud gloves come off, it will be google killing themselves. That adsense network is a hornets nest of litigation, bad press, etc.

MSFT may as well let it implode.

Anonymous said...

Try "Kill Microsoft by cutting off its air supply." Doesn't that just sound right? Wouldn't you love to see Ballmer a deep, rich blue?

Eddy Woo said...

There isn't a need for it, Google would kill themselve sooner or later, thanks to their all-power search engine. Why bother to click on Ads when you get the results from the google search results.