Google is everyone's darling business right now. The stock price is high, the company was rated the best company to work for in 2008, and it generates an enormous amount of media coverage. But it's worth analyzing the company to try to see through the hype (if it is hype). Nick Carr has written a thoughtful article about Google.
A NYT article on 2/1/08 discussed the importance of network effects to Google's success.
…with its acquisition of DoubleClick this year, [Google] is going after the market for online banners and graphical ads, which is Yahoo’s bread and butter….Even in graphical advertisements online — the banners, video ads and social network ads, that marketers use to create brand awareness — Google remains a relatively small player. It is an important market that is expected to some day match the search advertising business in size. “Search is great, but you can’t advertise Coca-Cola in search,” said Peter Sealey, a former chief marketing officer at the Coca-Cola Company. “Google is going to try to compete there, but they don’t have the same algorithm that they had in search.”
Why is Google So Profitable?
You can look at Google's financials to see that the business has an operating margin of about 35%. Yet the company has many competitors in the search engine market, including Bing, Yahoo Search and others. Why don't they compete on price and drive down Google's profits?
One reason is that the search engine business may be an example of a winner takes all market. If one search engine is perceived as the best, then there is no reason why everyone should not use it, leaving very little business for the rest.
How Google's Advertising Works
With Google AdWords, businesses identify words used in searches that are relevant to their product e.g. Ford might identify words like "new car" and "truck". Advertisers want their ads displayed in the search results involving those words.
However, there are a limited number of spaces for ads on the search results page, and many companies might want to advertise in "new car" searches. So, to decide who gets which slot, Google's search engine ads are priced at an online auction. Advertisers bid for "slots", with the top slot awarded to the advertiser who will generate the most revenue for Google. Advertisers bid for slots by stating a maximum price they are willing to pay per click. Google then estimates the number of clicks per day, and so works out how much revenue it can expect from each bidder. The advertiser who will generate the most revenue wins the auction for the top slot. The next two slots are awarded to the next two highest revenue generators. Then the slots at the side are auctioned, with the fourth remaining bidder getting the top side slot, and so on. Because there is a limited number of slots, competing bidders can push the price of slots up significantly. You can see estimates of the cost per click in Google's AdWords Traffic Estimator. Here are some real-life lessons from using AdWords.
To investigate using Adwords:
- Use the Google keyword tool to find the relevant keywords that are searched most frequently. What are they? How many times do Google users search for these terms in an average month?
- Use the Google Traffic Estimator to estimate the cost per day of advertising using your proposed keywords. What is that price per click? How many clicks should you expect?
A Business Week article discussed the ad words auction used by Google.
AdSense is a tool Google uses to place ads on web sites. If you own a web site you can sign up to Google AdSense and place some html code on your page. Google's software will "sense" what the page is about by the words on it, and place a relevant ad on your page. As the web site owner, you will get paid each time someone clicks on the ad (for CPC ads) or each time someone views the page (for CPM ads).
Google Supports Television Advertising
Google is now an intermediary in television advertising. According to a November 25, 2008 article, Google makes the process easier and allows control of spending3. Google's approach to TV is explained on its website.
Google Gets into Display Advertising
Google launched a display ad exchange in September 2009, based on the technology it acquired from DoubleClick.