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October 18, 2011, 6:17 pm UTC
The phenomenal growth of Google in the past seven years is in large measure due to its universal value creation to all its stakeholders: internet users, content owners and advertisers. Through its search and advertising model, Google created a virtuous circle and served the interests of all these stakeholders rather well by providing:
- users the best and the widest range of searches, free
- advertisers a more measurable advertising model AdWords linking directly to search phrases and triggering payments contingent on user actions (clicks)
- web content owners opportunities to monetise from traffic routed by Google, through AdSense revenue sharing model
In all this, Google emerged as the ideal intermediary in the search for information, linking users, content providers and advertisers together through its pioneering search and advertising technologies.
In Google's own words, "Our mission is to organize the world’s information and make it universally accessible and useful." Thus, access to information and the presentation of this information through search technology is critical to Google's services. Google's mission as a search engine is to lead users to the information- most of which was initially not located at Google but resided in the universe of the Internet, and was progressively cached by Google.
Google's Revenue Model
Thus, web content is the fuel of Google's business, most of which is put up for free, but a large part is also incentivised through Google's revenue sharing model, AdSense. Google's network of sites is therefore an important partner to enhance the usefulness of its services, both in quantitative terms- access to large spread of web content, as well as qualitative aspects (relevance, demand and popularity), both of which drive greater traffic to Google. In turn, the enhanced traffic to Google incentivises advertisers to target their offerings based on search patterns which provide better insights into user intent.
While Google recognises the importance of content providers as drivers of traffic and resultantly revenues, it reports paid or revenue earning content, as Traffic Acquisition Costs, in its annual reports. This is a subtle yet powerful indication of its business treatment of valuable content and its providers: costs are meant to be brought down, while revenues are meant to be augmented.
The following analysis of Google's revenues and the breakup of revenues from its own sites and partner sites shows a systematic trend of marginalising external content from Google's revenue model, and an increasing concentration of Ad revenues from Google's own properties.
- Since 2001, content networks enjoyed a growing share of Google revenues, and almost equalled earnings from Google's own sites in 2004 (USD 1.55 billion and USD 1.59 billion).
- From 2004 until 2010, while Google’s overall revenues have grown 9.19 times, revenues from Google's own sites have grown 12.3 times while revenues from network members have grown only 5.6 times.
- During this six year period, an average revenue share displacement of 4-5% year-to-year has taken place from content networks to owned sites, amidst a trend of significant growth in revenues.
- Traffic acquisition costs (revenues shared with content partners) have reduced steadily, reduced from 42.5% in Q1 2004 to 24.5% in Q2 2011.
Thus, Google is increasingly transforming from a conduit for searching information, into becoming the repository of information, altering the locations where ads are placed on its network.
Perhaps, the most significant is the Q on Q drop in 2011, which is the steepest to date. Some experts attribute this to changes in search algorithms, instituted in Sept 2010 and, most recently, the major update to Google’s ranking algorithm in Feb 2011, dubbed “Panda” which had an impact of moving over USD 1 billion away from affected content sites. However, most of this increase seems to have accrued to Google's own sites and not redistributed across other network sites.
In other words, users of search are clicking more and more on Google's own properties than on content networks. Increasingly, Google is becoming a place you can find information directly, without going elsewhere, through Google's own services- maps, places, shopping, finance (to name a few).
This reinforces two complaints made by a number of website owners: a) that Google preferentially places its own content above others' content (Foundem; Fairsearch); and b) Google scrapes others' content and puts it up under its own universal results (Yelp; TripAdvisor; Mapquest), adding external content to Google's own sites, without appropriate IPR arrangements.
An interesting explanation for the Panda update and the unprecedented revenue shift is given by tech journalist, Ryan Singel of Wired magazine, on his blog:
“What you’re seeing is Google cutting out the middleman. There’s no reason for Google search to send users to made-for-AdSense pages, where Google shares revenue with the external site, when Google can get the revenue from an ad on the search result page.
“From Google’s perspective, AdSense sites are only worthwhile if they have their own organic traffic. If they get their traffic from Google search, they’re competition for Google’s own ads. It’s thus in Google’s interest to down-rate sites with ads in Google’s own search results…”
All of these proof points indicate that Google is no longer a search intermediary pointing to other content sites as in the past, but is becoming a valuable piece of internet real estate in itself, for advertisers to reach online users. In Google's own admission (Annual report 2010):
"Our innovations in web search and advertising have made our website a top internet property..."
Thus, Google search results are becoming the Internet's most valuable real estate exchange, with an important characteristic: an increasing share of the estate being owned by Google itself, and a reducing share of estate owned by others. Resultantly, the argument of a platform and an intermediary can no longer apply to Google, given the conflict of revenue-sharing with content networks.
Resultantly, web content developers must ask themselves, whether they are Revenue Partners or Traffic Costs for Google. And internet search users must begin to ask: What are we seeing on Google results: Google's own pages or pages of others? What does that make Google: a search gateway or the destination itself?S V Divvaakar is the “Executive Director” of Initiative for a Competitive Online Marketplace’s India Chapter.
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