Another Perpsective on Google’s Death Throes

Pamela Parker points to a post by Tom Watson, entitled, “Google’s Death Throes” that left me scratching my head.

Tom believes Google and eBay are both screwed (my word), and points to a seemingly ill matched Contextual (i.e., AdSense) ad as proof.

Tom, here are some counter points:

1. Contextual Advertising is new. It will improve over time as a) page analysis improves, b) more advertising inventory [keywords to match against] are added, c) additional meta data is fed into the targeting algo, and d) it is blended with other targeting mechanisms.

2. Comparitively little of Google’s revenue is tied to AdSense. The vast majority of its revenue comes from AdWords. This is true for a number of reasons, the primary one being that Google keeps 100% of the revenue generated from clicks on its native search volume, whereas it shares revenues for non-native search and non-native Contextual.

I don’t know how many times I have to point this out, but just because Search and Contextual use the same advertising inventory doesn’t mean that the two mechanisms are synonymous!

3. The ad in question wasn’t $0.20 a click, it is (at the time of this writing) $0.06 a click

And ironically, the last point is perhaps the most important.

Tom’s post implies that eBay would lose money paying for poorly targeted clicks (i.e., for an ad that returns no matching products) in the eBay marketplace. Let’s think about that…

A) A 1% click rate on a Contextual ad is pretty good. That would result in a $0.60 CPM

B) That means that for $0.60, eBay gets 10 clicks and 990 no-action branding impressions

C) Of the 10 clicks, how many simply look at the zero result set and leave? Or rather, how many 1) decide to do a search for something else, 2) decided to sell a product, or 3) have never been to eBay and decide to sign-up?

D) Of the 990 impressions, how many trigger a sign-up, buy or sell action or the next few days, from a new or existing customer?

Boiled down:

– If only 1 of 1000 people sign’s up as a new eBay member, eBay has acquired a customer for $0.60. I suspect the LTV of an eBay member is north of that number

– If only 1 of 1000 people buys or sells a product, eBay has cleared a listing for $0.60. I suspect the average listing fee plus commission is north of $0.60 (not to mention the value of reactivating a member)

In other words, eBay’s business model has sufficient margin and conversion to buy cheap Tail terms all day long (or, more conservatively, as a non-trivial component of their overall online marketing spend).

In reality, I believe we’ll see far more of this behavior, now that companies like eBay can programatically create, manage, measure and refine P4P listings through Web Services, like the Overture AWS API (nee, Yahoo! Search Marketing Services). (I helped build the business and product strategy for the AWS API, co-sell and deploy $1MM+ licensees,etc… and now that it’s fully public, I’ll have more to say about it in future posts.)

I believe the more interesting story is this: Goggle (i.e., search) is a critical customer acquisition and activtation channel for eBay, allowing Google, effectually, to tax eBay’s business.

Moreover, Amazon, whose margins (for goods they physically handle) are much more sensitive to this pressure, recognizes the threat and is busy building A9 (leveraging Google’s R&D expenditure!) to a) create a no-cost search channel for themselves, that b) also enables them to tax competitors vying for the same customer.

Wicked smart… assuming they can bootstrap usage and own a fair share of search volume.

Of course, this tax applies across any industry that search impacts (and that’s, well, pretty broad). Anyone that doesn’t own a complete micro-content stack will be at the mercy of those who do (and certainly that of the marketplace owners). If you agree with this end state, you likely also understand why the NY Times purchase of About.com is questionable, as they paid $410MM to play the game, rather than be a player in the game.

In my opinion, the only real threat to the Search Co’s is viable multi-party competition that leads to significant fragmentation… which in turn would delay bidding pressure across the tail, thereyby slowing the rate of revenue growth, giving more competitors more time to innovate… creating a vicious cycle, indeed. Fortunately for Google et al, it appears that many companies, like the NY Times, would rather play it safe and leave the rules of the game in someone else’s hands.