5 ms·

How/why are search margins shrinking? Is it getting more expensive to deliver search? Online ad spending is going up, not down.

PunchTornado 10y ago
a lot of it is going to facebook & others.
- bitmapbrother 10y ago
  And yet Google is making record profits YoY. As for Facebook, it would seem they've been cooking the books.
ChuckMcM 10y ago
What Punch said, basically its a maturing of the Internet Advertising market, the early enthusiasm for lots of metrics on engagement being dampened by a gradual understanding of click fraud. This is reflected in Google's financials as a falling 'cost per click' (what Google gets for an ad click). The other factor is that Google search has been slowly losing its quality edge on its competitors and so services like Microsoft's Bing start developing more significant inroads, the combination of more market share and higher CPCs on Microsoft's service lead it to be profitable last year[1]. And the reason is in part because Microsoft can preferentially send search traffic to their properties, but it is also tied to the fact that consumers don't then switch their search provider later. To counter-act that Google has been paying more and more money to third parties to send search traffic their way (this expense is called 'traffic acquisition costs') and Google was horrified when Oracle's lawyer disclosed that they were paying Apple a billion dollars a year for their search traffic[2]. They paid millions to Mozilla to send their search traffic to Google [3] and had a material dip in traffic revenue when Mozilla cancelled that deal[4]. What the author of the article in [4] did not realize is that all of Yahoo!'s search traffic is in fact served by the Bing index and servers. Yahoo! hasn't had a native search service since they agreed to send it all to Microsoft. So Bing+Yahoo! market share is really just Bing market share. That money paid, their TAC, comes right out of the profit margin for their ads At the end of the day this is neither good nor bad, search is being commoditized. And as it commoditizes that puts pressure on margins since discrimination based on cost always puts pressure on margins. Eventually Bing and Google will be equally expensive from an advertiser point of view and the one with the best operational efficiency will make the most profit. Neither of them will be able to use "excess profits" to fund moonshots. That is why it is so critically important for Google to find additional viable businesses to augment its search advertising revenue. The current road leads to a very un-fun place to work, long hours (maximize work done for salary paid), few benefits (reducing costs), and little room for new development. They won't end there, it's like saying if you drive west in the US and never turn eventually you'll drown in the Pacific ocean, it's true but there is always a turn before that point. But if Google of 2003 was one end of the spectrum, Google is inexorably moving toward the other end. Ruth is there to make sure what's left is still a viable business that deserves a high stock price. [1] https://techcrunch.com/2015/10/22/bing-is-profitable/ https://techcrunch.com/2015/10/22/bing-is-profitable/ [2] https://www.bloomberg.com/news/articles/2016-01-22/google-paid-apple-1-billion-to-keep-search-bar-on-iphone https://www.bloomberg.com/news/articles/2016-01-22/google-pa... [3] http://www.pcmag.com/article2/0,2817,2398046,00.asp http://www.pcmag.com/article2/0,2817,2398046,00.asp [4] http://www.geekwire.com/2015/yahoos-deal-mozilla-draws-searchers-away-google-bing-stays-flat/ http://www.geekwire.com/2015/yahoos-deal-mozilla-draws-searc...
- gniv 10y ago
  > This is reflected in Google's financials as a falling 'cost per click' (what Google gets for an ad click). But what is not known is the cost of a _similar_ click. Since the number of clicks increases dramatically quarter over quarter, it could be that it's the new clicks that are bringing the cost down.
- spydum 10y ago
  Chuck, just want to say your detail and insightful comments are a tremendous asset to the community! I do have to disagree though: MSFT has office and windows as major cash cows, maybe azure will also start turning some big profit in 2017 as well (tbd). So they can afford those r&d style projects without nearly as much risk as "Alphabet". I do agree with your assessment of goog though: the heat is turning up and I don't doubt belt tightening is their future.
  - ChuckMcM 10y ago
    I agree, Google really needs their version of 'office' or to make their cloud offering competitive in order to survive long term. I see them trying to extract more and more revenue from Android as one of their strategies.
- MarkMc 10y ago
  Here is Google's net profit margin for past 4 years [1]: 2013: 22.9% 2014: 21.4% 2015: 21.7% 2016 (9 months): 22.0% It doesn't look like profit margins are under strong downward pressure. But a better metric would probably be 'revenue per search query' - I don't have any recent statistics, but if Bing can close that gap it will reduce Google's margins when bidding for search traffic from Apple and Firefox (and maybe force Google to increase the percentage of AdSense revenue they give to website publishers). But even then, Google will still have three significant advantages to avoid the complete erosion of their margins: (1) Android; (2) Chrome; (3) The Google brand (I'm sure that more people try to change the default search engine on their new Windows computer than try to change the default search engine on their new Android phone). Also, Bing would probably not be profitable if it was a separate company and had to pay Microsoft for the privilege of being the default search engine on Windows. Bing+Yahoo seems to be growing market share, but I wouldn't expect them to completely close the gap with Google in the next 20 years because Google's ownership of assets like YouTube, AdSense, Google Maps, Android and Chrome. Google has all my search history, a list of all the AdSense websites I visit, my YouTube history, my location history, ten years of my email history and my Play Store purchase history. And for any given search query I perform, Google can access a larger pool of similar search click history from other users. How will Bing ever overcome all these disadvantages? [1] Derived from https://www.google.com/finance?q=NASDAQ%3AGOOGL&fstype=ii&ei=ZbZKWLn1NMOB0ASYnrqQAw https://www.google.com/finance?q=NASDAQ%3AGOOGL&fstype=ii&ei...

PunchTornado 10y ago

a lot of it is going to facebook & others.

bitmapbrother 10y ago
And yet Google is making record profits YoY. As for Facebook, it would seem they've been cooking the books.

ChuckMcM 10y ago

What Punch said, basically its a maturing of the Internet Advertising market, the early enthusiasm for lots of metrics on engagement being dampened by a gradual understanding of click fraud. This is reflected in Google's financials as a falling 'cost per click' (what Google gets for an ad click). The other factor is that Google search has been slowly losing its quality edge on its competitors and so services like Microsoft's Bing start developing more significant inroads, the combination of more market share and higher CPCs on Microsoft's service lead it to be profitable last year[1]. And the reason is in part because Microsoft can preferentially send search traffic to their properties, but it is also tied to the fact that consumers don't then switch their search provider later. To counter-act that Google has been paying more and more money to third parties to send search traffic their way (this expense is called 'traffic acquisition costs') and Google was horrified when Oracle's lawyer disclosed that they were paying Apple a billion dollars a year for their search traffic[2]. They paid millions to Mozilla to send their search traffic to Google [3] and had a material dip in traffic revenue when Mozilla cancelled that deal[4]. What the author of the article in [4] did not realize is that all of Yahoo!'s search traffic is in fact served by the Bing index and servers. Yahoo! hasn't had a native search service since they agreed to send it all to Microsoft. So Bing+Yahoo! market share is really just Bing market share. That money paid, their TAC, comes right out of the profit margin for their ads At the end of the day this is neither good nor bad, search is being commoditized. And as it commoditizes that puts pressure on margins since discrimination based on cost always puts pressure on margins. Eventually Bing and Google will be equally expensive from an advertiser point of view and the one with the best operational efficiency will make the most profit. Neither of them will be able to use "excess profits" to fund moonshots. That is why it is so critically important for Google to find additional viable businesses to augment its search advertising revenue. The current road leads to a very un-fun place to work, long hours (maximize work done for salary paid), few benefits (reducing costs), and little room for new development. They won't end there, it's like saying if you drive west in the US and never turn eventually you'll drown in the Pacific ocean, it's true but there is always a turn before that point. But if Google of 2003 was one end of the spectrum, Google is inexorably moving toward the other end. Ruth is there to make sure what's left is still a viable business that deserves a high stock price. [1] https://techcrunch.com/2015/10/22/bing-is-profitable/ https://techcrunch.com/2015/10/22/bing-is-profitable/ [2] https://www.bloomberg.com/news/articles/2016-01-22/google-paid-apple-1-billion-to-keep-search-bar-on-iphone https://www.bloomberg.com/news/articles/2016-01-22/google-pa... [3] http://www.pcmag.com/article2/0,2817,2398046,00.asp http://www.pcmag.com/article2/0,2817,2398046,00.asp [4] http://www.geekwire.com/2015/yahoos-deal-mozilla-draws-searchers-away-google-bing-stays-flat/ http://www.geekwire.com/2015/yahoos-deal-mozilla-draws-searc...

gniv 10y ago
> This is reflected in Google's financials as a falling 'cost per click' (what Google gets for an ad click). But what is not known is the cost of a _similar_ click. Since the number of clicks increases dramatically quarter over quarter, it could be that it's the new clicks that are bringing the cost down.
spydum 10y ago
Chuck, just want to say your detail and insightful comments are a tremendous asset to the community! I do have to disagree though: MSFT has office and windows as major cash cows, maybe azure will also start turning some big profit in 2017 as well (tbd). So they can afford those r&d style projects without nearly as much risk as "Alphabet". I do agree with your assessment of goog though: the heat is turning up and I don't doubt belt tightening is their future.
- ChuckMcM 10y ago
  I agree, Google really needs their version of 'office' or to make their cloud offering competitive in order to survive long term. I see them trying to extract more and more revenue from Android as one of their strategies.
MarkMc 10y ago
Here is Google's net profit margin for past 4 years [1]: 2013: 22.9% 2014: 21.4% 2015: 21.7% 2016 (9 months): 22.0% It doesn't look like profit margins are under strong downward pressure. But a better metric would probably be 'revenue per search query' - I don't have any recent statistics, but if Bing can close that gap it will reduce Google's margins when bidding for search traffic from Apple and Firefox (and maybe force Google to increase the percentage of AdSense revenue they give to website publishers). But even then, Google will still have three significant advantages to avoid the complete erosion of their margins: (1) Android; (2) Chrome; (3) The Google brand (I'm sure that more people try to change the default search engine on their new Windows computer than try to change the default search engine on their new Android phone). Also, Bing would probably not be profitable if it was a separate company and had to pay Microsoft for the privilege of being the default search engine on Windows. Bing+Yahoo seems to be growing market share, but I wouldn't expect them to completely close the gap with Google in the next 20 years because Google's ownership of assets like YouTube, AdSense, Google Maps, Android and Chrome. Google has all my search history, a list of all the AdSense websites I visit, my YouTube history, my location history, ten years of my email history and my Play Store purchase history. And for any given search query I perform, Google can access a larger pool of similar search click history from other users. How will Bing ever overcome all these disadvantages? [1] Derived from https://www.google.com/finance?q=NASDAQ%3AGOOGL&fstype=ii&ei=ZbZKWLn1NMOB0ASYnrqQAw https://www.google.com/finance?q=NASDAQ%3AGOOGL&fstype=ii&ei...