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Their financial model is similar to a TV or newspaper. Imagine you create a newspaper, you start out showing no ads, lots of people buy it, it is all good. Th
by skippyboxedhero 3y ago
Their financial model is similar to a TV or newspaper.
Imagine you create a newspaper, you start out showing no ads, lots of people buy it, it is all good.
Then you raise money from investors to grow, and they start asking for more revenue. So you add one advertisement.
Then the investors want out, so you have to IPO...more ads. Then you have to keep the share price up because execs want options, and your HR consultant tells you that the "top" execs need to see a rising share price (as if you need a "top" exec to add more ads to a webpage)...more ads.
The ability to add more advertisements is limited by the space in the newspaper, but there is almost no marginal cost associated with adding more ads. So it looks like very clean growth, very strong economics.
This is basically how Google and Facebook work. Their revenue growth looks puzzling because they seem to achieve very consistent, very predictable revenue growth with no extra resources. The reason why is that they can add more ads to a page very easily, and can control their level of revenue growth so they can keep employees/investors happy (in that order). It is true that they have also achieved some pricing growth but that advantage has been capped (and is largely a function of their monopolistic position, i.e. Doubleclick allows Google to play both sides). Most of their growth has been increasing ads per page.
There is no way for them to function as public companies in this environment (again, I would say the situation with employees is actually taken more seriously than investors) without making their product worse. They won't stop before the product collapses.
- charcircuit 3y ago>The ability to add more advertisements is limited by the space in the newspaper, but there is almost no marginal cost associated with adding more ads. You are also limited by potentially causing users to stop buying the newspaper. Google will be matching the metrics to see if users actually use the app less when adding more ads. It's possibile there will be no statistically significant difference and consumers are okay with the new ad level. If they start leaving Google can revert the change.
- skippyboxedhero 3y agoAs I said, there is almost no chance that they reverse before the product is killed because they are optimizing for revenue, not user growth (and when you take this at the margin, increasing ads per page is the only way). I have never seen a company stop before this point either. The institutional imperative to continue gaming the numbers is overwhelming.
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- esafak 3y agoWhen users start leaving, they will not return if changes are reverted because they will have lost their goodwill. It would take more than a reduced ad load for me to go back, for example.
- fauigerzigerk 3y ago>Most of their growth has been increasing ads per page Hasn't most of their growth come from a growing number of internet users?
- 6510 3y agoIf the user has no money his eye balls aren't worth much.
- fauigerzigerk 3y agoBut the user does have money everywhere. India's GDP has long surpassed that of the UK and is quickly approaching that of Germany.
- 6510 3y agoI'm getting old sorry. I didn't know India had such wild growth in internet connections. They went from 4% coverage in 2007 to 48.7% in 2022. woah! Japan CPC $1.32 CPM $0.38 United States CPC $1.09 CPM $0.22 Poland CPC $0.26 CPM $0.06 India CPC $0.25 CPM $0.13 funny numbers! 1.09/0.22 = 4.95 while 0.25/0.13 = 1.93 !?! Apparently Indian eyeballs are really expensive! Fun stuff, thanks.
- skippyboxedhero 3y agoYes, that is correct. The assumption in the example is that users are flattish, and you need to "do something" to get marginal growth. In the early days, you saw very real pricing growth (due to better targeting) and volume growth due to user growth. Over the last ten years or so, I believe that a lot of the growth has been greater ad density, and ad density is much more important for controlling financial results...which is the key point when it comes to exec behaviour. Execs can't turn on user growth, they can add more ads to a product if they see numbers coming in light.
- 6510 3y agoAnd the end game [for the newspaper] is to get rid of articles, puzzles, cartoons, letters from readers, get rid of subscriptions and go 100% advertisement. It is entirely possible for google to go there. Search being free is really half way there already.