Google Money: the business model that rules

Michael Hedges April 22, 2008

It was a shot across the bow of the traditional advertising media model last week when Google announced first quarter profits jumping 30%. It’s not just recessions, and fears there of, driving advertisers to click-through ads. It’s the triumph of accountability.

When advertisers talk about accountability, it’s not a discussion of measurement accuracy. Ever since John Wannamaker said he didn’t know which half of his advertising worked, the anxiety over pulling customers into the store, figuratively, fueled the brilliantly creative and largely effective advertising industry, paid for by those store owners, figuratively. Accountability, to them who pays the bill, means seeing (e.g. accounting) a direct relationship between ad money spent and cash in the till.

The ad industry has invested a good portion of its creative energy convincing that store owner (or any of the giants of ad spending) of the merits of image, brand and customer relationships. About half the time, as John Wannamaker predicted, it works, and works brilliantly. Zillions have been spent on romance, scene and story. And every ad agency CEO knows the secret to success is location, location, location. Shoot those TV ads in a great location and take the client. Win an award and take the client to Cannes.

Google makes the lions share of its revenue on a simple, yet elegant business model that builds on a well-known but less reported fact. People are more likely to notice ads for automobiles when they are looking for an automobile. Google scans the contents of web pages and, like magic, places ads related to that content somewhere on the page. The advertiser does not need to hire George Clooney. A simple text message, with a link, is sufficient. When Google can match what it knows – or statistically extrapolates – about the web surfer, all the better. Buyer + ad = sale. No other medium can match that…yet.    

Google’s first quarter results were stunning for other reasons, not the least of which is the emerging picture of the company’s geographic footprint. Nearly two-thirds (62%) of all search queries worldwide were through Google. And, for the first time, 51% of the €3.32billion (US$ 5.19 billion) in first quarter sales came from outside the US, reinforcing the view that Google might be recession-proof. The sales surge from outside the US benefited Google in other ways: lower US taxes and the exchange rate bonus.

If Google CEO Eric Schmidt seems disinterested in the suffering (and whinging) of traditional media it’s clear he is. "It's clear to us that we are well-positioned for 2008 and beyond, regardless of the business environment we find ourselves surrounded by," he said during an analysts conference call. Stock traders, wringing their hands for a variety of reasons, rewarded Google with a 20% bump in the share price.

The ‘display’ ad model used by traditional media, spots and space, is far from dead, though all traditional media, save outdoor, is losing ad share to the Web, widely reported in survey after report after survey. For some advertisers television, radio and print will continue to have an effective place in the marketing mix. But it’s become a different mix.

Ad agencies, quick to spot a profitable trend, have moved full-throttle into Web 2.0. Their hot new business is turning dull and boring company websites into interesting and entertaining sales machines. For comparatively little money, buying ‘keywords’ with Google or the other search portals moves potential customers.

Also growing leaps and bounds is the sponsorship segment. Event sponsorship, particularly sports, is very popular among companies wanting to attach to teams, rock stars or causes. A bit under the radar, and similar to designing company websites, advertisers are throwing sponsorship money at traditional media venues that appeal to specific customers. Right here in Geneva, Switzerland, my hometown, the local bankers association propped up the financial newspaper Journal de Geneve for 170 years… until figuring out that nobody looked at it. Similar thinking tends to continue until that old ‘accountability’ question is raised…usually by someone much younger.