Struggling to Make Sense of Google Earnings

In the wake of Google's recent earnings release there are few surprises. Financial analysts had a few takes on things to try to lend insight. But beyond that, I've been struggling with coming up with something interesting to say. Especially when you look at the bar graph of the last six quarters of revenues (from the slide show).

The word that fits all of it for the past six quarters is, pretty much: flat.

  • Total revenues are flat.
  • International revenues are flat, though slight trends upwards have been noted.
  • Revenues from search ads are flat.
  • Revenues from the content network are flat.
  • The stock price is basically flat (down 8.9%) over the past year. Then again, it depends on your perspective. It's up 40.9% over the past six months.
  • Over the past one month and over the past five days, the stock is within 1% of where it traded at the beginning of the period. Can you say flat?
Some things have to be up a bit (total paid search clicks for example), so that these other numbers can actually be flat, because some other things are down.

Down:
  • CPC's, especially in some competitive bid-war-driven areas
  • Your mileage, however, may vary.
Also down:
Which means that:
  • Profit is up.
So:
  • It's business as usual with an ever-growing cash pile at Google. The company has added over $3 billion to its cash on hand over the past 6 months.
  • World domination is still on the agenda.
Maybe Google's world isn't as flat as it looks.

Google Doesn’t Lack for Transparency for Individual Tentacles, But the Whole Octopus Scares Us

I just wanted to clarify the previous post, given that blog tone can sometimes be as brittle as email.

Compared with the ‘typical’ company, Google has shone far more light on advertising performance than any company that has come before it. If all it had done was to come out with Google Analytics, advanced segmentation, free to everyone, that would have been enough. But in addition — save for a few quibbles — the advertiser has pretty much gotten their wish on all kinds of disclosure points. Running a placement performance report in the AdWords back end, for example, gives you minute information about the click and conversion performance of publisher partners. While such info may be too strict for those seeking reach and frequency to build their brands, it is surely nice (more than nice) that it is offered.

In releasing Google Webmaster Tools on the organic side, Google also took a major stride forward in communicating with site owners about their page indexing status, the true status of inbound linking, etc.

It’s not like we haven’t been noticing this stuff. It is worth noting though that such disclosure and communications have been hard-won. Folks on the outside needed to clamor for them, and there needed to be advocates inside Google willing to spearhead those initiatives.

We’ve written about Google’s transparency previously, here and here. This transparency has been insufficient to convince some analysts, however.

Exceptions:

  • We don’t know the exact specifics of how the AdWords ranking algorithm works, especially on landing page and website quality and anomalous words like trademarks or just weird stuff that seems to get you into more trouble. That said, Google publishes a lot about the Quality Score recipe, publicly (anyone who says they don’t is blowing smoke). And spokespersons, primary among them Nick Fox, Frederick Vallaeys, and Hal Varian, have always been extremely forthcoming about details. Nick in particular has helped to combat common myths, including some I tried to dispel here in a Landing Page and Quality Score Refresher over at SEL. In hindsight, it was quite a bit easier to overcome snake oil stories about the ranking formula back when it was essentially CTR X Max Bid. The funny thing is, that’s pretty much how it still works, outside of a few quirks and exceptions. But by making the algorithm sound so sneaky, Google has opened the door to an endless procession of seminars by “experts” (mea culpa on this also), and has indirectly allowed old-school SEO companies to re-enter paid search as the kinds of “experts” who never feel like they’re delivering a service properly unless their spreading FUD and doing a number on their clients’ brains. Quality Score Fascination has risen from its opacity, and has indirectly distracted some marketers from marketing. For example, you really should test landing pages for your users and for business results — not to make Quality Score happy!
  • Disclosure is relatively poor to AdSense publishers;
  • Search partner traffic still performs worse than Google Search traffic, but you can’t bid it lower (though you can opt out). This makes it actually worse than content targeting (placements) today.

Flies in the ointment:

The many products Google has now developed fall under the broad heading of “free” stuff that comes with hidden strings attached, as addressed in Chris Anderson’s new book. Google is a Super Funnel (or perhaps Mega Octopus is a better term) that actually relies on the fact that the terms and conditions of engagement with any given tentacle don’t adequately capture the reality of the fuller relationship you’re developing with the company as a whole. In that sense: you cannot criticize great, free products like Google Maps integrations and GMail… you just can’t! After all, they’re great, and they’re free. So why is it that at some point, these wonderful gifts start to make everyone feel just a little bit uneasy?

Maybe that’s why I like to focus on their advertising program. You pay. I can wrap my head around that.

Google’s Products Seem Designed to Make “Criticism” Beside the Point

Google’s Matt Cutts generously admits that Googlers are too defensive when it comes to criticism nowadays. On further reflection, though, it will take a lot more than an attitudinal shift to change that state of affairs. Google, it turns out, is now a very large business that has designed so many of its products with the façade of “automated and therefore uncontroversial,” those few years of entrenched anti-institutionalism will take many years to undo, if the problem is even recognized.

As a business owner seeking to transact with Google, your sense of puzzlement may only grow if you’re brutally analytical about what drives Google’s economic engine. Isn’t Google, at the end of the day, a classified advertising company like Craigslist or Yellow Pages, making money from highly targeted advertising? And don’t those companies basically explain how their products work, and have clear mechanisms, rules, customer support protocols, and yep, in some cases, sales forces, to work in a relatively ingratiating fashion with the relevant customers and suppliers? Some of Google works in this way. Most of it does not. And most of us are still having difficulty grasping how we’re supposed to interact with the 95% of Google that doesn’t operate in this fashion.

This isn’t primarily an issue of Google not taking input into the design of its products. It’s particularly good at that. It now uses beta councils to take expert input into many products, and of course it’s got the world’s biggest user community to help it refine everything.

No, it’s a deeper issue of how Google interacts in the transaction of business when it comes to a wide variety of products and how they will affect customers and partners. The informality of the thinking here was appropriate to a much younger company, but is bewildering as the company reaches maturity. They’re not alone here. The bizarre amateur hours, arbitrary decisions, and laid-back communications that Facebook and Twitter users and partners are subject to are easily enough explained away by those companies’ youth. Google is of course going to be held to a higher standard given the privileges they’ve enjoyed with growth, including enormous material gain in a competitive landscape.

My awareness of this broad issue began growing when I began to piece together the shift from older generations of the advertising rules and algorithms to the newer generation, dubbed Quality-Based Bidding. Don’t get me wrong: as an advertiser, technologist, economist, and user advocate, I love the elegance of Quality Score. But it twigged me to a deep shift that was incorporated into algorithmic changes. A host of editorial rules and policy discussions could be baked into what was now referred to an “algorithm,” not editorial policies. While Google kept its published guidelines for landing page and website quality (and indeed beefed them up), it’s safe to say the theoretical need for human explanations, interactions and appeals was reduced greatly; it could, if Google wanted, approach zero. To the average observer with a background in placing advertisements in classified media, that looks like one introverted company! Especially one taking in $21 billion a year from that very revenue stream.

I had become more dimly aware of this issue when shifts occurred in how Google administered their AdSense advertising program from the publisher side, introducing Smart Pricing on clicks, so that an actuarial-style system determined how much less than the market bid price any given publisher should receive for a click, in order to reduce advertiser disgruntlement. That shift, too, had reduced the need for open policing of publisher partners, and over time advertiser satisfaction indeed went up. Efficiency triumphed, and the thing Google fears the most — people in positions of authority taking responsibility for editorial judgments — was submerged.

If these two highly public and highly controversial revenue generators were reduced to mostly algorithmic formality, just imagine how easy it would be for this company to tell that same story about all of its other products. Thus delaying, possibly forever, the need to develop old-fashioned institutional means and published rules for how the company accepts content and money from the many businesses and consumers attempting to interact with Google.

I dedicated Winning Results with Google AdWords (2nd ed.) to Bill Gates, perhaps as another small cry in the wilderness stating essentially this: It was pretty easy for Google to make decisions to avoid “being evil,” and to look a lot less evil than Microsoft, back when it was an an apples-and-oranges case; Google small (as Matt Cutts points out, “many Googlers, especially old-timers, still think of Google from early days, when we were the underdogs in search”), Microsoft incredibly large and successful in its goal to lock users into its workflow environment. Things are now moving closer to apples and apples, or should we say oranges and oranges given that there’s an Apple in this mix too. In releasing an OS, Anil Dash judges Google to be stepping into its “Microsoft moment.” He doesn’t say that is evil per se, but the primary accelerator of Microsoftishness (whatever it means, it was a moment/character that, for Microsoft, began as early as 18 years ago) is insularity.

Controlling for degree of difficulty (company size, global domination, etc.), it’s quite possible that Bill Gates will ultimately be judged less evil than Google’s founders. By dedicating a book about Google’s main revenue stream to Gates, I guess I was just saying: let’s hope it doesn’t become so. Let’s hope Google starts to recognize when they’re competing too hard, too aggressively, too selfishly against all and sundry (including, sometimes, valued partners and allies). Anil Dash’s analysis suggests cheekily that this will require the company to acquire Theory of Mind (something a two-year-old doesn’t yet have).

One of the biggest tests of whether Google has the capacity to continue living up to their early ideals is precisely in the company’s ability to accept constructive criticism. It’s perfectly understandable for ordinary people to be a bit touchy in response to criticism. But when you’re an entity worth over $100 billion that last time we checked wasn’t formally in the business of eradicating diseases or helping old ladies across the street, thicker skin is going to have to come with the territory. This is what folks like Danny Sullivan (in The Google Hive Mind) and Anil Dash have been alluding to; and it’s great to see yet another example of Matt Cutts’ legendary openness.

I guess people like me and a few others (including Google “oldtimers,” some of whom have moved onto places like Facebook, and Danny) feel a certain stake in the outcome, in the sense that over the years, much of what we’ve written has been accused of being too pro-Google. That’s never been true, but we’ve certainly got a responsibility to be even-handed and to serve our own customers and readers – not Google’s PR objectives (whatever we might guess them to be). I suppose Google may just have to get used to it.

Google has a million things going for it, but it’s become a puzzle for those running businesses that are directly impacted by its decisions. That now numbers in the millions of businesses.

Mature companies develop institutional frameworks and transparent processes that manage their various lines of business. For the past few years, Google has made sometimes halting starts, other times major strides along these lines. But to take just its core area of search, Google today is now a patchwork of aggregation products — news, real estate, reviews, video, product search etc. — that have no common framework for submissions or membership. Communications and criteria often seem to be afterthoughts, and the community around Google (often supplying either content or dollars to Google) is left to scratch its head and wonder what the rules really are.

Looking at it in the context of the history of search, Google’s many search products today stack up as similar to directories, classifieds, or paid inclusion schemes from the past, but without clear explanations of the role of editorial, without the explicitly paid parts, and without stated rules or expectations for what next year’s rules might look like. For why Google is to its own core products as 1896 was to public administration, see The Progressive Era.

(AdWords, for all of its complexity and layers, is in fact a major institutional force at Google and its main cash cow, so is largely an exception to this rule.)

Over the years I’ve met more than a few Googlers who haven’t felt the need to check every statement against the formal public relations protocol. Let’s hope their light is never extinguished.

But it will likely take more than some frank commentary or a different attitude to reduce the ecosystem’s growing bewilderment with Google. There are too many products — even counting only search-related ones — that face towards the legitimate, earnest, content-producing, advertising-dollar-spending community with a set of coded, impenetrable, quasi-rules. Will a new generation of Googlers be empowered to create relationships with affected businesses in a framework of institutional transparency and consistency, or will we continue to experience a “hey, we’re just little guys from Mountain View” culture that spits out a confusing array of search “products” with the claim that their conception and impact is entirely scientific and that there is no editorial function or implicit, shifting rule set lurking underneath, just daring you to try to figure out what they are? In that kind of culture, you can’t blame Google PR for being tentative and difficult to communicate with. In many cases, they wouldn’t know what to say unless given a script; any more than you or I would.

How to Increase Browser Market Share: Release an OS

Wow. A Google Operating System. We all knew it was coming, but it still feels weird to talk about it. It's a major departure from Google's humble roots... but it's a departure that left the station years ago, of course. Where better to read about it first than from Danny at Search Engine Land, though (wait for it) the very first mention of today's news item that I ran across happened to be by a fashion and entertainment reporter I happen to follow on Twitter. Hmmm.

The #1 browser in the market, IE, has long been buttressed by its integration with the world's #1 selling computer operating system. The ever-stronger #2 OS, Firefox, is not similarly blessed, making its rise even more impressive. The #3 OS, Safari, also has tight OS integration as its main beneficiary.

Google's browser, Chrome, is still languishing in fourth spot with 2-3% market share. I predicted they'd reach 7.5% share at least by 2010, and no more than 16%. Their chances of reaching 7.5% increase significantly if netbooks are sold containing the Chrome OS, but there's still a long ways to go. Inertia rules.

One open question facing all of this is: what's the business model with a free OS? Most of Google's lines of business outside of the ad-supported media continue to be cost centers. As the company grows, its profit margins continue to shrink. But perhaps taking over the world -- to say nothing of releasing cheaper, better software -- is more interesting than fat margins.

First dismissive mention of a potential Google OS on Traffick: November, 2003.

Google, The Portal, in New Land Grab

The portal wars are back! This time around, perennial winner Google isn't battling it out with Yahoo, AOL, Microsoft, and, er, Excite and Snap.

Rather, it's left with the rather easier task of sucking the oxygen out of the rooms vertical players like Zillow try to breathe in, and then battling any potential public image drawbacks to its growing status as a vertical-devouring meanie.

In the wake of Google's entry into the aggregation of property listings, Hitwise's Heather Hopkins notes the importance of the vertical: last week, 2% of Google traffic was sent off to listings in the real estate industry.

This brings up the potential contradictions and disingenuousness of the search engines' efforts to tout the merits of what's being called Universal or Blended search. The "death of the ten blue links" is a sexy way of dismissing clunky old search results pages and opening the door to a new age of more context-sensitive search results, to be sure. But when directly asked if the strategy isn't a way to keep more users on their own properties rather than sending them to those "downstream" sites Hopkins et al. spend their careers following, the search engines generally indicate something to the effect that they would never contemplate such a thing, or would "weigh these decisions in light of what's best for the user." Perhaps. But as predicted, Google's moves into blended search have done little to increase traffic (for example) for any video streaming site but YouTube. You can often extend that principle to other elements of these blends.

As Hopkins notes astutely: "The real question for Real Estate websites is whether (and when) property listings will be included in the search engine results page on Google.com." The search engines have plenty of alibis handy for their land grab behaviors -- for example, they've built out a variety of metasearch and aggregation models (such as Google Video and Yahoo Video) that offer due credit to a variety of third party providers. But the real power comes from that first page of SERP's -- the ones we keep such close watch on with heat maps and Google Analytics referral statistics (when they do refer traffic downstream, that is). Google isn't sending you from Google.com to some other provider of news headlines; it's sending you to Google News.

The powerful utility of the new tools tends to soften the fact that the major search engines are essentially moving back to a walled garden concept reminiscent of the old AOL, minus the wall and the subscription fee.

In the meantime, data providers are left with difficult choices: do I give all of this data/power to large centralized players with little hope of a formal agreement, let alone any explicit conversation or setting of positive expectations about outcomes? (In the tradition of Google Base and the public relations strategy around that: "Here it is. It's really important. Go nuts.") It's this ambiguity that has led more observers to refer to Google as little more than another "scraper site".

Ironically, such accusations are sometimes levelled by the purveyors of similar quasi-scraper schemes. It takes one to know one. In real estate as in so many verticals, any land grab is going to be reminiscent of a scene from Goodfellas. Arguably, though, sites like Zillow have made great headway in connecting personably and directly with homeowners; encouraging them to voluntarily join in an information exchange and convincing them persuasively of that benefit. Google has done nothing of the sort.

At the end of the day, I think (hope?) the search engines recognize the dangers inherent in leaving originating data sources and content providers devoid of traffic and income, so it is a matter of how much traffic they continue to send along to third party vertical players, rather than being an all-or-nothing scenario. Taken too far, companies that purport to be dialed into their core competency in "search" -- the implied mission being to send traffic downstream to originating content providers who've made heavy investments in content and community -- would morph back into walled-garden, AOL-thinking portals.

Gian Fulgoni, Where Have You Been?

Really, it's not becoming my favorite thing to name names in headlines. But in light of Mr. Fulgoni's deliberate (if lighthearted) provocations of online "direct response" lovers, we must fight fire with fire. Or at least, on this statutory holiday, fireworks with fireworks.

When I read that comScore founder Gian Fulgoni yesterday told eMarketer that the "preoccupation with direct response" is "partly a response to so many young people being involved in Internet advertising," I nearly fell off my Big Wheel.

I suggest a different reason for clicks and sales conversions as key metrics in the marketing and advertising industry: they're objective. Much like:

  • The radar gun that tells the police officer you've been driving 20mph over the limit, in response to your opening salvo: "...but I was just having a nice, zippy day."
  • The 7.5 second time in the 40-metre dash that tells the college coaches that your son has zero chance to become a wide receiver at that level, let alone the pros, as opposed to "my boy has a big heart -- as big as they come!";
  • The growth in net profit that helps investors decide whether or not to buy Comscore (SCOR) stock;
  • The thermometer and hygrometer that tell your furnace, air conditioner, and dehumidifier/humidifier when to turn on and off;
  • Countless other measures of obvious stuff.
If measures of "brand lift" also prove useful, then so be it. But the interest in measuring the more obvious stuff didn't get dreamt up by some imaginary cabal of literal-minded rave-going Youth. Rather, it appears to be an unholy alliance among people called Clients (the ones with the dollars to spend on more measurable digital media channels, who by the way got burned by brand-speak in Bubble I in 1998-2000); Web Analysts and the inventors of tracking methods, software, etc.; and Customers (who often use online tools like search and classifieds to avoid being bombarded with off-topic commercial messages). The Designers of the Medium Itself (eg. Tim Berners-Lee) and the surfing tools people use to access the medium (eg. Lynx, Netscape) created something called Standards and Conventions that created Expectations in Users, later codified and explicated by the Usability Gods.

Performance-based media? Clients ask for it by name. Customers don't shrink from it. Perhaps that's why upwards of 60% of online ad spend goes to the combination of search and classifieds/local.

If we're going to tout the benefits of "all of the other media that impact a person's psyche," then shouldn't we hold them to account as well as singing their praises -- specifically pointing to their enormous cost, and at least attempting to measure the benefit?

On a serious note: online, there is still a shortage of the types of quality places to engage customers, to start conversations, and to (without making them rebel) place decent "demand creation" messages. Then again, are we conceiving of "online" too narrowly? A celebrity touting a hot new camera will find herself on TV ads and billboards at the ball park. But in my mind, those are all potentially "digital, measurable, targeted, and auction-efficient" media channels.

Creating new kinds of (digital and measurable) demand-creation media spaces isn't as easy as it looks, perhaps because of the conventions and expectations cited above. Nor is it impossible. The Internet isn't TV. It really isn't. That does not, of course, mean that we should close off innovative conversations about what digital might become.

Why Razorfish Divestiture Now?

Back in 2007, we briefly reviewed the major M&A activity in the digital ad serving technology and digital agency spaces. Many of our panel observers felt that Google and Microsoft should immediately divest themselves of the agency parts of the DoubleClick/Performics and Aquantive/Razorfish acquisitions, to clear out some of the conflict of interest inherent in major agencies owned by the sellers of supposedly performance-based, impartial media platforms.

Google moved relatively quickly to divest itself of Performics, whereas Microsoft held onto the Razorfish business -- until now.

Amazingly, the $6 billion acquisition of Aquantive counted as Microsoft's biggest ever acquisition. Considering its size and clout, Razorfish (formerly Avenue A | Razorfish) has had a relatively quiet two years since then. Perhaps this can be chalked up to this mega-agency's DNA; its first go-round in Bubble 1.0 was in the fast-hiring, website-overbuilding, overvaluation heyday of 1995-2000. And the company still seems to favor slow-loading, expensive-to-build, semi-indexable pages. Like ALPO, a recent client win for Razorfish, could it be that Razorfish represents a previous era of overpackaged, overstrategized goods with the same old ALPO inside the can?

While some may ask why Microsoft is selling this business, Daily Finance reporter Douglas McIntyre proffers: "What it is doing with the company in the first place is anybody's guess."

Certainly, if the long delay in selling Razorfish was helpful in demonstrating that Microsoft's decision-making process was totally independent of industry opinion that they should divest sooner, the delay was effective. Unfortunately, the value of the asset may now be sharply reduced. But so are many assets... such as the parts of Yahoo Microsoft is still considering strategically partnering with or buying.