The Google economy

I think there’s something more fundamental happening in Google’s rousing quarterly report yesterday than we’re seeing in the news reports about it (which are mostly eating crow over predictions to the contrary).

I think we’re seeing a new definition of “the economy.”

The old definition meant and measured the performance of big companies and their impact on each other. This was especially the case in media and advertising, which served only companies of a certain size because only large companies could afford to advertise in large outlets. But Google’s marketplace for advertisers of all sizes represents the small-is-the-new-big economy: no limit of small enterprises that can now add up to a critical mass. The fact that it is an auction marketplace also means that this economy is more fluid; it fills in voids.

So for example, when there’s an economic downturn that affects, say, travel, that will affect a magazine like Condé Nast Traveler; airlines and hotels of a certain size will advertise less and there aren’t new advertisers to fill in that void at Traveler’s price. But on Google, if American Airlines and the Ritz aren’t buying the keyword “Paris” this month, there are no end of advertisers who will step in to buy the word. The price of that keyword may decline. But in Google’s very broad economy, the prices of other keywords (e.g., “credit”) may rise.

And because this is a pay-per-performance marketplace and Google is motivated to continually improve relevance and performance, it is not a market driven by scarcity of space or audience. That makes it hard for old measures of the economy and media to figure it out. It doesn’t march to static metrics like fuel costs affecting prices and dollar conversions affecting passenger miles, all of which affect paid ad pages.

This is apparently what threw Comscore’s measurements into a tizzy as it tracked what it thought was a drop in clicks on Google ads while Google said it was tuning its ad placement to improve relevance and performance. There was another variable in there that old economic measures could not predict. Were we clicking less because we were poor and depressed or because Google tuned an algorithm? No way to know. After causing a storm with this measurements, Comscore tried to back up and say that it wasn’t necessarily saying that Google would earn less; the market didn’t listen and punished GOOG by 100 points but last night it punished Comscore’s stock in retaliation.

This is also one of the many factors making old-style media — and, in some cases, economic — measurement inaccurate and irrelevant. I’ve been saying that measurement by sample is useless because you can’t possibly get a big enough sample to measure all the niches; Nielsen, Comscore, and the entire industry will fail in a small-is-the-new-big economy because they can never measure and add up all the smalls. They will also fail because measuring how big a media outlet is has become almost irrelevant: An advertiser buying in Condé Nast Traveler cares how many people read the magazine because the assumption is that everyone who sees the magazine sees that ad. But online, a sponsor buying ads at the magazine’s site,, cares only about the specific people who saw the ad when it was served on specific pages, and so the size of the overall site is largely irrelevant except as a filter to decide where to consider buying ads or as a bragging right for the site. (This is why, when I served on committees for the Audit Bureau of Circulations in the mid ’90s, we discovered that audits of total site audience were meaningless — nobody wanted to pay for them — and all sponsors wanted audited was the serving of their own ads.)

But the pity is that ad agencies and stock analysts, reporters, and stock buyers still pay attention to these outmoded measurements and the companies that push them. That’s why GOOG went down 100 points while the company’s revenue soared 30 percent. They were selling on the wrong measurements that led to the wrong assumptions. But mere methodology won’t help. Why?

The Google economy is just different.

(Disclosure and caveat: I bought GOOG at 512 and now don’t feel quite so stupid for it, but I did feel stupid in econ class.)

: LATER: The NY Times headline this morning said that “Google defies economy.” Perhaps that’s a typo. Should it be “Google defines economy”?

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  • Michael Katcher

    Don’t begrudge the misguided stock buyers Jeff. I think Google is an excellent company, but I wasn’t buying their shares at 700. Without these short-sighted fools, we never could have gotten such good buying opportunities.

  • Google seem well placed to ride the falling dollar as more of their earnings are from out of the dollar zone. In fact I think without the falling dollar the analysts would have been correct for the last quarter.

  • Michael Katcher

    The problem with that theory Geoff is that the analysts were aware of the falling dollar. Without the falling dollar, the analysts would have forecasted even lower earnings.

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  • Ross Bradley

    With the falling dollar, there-in lies (in part), the true Google story.

    Google have told us that:

    “Revenues from the United Kingdom totaled $803 million, representing 15% of revenue in the first quarter of 2008, compared to 16% in the first quarter of 2007 and 14% in the fourth quarter of 2007.”

    That’s a Y/Y “decline” of ONE per cent.

    Google had also announced that its International revenues reached $2.65 billion, or 51% of its total, compared with 47% of the total in the same period a year earlier.

    Google’s increase in International revenues were only 4%.(Or,$106 million – Yes, that’s an increase of, only $106M on the $2.544 billion from Q1 – 2007)

    But Google had also told us, that:

    “Had foreign exchange rates remained constant from the first quarter of 2007 through the first quarter of 2008, our revenues in the first quarter of 2008 would have been $202 million lower.”

    That’s a “real terms” DECLINE (and one that is representing that 51% of it’s total revenues), of some $96M !!!!!

    A comment (elsewhere) asks, “Is it lost on everyone that half of the beat at the EPS line was driven by a lower than expected tax rate ” – (23.7% vs.consensus of 26.9%)?



    I don’t have the opportunity to read daily, so, when the weekend rolls around with a time slot open to catch up my reading, yours is one of the top 3 blog-itorials I read.

    I *don’t* always agree with you; sometimes I agree with you, but your forceful manner makes me flinch. Yet, I keep you in my top 3 because you never fail to make me think. Thank you!

    As for this particular topic, you have it spot on. The Internet Revolution has changed business and daily life down to layers we haven’t even conceived of much less explored or discussed. That the metrics have “matrixed” should surprise no one; that we can’t continue to put “new wine in old skins” is our responsibility.

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  • Martin

    Well, everybody around tries to define web 3.0 – google own way, MSFT, Yahoo, etc…

    but it will not be them. They just cannot, even if they tried. so their shares will go up and down because of one fundamental reason – lack of information and lack of substantial priciples of web 3.0 which has not yet been understood.



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