5by5 | The Critical Path #18: Who's Paying for My Lunch?

Dan and Horace ponder why some companies are more mysterious than others. We ask whether transparency and simplicity of business models is a sign of strength or weakness. We compare the measurement, creation and capture of value and why we should celebrate the mortality of businesses.

via 5by5 | The Critical Path #18: Who’s Paying for My Lunch?.


  • Regarding how various people use their blogs, most are streams of unchangeable snapshots, like a camera roll.  I arrange all my posts in a structure and each post is allowed to be continuously updated.  It’s more like a living resource.  It definitely affects the dynamics of what gets posted for sure, but I think it’s harder for people to deal with since it’s unconventional.  But there are benefits too.

  • Anonymous

    Horace, aren’t the advertisers paying Google for click throughs the ones paying for your Google Services Lunches? It’s assumed the Google search result readers who buy services displayed on those click throughs are ultimately paying but this is something to question. I believe advertisers are being over charged, but few alternatives exist for similar search service right now – maybe Amazon’s Silk and Siri can compete there?

  • af

    Horace listening to the podcast and that bit about Google and who pays etc. I think the insight is great – I have been saying the same thing: Google is great and I use them everyday – I actually make a lot of money with AdSense – but – I never click an ad, and I don’t pay for anything – Gmail,  Analytics, AdSense, Google docs, etc. I actually believe that Googles ad revenue could potentially one day hit a wall if more and more people are educated to what exactly are ads (as opposed to content). Meaning – I know from user tests on my own websites that many, many people (especially older adults) click on text based ads and have no idea it was an ad! I don’t want to say that Google ads are a Ponzi scheme – but – they are I think in a bit of a mess in their honesty and integrity (specifically the text based ads). The other huge problem which I think they do an amazing job of keeping out of the public eye is click fraud. I have talked to ad network reps were 90% of applications (to the ad network to show ads) have been fraudulent. I have had checks sent out in my companies name to fictitious third parties! (People signing up for ad networks using my companies URL and then performing click fraud or CPA scams).

    The other issue for Google with me at the moment is that as indispensable as they are to someone like me who works on line, they are actually (talking about search) almost USELESS at this point. Think about it – we needed Google ten years ago when the web was a mess, a lot of companies and or brands did not have websites, and stuff was generally hard to find. The main part of Googles algorithm was always the link juice – who linked to something using what text. But now everything is indexed and “known” if you will (and not only by Google but many other search engines). For example I don’t have to type in some crazy phrases or spend any time trying to find BMW or Apple etc. I just type BMW or Apple into Google (if I am too lame to just type it right into my address bar and add the .com).  But I am not really “searching” for anything – I know exactly what I want and expect to find, and Google’s “search” at this point  is much more of an index then when it started. It really is more like a Yellow Pages or directory, but with no table of contents. You don’t really get the wrong thing – if you know what you want. (Not sure if I am wording this right – but it made sense when I was talking to someone the other day). I think part of what I am trying to say also comes from the website owner side – as a consultant I am now telling people to forget about Google – just make the best website you can with the budget you have, and then spend on advertising to drive traffic. If the site is good and relevant, it will eventually show up for relevant searches (again the nuance here are so fine and multilayered – between selling things, services, small companies, large, etc.). 

    I do think that at some point they have to start charging for some of their services – Gmail, Analytics, etc. It would be impossible for someone like me to say no. Especially if they could prove to me that they never make a dime from me from their ads, so I need to pay something every month.

    • Speaker

      Google can no longer use the “Do no Evil” slogan

  • berult

    Google’s ad business propels actual earnings. The Google sophisticated services users are ‘high yield’ gateways to massive behavioral informations other than consuming habits and reflexes, which are being taken care of by the upfront ad business. This trove of high quality data accumulates in information ‘vaults’ for subsequent easy transformation into potentially massive future earnings. No questions asked on deferred data usage and likewise on deferred revenues.

    It doesn’t have to be tagged with a personal identity for it to gather statistical momentum and therefore acquire over time enormous transactional value. You may not be charged for your personal usage of Google’s gateway-luring hoarding mechanism, but lo and behold, neither are you paid some blood money to make those servers humming along towards enlightenment-threshold monopoly. 

    Google is even more nodal than it is nerdy.The nodes being graciously outsourced at no actual cost to its financials or to its integrity to seemingly free-riding, albeit blind-sided, Google virtual-intelligence agents. What extraordinary quality of intelligence one can divert to its algorithms from a gatekeeping partnership with intelligence itself.

  • MOD

    I might be one of the ones to pay Google but don’t use it much.  As a merchant I pay about $15/month for search placement and such.

    There are many merchants who do so. I think it was in the news that Google paid $150 million to some DA for advertising Canadian pharmacies in the US. Why that sum? Because that was its advertising revenue over the years from Canadian pharmacies looking for search engine placement.

    That is a huge amount, but it was their (perhaps only) advertising budget.

    Companies are like that. They have an advertising budget and give it all to Google. If I were them I would too. They are the top search engine…

  • Andrew

    I liked this podcast a lot. I have to believe that Google hides a lot of its income and expense numbers since advertising is probably the vast majority of income, yet all of its other activities are the expense. Stockholders wouldn’t like, and I don’t think the ad customers would either, if they saw the real numbers.

    How are they going to monetize Android? Perhaps they have the same problem that Sun had with Java … great stuff, indispensable in many cases, but never have so many been given so much for so little for so long – and now there is no way to start charging. (perhaps unlike Java, Google has to worry about legal liability as an additional Android operating expense ???)

    ( Brian Hall’s smart phone wars blog covers these ideas all the time)

  • beautiful freak

    You mentioned Google’s duty to shareholders, but Google shareholders don’t have typical voting rights. The public holds Class A shares with one vote each. Google founders hold Class B shares, which grant ten votes each. There were 7.8 million Class A shares released in the IPO and 86.7 million Class B shares created which are retained by the founders. However, the founders are selling off their shares gradually and will have less than 50% voting majority by 2014.

    The whole strategy of Android could be (cynically) to prop up the price of Google stock as the founders divest their shares to the public.

    • beautiful freak

      These numbers came from disparate places. Something seems wrong about the numbers, if the sell-off of Class B shares relinquishes so much voting power. I think the CNet piece must be right, so did my source for the number of Class B shares get it wrong? (86.7 million should be much lower?)  It’s still a huge sell-off of stock by the founders of Google, which could account for your question about who’s paying for your lunch.

  • Google is a weird company. They have to be mis-allocating a ton of capital. Most companies allocated resources (engineering, support, marketing, etc.) based on their product’s profit/revenue contribution. How do they even determine the ROI on Android, Google Docs, Gmail? 

    There is also something perverse about plowing profits from a dominant position in Search into other products and driving the price of those products to $0. How many companies can compete with free? Consumers are happy with free products, but where is Google’s incentive to improve the products once there is little to no competition. If search is ever disrupted Google becomes a shell of itself…

  • Anit Pasta

    The concepts already mentioned of monetizable ‘data vaults’ and of Google as an advertiser, rather than a search engine, first and foremost from the financial perspective, seem really spot on. 

    To the advertising angle I would add my stating-the-obvious two cents, that Google is a tremendous disruptor of the advertising industry, and especially of advertising valuation. 

    Web ads ad Google ads in particular have enabled pinpoint insight into the efficacy of advertising from placement through ‘conversion’ for many goods and services. Meanwhile Google continues to produce tools that reduce the costs of creative production to the advertisor, providing a great challenge to the immense sums associated with ‘professional’ creative services and legacy ad platforms. High end advertising costs a fortune, the amount of money that goes into producing a corporate level print ad is mind-boggling, especially considering the resolution of the data about consumers generated by such an ad. 

    Products like the speculative Apple TV will probably increase the accountability of TV style ads in the future and further put downward pressure on creative pricing. Maybe.

    Anyway Horace, tremendous show as always, but I think to gain insight into Teh Google one has no choice but to develop a deep understanding of the industry of advertising.

    • I agree. Advertising is a fascinating industry. There is much to learn.

      • Michael Corrado

        There was a time when Google refused to monetize search with advertising. Google ads are unobtrusive because Google originally didn’t want to get into advertising in the first place. They just wanted to provide the best search service possible. I like that about the Google story.

        They want to out-hack the other hacker geniuses, to be cool, having savoir faire about tech. It’s an academic fun exercise at some level for them, which is good. They just want to assert their superiority as geniuses, in the fun and amusing ways that geniuses have contretemps with each other.

        These business responsibilities must really drag them down. They proved themselves a decade ago. Sigh, why do they have to keep going to the office every day?

        Google and Apple are so much alike in how they appreciate the joy of tech. I don’t think that Google has ever enjoyed its advertising prowess. They didn’t want it in the first place. Larry and Sergey don’t want to be these guys who keep a database on everybody in the world, in order to sell products to them in the most efficient manner possible. Criminy, what a nightmare that must be for them, to be portrayed as those kinds of guys.

        I’d suppose that they want to be like the heroes in the movie, Real Genius. They want to save the world from biz whackos, not to innure the world to them. The way that business works, though, maybe there’s no choice, and they just have to take off the false moustaches, put down the cloned ROM chip, and forget about all of that popcorn.

  • Anonymous

    A few examples of indirect ways that Google might make money from the things they do:
    1) Even if Google doesn’t directly benefit financially from geek users, these people are thought leaders and direct a lot of other people to their products. 2) I imagine their ad rates depend on addressable audience, even if you don’t click through.  3) Making cool products helps Google recruit top people, which benefits their search product.  4) iGoogle surrounds their search box with a lot of other Google services, making their search stickier.    5) Even though I don’t click on Google ads, they do see most of my shopping search behavior, which is probably valuable to them. 6) Watching the searches of sophisticated people may help them bias and improve searches in general, and so hang on tighter to their “paying” customers. 

    Apple seems to have a philosophy that if they focus on great products, they’ll end up making more money than if they focused on making money.   Google may have a similar faith, that if they focus on many aspects of being a knowledge conduit, they’ll end up making more money than if they focused just on the parts that are making money right now.

  • I used to work at a Facebook game company, where we had to think a lot about exactly how much money we would expect to make from users, taking into account the fact that most users weren’t going to pay us anything, just like Horace doesn’t lead to any direct ad revenue from Google. I’ll go through some of the calculations (though they’re pretty obvious, I suppose), in case that sheds light on any of the Google stuff, though the situations aren’t all _that_ parallel.

    The basic question: how much are you willing to bid on an ad? You don’t want to bid more money than you can expect to make in profit from that user. And of course that’s a statistical question, you can’t hope to begin to answer that for every individual user.

    One starting point: you can measure how many users you have, and how much money you make, and calculate the average amount of spending per user. Which is already a little problematic, because you only know how much users have spent in the past, not how much users will spend in the future – maybe it makes sense to measure the average daily spending per user and the average amount of time a user will play your game before giving up (measured, say, as not playing at all for a month), and use that as a proxy for expected value from a user.

    Of course, not all users are alike – e.g. you might want to segment your audience by gender (it makes a lot more sense to show Mafia Wars ads to men than women) and by age. Facebook is happy to let you bid differently on those populations, as well as the country of origin of your users. (And Facebook is also happy to not show ads for your game to people who are already playing that game.)

    But that alone isn’t enough – not all users come in through ads, many users come in through messages from their friends. So say that, on average, each user convinces .5 of their friends to play. Then that user is really worth 1.5 times as much as they’ll spend directly. Or, probably, 1 + .5 + .5^2 + .5^3 + … = 2 times as much as they’ll spend directly. So if you take that into account, you might be willing to bid twice as much for that ad click as you would otherwise.

    Also, the company that I worked for didn’t have just one game: it had a bunch of games. So maybe a user who comes in through an ad might not spend a lot of money on that game, but there’s some chance that they’ll start playing one or more of your company’s other games, and spend money there. (Or pull in their friends to those games.) So there’s some sort of multiplicative effect going on from cross-promotion.

    I suspect that some of these have analogies to Google’s situation. (Though some of those analogies are stretched!) Google’s portfolio of products seems somewhat analogous to the cross-promotion situation: I’m sure some products bring in more direct revenue (via ad clicks displayed on those products) than others do, but maybe those lower-profitability sites bring users to other, more profitable products? And for the friend analogy, I’m sure Google gets some benefit even from adblock users using their product – if a noticeable chunk of people who are technologically inclined enough to use adblock switched to a different search engine or e-mail provider, then I bet they would influence a large enough swathe of non-adblock-users to have an effect on Google’s income. (So that’s like the friend multiplier I mentioned above.)

    I’d be quite surprised if Google didn’t have internal metrics related to some of this stuff – e.g. on how much revenue they get on search clicks (within their regular search) from, say, Google Reader users versus non-Reader users. It’s not completely obvious to me how to use that last number – e.g. if Google Reader users turn out to be less profitable, does that mean they should get rid of Reader? I’m sure the answer to whether or not Reader is profitable for Google isn’t as simplistic as that question, but it’s definitely one that I would want to know if I were making decisions about that product.

    Hard for those of us outside Google to see that sort of info, of course.