We learned the fundamental law of Supply and Demand in Economics 101. The textbooks explain that shifts in demand cause corresponding changes in supply. No matter what the changes are, the point where the curves intersect sets the price of the good or a service. This law provides a powerful explanation for how markets come to equilibrium.
But this law makes important assumptions which are often overlooked - that supply and demand are treated as flexible and having unlimited quantities. In the real world this is simply not the case, because of the laws of physics. However the Internet, because it does not have geographical restrictions, changes the rules once again. So in this post, we look at some different types of supply / demand scenarios. Our conclusion (sorry to ruin the ending) is that Google is the ultimate money making machine on the Internet. Now let's find out why...
A classic example in the physical world, and perhaps the earliest example of urban business, is the mom and pop grocery store. Since Mom and Pop are mere mortals, their daily output is fixed. This simply means there is a physical limitation on how many customers they can serve. Hence, the supply is limited. Also, because it is a physical store, there are only so many people who can come to it - regardless of how good their stock is. Geographical locality implies limited demand. All of these physical limitations are bad news for mom and pop. No matter how hard they work, their revenues will peak and max out after they get to maximum efficiency at what they do.
Large corporations like Starbucks solve this problem by breaking away from one store and expanding into various geographies. This allows them to tap into economies of scale, where they are able to produce additional units of output at a lower cost - typically because of technology and know-how. Historically, geographical expansions are done by Franchising - the creation of independently operated units that obtain supply from the parent company, as well as maintain brand and comply with regulations. Curiously Starbucks is not technically a franchise, so it is perhaps the exception that proves the rule. In any case, a smartly operated franchise has the chance to leverage geographical expansion to generate exponential growth in revenue.
Surely the laws of physics apply to the online world? After all we use electricity to channel bits around and to power our computers. For example Amazon servers take up physical space. And finally, our brains consume real calories to generate all of the source code and HTML on this planet. Yet, the Internet is far from being bound by the laws of physics in the same way that the real world is. This is because there is almost no friction. At least, we do not perceive any friction when we drag and drop widgets or type our blog entries. Two facts: software is 'soft' and the Internet has no geographical boundaries. So this results in a completely different business scale and dynamics.
To understand this, let's start again with an example of a bounded online business. Case in point - a niche blog such as Read/WriteWeb. Again, as in the real world, the supply is limited. Our writers work around the clock to bring you fresh analysis posts about web technology, but the number of posts per day is limited - to say no more than ten. There is also a 'limited' amount of people that come to Read/WriteWeb. Now we are very successful blog and have a daily audience of over 80,000 readers, which is a large number, but still it is limited.
Finally, any blog has a maximum revenue that it can generate - dictated by the traffic and amount of advertising that it can present. So in terms of limitations on supply and demand, blogs are similar to mom and pop shops. But there is a key difference: scale. What local store would be able to serve 80,000 customers daily?
The difference in scale becomes more obvious when we compare Amazon to Barnes and Noble. Amazon started with just books, but after building the brand it expanded into many other categories - eventually surpassing Barnes and Noble. Amazon's revenue curve has a slope that is far greater than the slope of Barnes and Noble. The key difference: no geographical constraints in the physical sense.
Amazon (red) vs B&N (blue)
Despite Amazon's success, the very nature of its business model limits its potential revenue - because it is a web site. A web site is an online geography. Granted, it is not hard to find Amazon, but that is different from saying Amazon follows you everywhere when you are online. Amazon does not, but Google does!
In addition to being one of the top three online destinations, Google - through its text ads strategy - has managed to weave itself into the very fabric of the Web. In doing this, the company freed itself from even Internet geography and became ubiquitous. By empowering companies and individuals to publish Google ads on their sites, Google solved the unlimited supply and demand problem in one fell swoop.
So how does Google compare to Starbucks, which is a very good money making machine in the real world? The key differences between Google and Starbucks are:
These differences make Google by far the more attractive business, compared to Starbucks. To put it simply, Google has almost no friction.
Google (red) vs Starbucks (blue)
So one can't help but wonder: what model could possibly beat Google?
We are not talking about a better search engine; we are looking instead for a better, less costly and more efficient business model. At the moment, it is difficult to imagine what could possibly beat billions of links meeting millions of eyeballs daily.
However, human history is the history of progress and innovation. In the seventies it was difficult to imagine what comes after IBM and in the nineties it seemed that Microsoft was unshakable. So there has to be the next leap after Google. At the very least, making Google's model work in the mobile world would increase revenue, by hitting more eyeballs with ads more often. Google is, of course, already working on just that.
But beyond wireless, and in the decade to come, will there be a better business model than Google's current Internet model? Let us know in the comments what you think is going to be the next big business break through.
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Damn you, Read/Write Web, for making me think (;.
I've had a go at this topic a while ago, but I must congratulate you on a great analysis. I do find one flaw with your reasoning, though. Although Google might have an unlimited supply of whatever it is they're offering, so does everyone else. It's an unlimited supply of unlimited suppliers.
That's why they have to figure how to beat zero switching cost. They're doing a good job, though, by making users give them their data. But, everyone else can do it, too. It's going to be an interesting fight.
Posted by: Stan Schroeder | April 11, 2007 1:33 AMThis article has a great way of explaining the phenomena that causes services like Google & so many others to almost endlessly grow. The Boundaries of the mom an pap store are geographical, where Google's are privacy (somethning mom and pap don't worry about).
In fact, the success of all 2.0 things is in my opinion a shift form the classic value chain input -> output (starbucks, B&N) to a value chain where the end-costumer is actively contributing to the value in the chain. Kelkoo, Myspace, Google, etc.
Api’ing services (like adsense) enlarges the reach and effect of the 2.0 value chain, but is not proprietary to Google.
Posted by: Sander Hoeken | April 11, 2007 2:03 AMGreat post .. but I guess you became a bit too enthused in naming Google the king ... I have some reservations to your assumptions ....
1. "Starbucks spends money on expansion, but Google ads spread themselves;"
Not exactly - every time a new site syndicates Google Ads - the load on Google's Ad serving engines increases - so even Google will have to keep investing in increased server power and better software to ensure good response times.
2. "Starbucks spends a lot of money on maintenance, Google spends little;"
You got this one completely wrong. If Google spends any money - it spends it on maintenance only. If not, how do you account for the money spent on hiring the best grads from college giving them top notch salaries and excellent offices to work in - so that they can work towards creating better and better Ad match technology, which makes Google Ads more and more relevant and better targetted
"Starbucks spends money on marketing, but businesses flock to Google because it just works;"
Wrong again!! Google survives because of its immensely popular search technology. Google spends millions in improving its search. The "Google Search Engine" is the marketing tool for "Google- the company" and any spend on improving it (even maintaining it - every day Google adds millions new pages to its pagerank index and also re-caches old ones) goes into marketing for Google Ads.
As someone has pointed above - all investments Google makes (even say in GMail, Blogger, Orkut etc) go into customer lockin for it and hence is a valid expenditure in customer acquisition and retention - which is what marketing is meant for.
"Starbucks relies on people, Google relies on software."
As a difference valid - but if meant to say that no money is spent because Google relies on software - you are again going wrong!
Posted by: Nikhil Kulkarni | April 11, 2007 2:38 AMNevertheless - I do agree that until there is another path breaking change comes in displacing Google just like it displaces M$ and M$ displaced IBM in the yore - Google will remain the "ultimate money making machine"
Google have rather shrewdly created their own economy based on adverts, with obvious pay off for web site owners. However, Google's ads are subject to perception and confidence, like the stock market. So it's worth remembering what happened the last time the perceived value of online advertising plummeted.
What if the perceived value of Google's ads plummeted? This could happen when various factors come into play:
* Strong competition for other text ads eating into Google's profits - Yahoo's new ad engine is picking up steam
* The public react strongly to the sheer amount of online advertising: filtering, ignoring, wanting to pay to get rid of them
* Smaller services create paid-for services with no advertising, digging into Google's investor confidence
The end result? Investors would lose confidence, Google's stocks would shrink, and Google would have to spend more (possibly exponentially) on people and hardware to climb back up to the top. It would be a battle against diminishing returns.
Meanwhile, smaller businesses would be built on monetary transactions for services and content, utilising syndication through micro or simply small payments.
I'm not saying it's doom and gloom for Google, but I am saying there's potentially a lot of money to be made by thinking small and simple. There's no need to _beat_ Google, just a need to think differently (and small instead of big).
Posted by: Alex | April 11, 2007 5:06 AMYes, Google a positive feedback loop of the first order.
Posted by: feedMashr.com | April 11, 2007 6:01 AMNice to see this broken down into basic economic theory. I would only point out that Amazon has learned from Google somewhat and is able to expand its 'geography' through the Amazon affiliate program in a very similar way to a real-world franchise type scenario.
Posted by: Mike | April 11, 2007 6:37 AMSilly claims. See my blog for further details.
Posted by: Sahar Sarid | April 11, 2007 6:38 AMI wouldn't say it's unbounded however, as it's the element of competition that provides some sort of boundary. If Google becomes complacent, other firms will catch up, and in the same way Google is placing pressure on more traditional companies (ex Microsoft), it also can come under pressure
Posted by: Owen | April 11, 2007 6:51 AMOne another excellent article from Read/Write Web.
Posted by: Srikanth Bhakthan | April 11, 2007 7:05 AMNice post Alex!
This is the most disjointed and ridiculous analysis I've read in a long, long time. You are confusing all manner of concepts and attributing them to "Economics 101". Sorry, but any decent economist would find a ton of holes in this post. For starters, the first paragraph states: "textbooks explain that shifts in demand cause corresponding changes in supply". That is not true. It can happen, but its not a given or even necessary. Changes in demand will usually cause a change in PRICE. Whether or not supply changes (in the long-er run) depends on other factors as well.
Honestly, you should reconsider this post. Usually the analysis here is passable. This time its not even passable, by a long shot.
Posted by: JP | April 11, 2007 7:38 AMGreat analysis and very well thought out. Both Google and Starbucks have similar "costs of goods" and large work forces. Google's workforce is considerably more expensive than Starbuck's. The difference is not friction in the marketplace, it's friction in product delivery. Google has almost no product delivery friction due to the self-serve nature of Adsense. Starbucks does.
Posted by: David Moss | April 11, 2007 7:48 AMResponding to a few comments: while Google's workforce might be a bit pricey, I think it would be a mistake to think that Google's revenues will remain tied to searching. In addition to things like the GoogleDocs, Google is investing some serious capital in bandwidth. The internet is not as unlimited as we might think: as more users upload/download large files (audio, video, etc), the strain will begin to hit ISP's hard. There will be increased demand for bandwidth. And guess, just guess, who's likely to own a large chunk of bandwidth? Guess who will be able to offer users another network with guaranteed high speeds (while the other ole www is choking)? Go ahead and guess.
Supply and demand: economics 101.
Posted by: mcs | April 11, 2007 8:38 AMA better business model is one that doesn't harness a locked-up, proprietary infrastructure and index. The next "Google" won't live on it's own servers...it will live on all of our machines and connected devices. Information (not just Software) wants and *needs* to be free.
Posted by: Spinchange | April 11, 2007 9:34 AMThe increase in the demand of bandwidth is likely to create a two-tier Internet. Those sites that can pay for users bandwidth and those that can't.
Whatever happens in the future, it's going to be both interesting and exciting!
Posted by: Graham F French | April 11, 2007 9:36 AMI think everyone except comment #2 missed the point.
Google's only limitation is in stretching the boundaries of our trust in them holding our personal information. This is a major issue that is not even slightly on the minds of the mainstream consumer yet. It has been covered before in many blog/magazine/newspaper articles.
Currently in my opinion the euphoria of the success of the second wave of Startups/Social-Networks/Free-Email/Cheap storage/etc is overpowering concern for the privacy of our online behaviour. This needs to change, Google should be thanked for changing the guards and reminding people that any company even Microsoft can be beaten(this goes for google too), but no one company should have more information on you than the government does.
If you even casually use google products, say the following ones:
Google Search
Your thought streams, of things you are interested in, or trying to find out about it. Pretty much the questions in your head.
Gmail
Your contacts(ie. all or part of your real world social network)
Your conversations, Your attachments etc.
Google Reader
What you've read, or are interested in. This must be used and factored into google ranking, as it really could help them improve the relevance and categorization of search results.
Adsense!?
I have always been suspicious of just how much information adsense scripts feed into google's datacenters, these are pretty much spyware. (I'd like to hear otherwise, who knows without access to their server side code)
I could go on and on. It's hard to discuss topics like this, as you feel like one of those foil-hat-wearing conspiracy theory guys. But when was the last time that there was a company that people openly embraced to letting their personal lives be searched, categorized, and indexed for public consumption!?
Those are my rough thoughts on that subject,
Posted by: roughoperator | April 11, 2007 9:37 AMRO
Jerky Ramblings talk about a business, although smaller, that has many qualities as Google. This is an opportunity for the average "Joe". Click on my name G. Mathers to read all about it.
Posted by: G. Mathers | April 11, 2007 9:47 AMwhen you talk about geographical constraints and friction with amazon and google, or the lack there of (being that they're both on the internet); don't people have to have computers and the internet to visit those online places? So, in a sense, sites like Amazon, when compared to Barnes and Noble, still have the problem of geography and friction, its just that Amazon has a lot more stores open (every computer with internet) in a lot more convienient places (the consumer's home) than does Barnes and Noble. Right?
Posted by: Rodrigo | April 11, 2007 9:52 AMGreat post but never take out of equation that as Starbucks relies of many physical things, Google relies on bandwidth that although seems to be infinite, it is not, it has a cost and when mobile phones get into the picture it is much more non-infinite.
However as blog post, congratulations!
MB
Posted by: Mark Bradley | April 11, 2007 9:56 AMThought provoking!
I would say the bandwidth discussion is where the next big money maker lies. Look at oil. It may fit the "very rare" Unlimited Demand/Limited Supply category. While we may be consciously cutting back on our need for oil... it's not going anywhere soon, but the oil is. Thus Exxon Mobil is the largest cash cow of them all.
The same can go for bandwidth. A seemingly unlimited demand, but limited supply. A business model that can leverage this could conceivably have unlimited potential. It may look very similar to Web 2.0. Bandwidth 2.0 would be user generated and shared?
Just my thoughts.
Posted by: Morgan | April 11, 2007 10:01 AMYour key point is valid -- Google is a truly new and unique phenomena, given the way it has reached such an enormous scale so quickly.
I'm not as sure about the broader conclusions you are trying to draw. Obviously, there are limits to how large a single blog can grow -- but there are also limits to how large Google can grow, unless they succeed at generating revenues and profits from some of their diversification efforts. And, that is something they have NOT done yet.
If you are generating billions of dollars in cash flow, and enjoying a dominant share of a large market, it's easy to make a splash by announcing innovative offerings which are given away for free. Its not as easy to innovate in ways that generate significant revenues and profits -- particularly at a large enough scale to allow Google to keep growing.
That's not to say Google has reached the limits of its potential. There is still plenty of opportunity for them to squeeze more money out of their dominant market position, and the entire internet will continue to grow for many years.
Posted by: Caribbean Carl | April 11, 2007 10:12 AMNot to be a nitpicker, but it should be "not technically a franchise" not "not a technically franchise".
Seriously though thats all i could see wrong with this post, thanks =)
Posted by: Elliot | April 11, 2007 10:18 AMI am another who finds that this post falls far short of the high standard set by previous RWW articles (including those by Alex).
Posted by: Andrew | April 11, 2007 10:26 AM- The Econ 101 stuff at the start is unnecessary and inaccurate.
- It's not true to say that Google relies on software, rather than on people. Who writes the software?
- etc.
@25 Any software-based business is fundamentally different from a factory. Once you rid software of bugs (which we are reasonably good at by now) it just works. In the factory people have to perform everyday. People are less reliable than software.
Can you be more specific about inaccuracies in my Econ 101 bit?
Alex
Posted by: Alex Iskold | April 11, 2007 10:31 AMUnlimited Demand + Limited Supply = the oil business?
Posted by: Timothy Post | April 11, 2007 10:49 AMOne word: Teleportation
Posted by: Antonio | April 11, 2007 10:56 AMI agree that the business model of Google is fantastic and nothing else comes close to it currently. But with time things will change and get better.
Posted by: Ketan Patel | April 11, 2007 10:57 AMI have to agree with the posters who are disappointed in the scholarship. It seems to be vogue these days to throw out a smattering of "science", "math", "economics", or "biology" and then derive large rhetorical theories, sort of like how a stem cell can be turned into anything.
Posted by: Joshua Allen | April 11, 2007 10:58 AMI have studied Supply-Demand Law in Economics and I can see some similarities here with Google being the monopoly of the Internet industry. I worried that may simply upset the balance of the macro-economics in the long run.
Posted by: Keith | April 11, 2007 11:11 AMCan't help. Survival for the fittest. Blame Darwin for it!
Posted by: Amiya Sarkar | April 11, 2007 11:34 AMAgree with Keith.
The way things are going right now - leaving off other comapnies faar way behind - isnt the best that should have happened.
Google IS a good way - but I dislike the fact that they are proving to be more and more and more untouchable everytime they balance their books.
Posted by: Ehab Mehedi | April 11, 2007 12:29 PMScrolling down on Techmeme, one sees this just below the link to your own article:
http://www.technologyevangelist.com/2007/04/why_google_loses_sle.html
Oops. So much for "unlimited demand".
Now, you might be able to say, Yes, but business will continue to be so foolish as to spend money on advertisements that don't work. And in that sense, the unlimited foolishness of "business" creates unlimited demand.
But I wouldn't count on business being that foolish forever.
It's entirely possible for Google to collapse as suddenly and dramatically as Enron. All it takes is a loss of confidence in the value of their product. Given that advertisements have no objective business value at all, that isn't unlikely.
Posted by: Hal O'Brien | April 11, 2007 12:39 PMMoney making machine? - yes undoubtably. Ultimate? - probably not!
Google is undoubtably a fine search engine and it has rightly earned a dominant position in the search market but so far it is only a search engine (although there are many new products which may mature). The search market/industry however is only a relatively small industry around $20bn - of which google has around 50%. This is about the size of the hardware store market or the US logging industry. So although G keeps increasing its share of the search market it is still a smallish market. Whereas in contrast G's rivals MSN and Yahoo are in the software market and content markets - both of which are much bigger. So big fish in a small pond sums up Gs position - it has limited options for growth unless it diversifies.
PS - Yes I know 50% of $20bn is huge (I should be so lucky!) but were talking about industries here and the search industry is relatively small - considering total time online - search is a very small part of that. The future lies with the content providers - such as Viacomm, Disney etc.
Posted by: DavidW | April 11, 2007 12:45 PMRailroads are limited supply, demand is strong and increasing. Warren Buffet just bought major ownership in 3 different railroads. He is known for being in front of the curve...hence the $60Billion in net worth. The "next big thing" is often right in front of our eyes. Oil was at $12 a barrel for a long time before it went to $75. Gold and silver were both "cheap" before skyrocketing. Although railroads don't "look" cheap now...we could be looking back in 5 years saying, "Why didn't I buy railroad stocks when Buffet did?"
Posted by: Mark Matthews | April 11, 2007 12:51 PMWell I guess we should all get out and buy some google stock before it skyrockets ?!!
Posted by: GiorgosK | April 11, 2007 1:04 PMThere are definitely supply and demand constraints that will eventually come to bear here. Google gets paid out of the marketing budgets of businesses - there is a finite supply of this out there. Though online share of marketing budgets is growing and will continue to grow for a while, marketing budgets are not infinite. There is also a demand constraint at work here... though the potential market for online users is still growing, there are only a finite number of eyeballs out there, and a finite amount of *time* that people are willing to spend clicking on adds. So, though we may still be on the steep part of the curve going up, there will eventually be a plateau. The article's economic analysis is faulty, to say the least.
Posted by: Benzo | April 11, 2007 1:36 PMI don't think your second analysis of the online world works because you're comparing apples and oranges. When you compare business models, you need to compare them within the shared competitive environment/market. Google cares about Amazon's business model as much as it cares about the business model of the guy that sells hot dogs at the end of the street.
What you should be comparing is business models for companies that work in advertising. Traditional advertising takes up physical space - whether it's the number of pages in a newspaper/magazine or number of available time slots on TV and radio in a day - and has limited demand due to high cost and relatively small audiences (LD/LS). The early online advertising platforms captured LD/US - virtually no cost to create ads but man those gif banners and popups sucked because the ROI was so low (ie. poor relevance and clickthrough). It wasn't until Google came along that a compelling platform for selling advertising with both unlimited supply and unlimited demand existed. Google ads are extremely cost-effective (UD) and easily propagated over unlimited online domains (US). Why is relevance such a huge motivator in the online world? When every online property operates at almost zero cost, demand (and ad revenue) follows relevance (effectiveness). If I design a search engine that's 100x better than Google, it won't mean squat unless I can also serve relevant ads better than Google.
This also shows why Google is moving into radio and TV advertising. Right now, relevance and cost-effectiveness suck in these mediums. They're expanding diagonally from UD/US into LD/LS with the hope that they can do better (cost and relevance) than the ad agencies and media companies that thrive there.
Posted by: Patrick | April 11, 2007 3:09 PMSpot On! Google is spreading organically, growing exponentially like a virus :)
Posted by: Kashif | April 11, 2007 3:46 PMDirectly tapping into the brain to monetize thought impressions would be up one level from Google and possibly better.
Posted by: michael addicott | April 11, 2007 4:42 PMI have studied Supply-Demand Law in Economics and I can see some similarities here with Google being the monopoly of the Internet industry. I worried that may simply upset the balance of the macro-economics in the long run.
Posted by: 工控网 | April 11, 2007 4:46 PMAlex,
I agree that Google is special and very good at what it does. But to call their supply and demand 'unlimited' is just plain ignorant.
Their 'supply' is the number of people who use their products or the number of searches and clicks those people generate.
Their 'demand' is the amount of $$$ advertisers are willing to spend online.
Both are finite and believe it or not, Google fights for more users and more ad dollars. The company is not on autopilot.
Posted by: Xavier | April 11, 2007 4:59 PM
Posted by: Greg | April 11, 2007 5:09 PMGreat Article. If you are interested in a business that has virtually No Investment - go to my link by clicking on my name.
Google and for that matter any other web 2.0 companies lack the option of locking in their customers forever (like how Microsoft did). The cost of shifting from Google to its competitor is zero. Under such a scenario, I wouldn't make a ludicrous claim like "Google, the ultimate money making machine". In your analysis, you have completely ignored this possibility which adds to the company's "cost" indirectly.
Posted by: Krish | April 11, 2007 6:22 PMPeople who use Google always tell me the same reasons for using it, until I show them the equivalent (and I belive better) features of Yahoo and they have no words. Google users are like sheep - they follow without knowing what else is out there. Searching is not rocket science - it's just a tool to give access to the web. Any company can write a search engine. Eventually a better model will come out and the sheep will stray. Google provides nothing that another company can not.
FYI: I believe that Yahoo email is substantially better (GMAIL - come on - I can't even delete my own email?) and yahoo's web search numbers their search results (whereas Google doesn't) - therefore I never use Google.
Posted by: Randy | April 11, 2007 8:44 PMI agree with #40 that the amount of $$$ advertisers are willing to spend online is finite. Howevere, supply of web pages with AdSense is virtually unlimited and growing exponentially. I'm witnessing gradual decline of AdSense revenues over the last three years as a reflection of limited
Posted by: Daniel | April 11, 2007 11:06 PMdemand (advertising dollars) and growing supply (Adsense web pages). Quality content providers are switching from Google Adsense to brand advertising or networks like Federated Media.
My guess the next big thing could be AGLOCO because the key for internet success is SOCIAL NETWORKS, like Myspace or Youtube.AGLOCO is building a new internet based economic network where you can get the share of the internet profit for FREE. More deatils at my blog.
Posted by: progi11 | April 11, 2007 11:41 PMInteresting article. I appreciate the supply/demand analysis. However, the stock comparison graphs don't make sense to me. Graphing market cap over time might be a better way to compare two companies, not stock price growth, which is says something about growth of individual companies, but not much about how they compare to each other.
Posted by: Andrew Parker | April 12, 2007 8:46 AMGo Google all the way! Google guys have an algorithm, Yahoo doesn't, the winner will be Google. We will be googling stuff in real time soon... (such as using RFID tags) All Yahoo is doing now is using other people algorithms, they don't have an original algorithm that works and that they can depend on.
Posted by: max | April 12, 2007 9:44 AMIt's a good article I understand the strategy is more useful to people If you are interesting visit the site business">business">http://www.ideacenter.com/">business strategy
Posted by: Ram's | April 12, 2007 12:35 PM> Can you be more specific about inaccuracies
> in my Econ 101 bit?
well, let me try.
First, imho the whole piece misses the point - the point beeing that Google has an extremly dominant position in the advertisment market that almost amounts to a monopoly and that THIS enables Google to command large profit margins.
And then this whole demand/supply discussion is just massively inprecise ..
In a finite world with finite many people, that live for a finite time and economies with a finite GDP there is neither unlimited demand nor unlimited supply. Also, in all your examples there would be more costumers for the goods if the goods where cheaper and less if they where more expensive. All businesses mentioned would probably be able to increase supply if demand (and thereby price) increases (that holds even for the mon and pop grocery store that could hire more employees, rent additional space, open longer; just as Read/Write Web could hire more writers if faced with a sudden surge in advertisers spending). The demand for the goods that google is selling is not unlimited - there is only so much money that is spend on advertisments (and space for advertisments - that's what google is selling). The same is true for Starbucks. Hence there is no qualitative difference in supply/demand between Starbuchs/barnes&Noble and Google/amazon. If you accept these points then the terminology you use throughout the article just collapses.
Your "impossible case" of unlimited demand, limited supply are a particular headache: what exactly do you mean by "Unlimited Demand"? You seem to mean something like: a product is in unlimited demand iff there is a (very low) price for which essentially everyone wants to buy it - thats the only way in which the supply/demand curve implies unlimited demand - the starting point of your analysis. But with this interpretation almost all goods become your impossible cases - cars, pictures by picasso, jewelry, land ... (if you where to sell these items for $1 there would be essentially unlimited demand and all of these don't exist or could not be produced in the necessary quantities)
Posted by: Valentin | April 12, 2007 4:09 PM@50
1) Article is not about Google dominance, but about why this business model is dominant.
There are two critical factors: ubiquity and self-organization. The ads appear everywhere online, and the the web is constantly growing. Self-organization is due to the fact that advertisers create ads and people click on them, it is self-regulating system, where advertisers say it works.
2) In a finite world with finite many people, that live for a finite time and economies with a finite GDP there is neither unlimited demand nor unlimited supply......
Of course. I can also argue that world is discrete you know. Unlimited demand in my view is due to the growth of the web. Of course in any given time there is finite demand, but it is so large, and the growth potential is so big that compare to mom and pop shop it is basically unlimited.
Last point. There is a huge difference between physical and non-physical worlds. And this is another major point in the post.
Alex
Posted by: Alex Iskold | April 12, 2007 7:59 PM> 1) Article is not about Google dominance, but about
>why this business model is dominant.
Google was neither the first nor is it the only ad brokering network (Yahoo Publisher Network, anyone?). Many of the others have gone broke and neither is earning comparable amounts of money - so really the "ad brokering network" business model alone does not explain their profits; is no money making machine.
> Unlimited demand in my view is due to the growth of the web.
Google is selling advertisments space (or clicks, if you like), the demand for advertisment space is limited by the advertisment budget of companies- just like it was when advertisment was only print, radio and tv.
Although yes, the web makes it a bit cheaper to supply adds and makes it possible to better track their success - so this may increase the demand a bit.
Posted by: Valentin | April 13, 2007 12:41 PMi agree with the comments which question the arguments put forward to prove google as a midas.google ofcorse is a great example for others to emulate.
Posted by: Rukmani | April 15, 2007 3:29 AMsurprisingly,the EBAY has been left out.i think EBAY is the
best example for a wonderful business model.
Google can be overrated. Particularly in the ratio of ad impressions as opposed to ad clicks.
There are signs that Google may be resting too much on its laurels. Google right now is fine with national or international companies who need recognition more than a direct order.
But when it comes to local companies Google's preoccupation with greatness may hurt it more than it realizes.
Google does not seem to do that well locally. When that is known there will be a change in the way Google is viewed. Not just politics is local. This might be Google's leveling.
Posted by: Bill | April 20, 2007 7:35 PMDidn't read all the comments, just wanted to mention my reaction to "Starbucks relies on people, Google relies on software"—I basically laughed really hard. Keep up the comedic blog! :)
Posted by: Flak | April 24, 2007 7:50 AMI guess its just coincidence that the goog and sbux graphs match up almost perfectly until a point?
Posted by: Motorcycle Guy | April 27, 2007 7:23 AMThis article has a great way of explaining how to services like Google and Yahoo almost endlessly grow.I think that this trend continue.
Posted by: scott | April 27, 2007 9:14 AMnext big movement? I think the current internet universe will be going to be multidimensional!
Posted by: rurih | May 8, 2007 9:32 PM