Google's Potential Vulnerability - An Open Ad Network
Robert Scoble recently wrote an interesting post, about FOG - Fear of Google (an acronym coined by CEO of eMarketer Geoff Ramsey). I observed this phenomenon strongly first hand at the Web 2.0 Expo and shared my thoughts on it in the R/WW post Thoughts from the Web 2.0 Expo. There is little doubt that the combination of Google's exceptional revenue growth, continuously release of innovative products, and market share dominance, has created a considerable amount of fear, uncertainty and doubt.
While understandable, I believe in one area Google is more vulnerable than analysts appreciate. More than one-third of Google's revenue is completely out of their control. To be more specific, in their most recent quarterly results 37% or $1.35 Billion of revenue came from advertising delivered on other sites. Specifically, I believe they are vulnerable in much the same way that Microsoft was vulnerable in the mid-nineties.
If you think back with me, no one would have believed that thought leaders like Paul Graham would be declaring Microsoft dead just a decade later (and he wasn't alone). Obviously, Microsoft is still generating considerable revenue - see the compelling response by Don Dodge. However, they are not feared by competitors and valued at a premium by Wall Street, like they were just ten years earlier.
So what's happened and should we anticipate a similar event occurring in Google's future? I believe the answer is yes and I'll try to lay out the likely scenario in the remainder of this post.
What Happened at Microsoft?
First, it is useful to examine what happened at Microsoft. Certainly, some of the platform on which innovative applications were built, along with users attention, shifted from the desktop (where Microsoft dominated) to the web. This shift enabled competitors to execute more aggressively.
Yet another component, that can't be overlooked, was the emergence of competitive open source software projects. The transparency and accessibility of open source projects like Linux, MySQL and Firefox changed competitor and analyst perceptions of Microsoft. I also believe (although don't know how to quantify it) that it also changed users' affinity and trust with the Microsoft Brand.
Where could Google Be Vulnerable
As I've already alluded to, I believe Google is currently in a similarly vulnerable situation. It would be a serious blow to the organization to see more than one-third of their revenue evaporate. (While they do have contracts with some of the larger online properties that leverage their ad network, even in that case those networks could switch when the contract comes up for renewal.) Just like Microsoft saw open source projects emerge and disrupt their dominance, I believe a competitor in the ad network space (hereafter referred to as an "open ad network") could introduce a new more open and transparent economic structure to the ad network ecosystem and disrupt Google's Network Revenue.
Specific Proposal: Open Ad Network
Typically when discussing this with someone, the first thing they point out is that there are other ad networks online today. Yes, there certainly are lots of competing ad networks, but they tend to operate within the same economic structure that Google does and not as well. They secure the advertisements and deliver them on a partner's site, keeping a percentage of the revenue. This made more sense when the original ad networks were emerging, because the ads were sold via expensive direct relationships with the advertisers. However, more recently, a significant number of the ads are sold to long-tail advertisers via a self-service mechanism.
A few months ago, I wrote two "think out loud posts" on my personal blog reflecting on how an 'open ethos' could reinvent an industry. (Part 1and Part 2). While thinking through those posts I came across an excellent book by O'Reilly that came out in 1999, "Open Source: Voices from the Open Source Revolution". It included an essay by Robert Young, one of the founders of Red Hat.
One of the quotes has significantly influenced me since first reading it. Robert states:
"You can't compete with a monopoly by playing the game by the monopolist's rules. The monopoly has the resources, the distribution channels, the R&D resources; in short, they just have too many strengths. You compete with a monopoly by changing the rules of the game into a set that favors your strengths..."
At the time, no one knew how successful Red Hat would become. However, it certainly has done exactly what Robert predicted -- changed the rules of the game. That is exactly what I'm proposing, changing the rules of the game such that the publisher who delivers the ad would keep 100 percent of the revenue. However, just like there are for-profit open source companies (see my post on Open Source Business Model) -- this would be a for-profit open ad network.
Ok, how do you make money?
Recently, I interviewed Chris DiBona, open source program manager at Google. He had an interesting take on commercial applications being 'vulnerable' to open source competitors. Rather than talk about companies being 'vulnerable' he talked about them changing their business model:
"Here's how I think of it: if a commercial entity finds that they can no longer sell their software because a viable open source project has risen to displace them, they really have to decide if they want to start selling services around the open source offerings or get out of that particular line of business. IBM has done a terrific job of the former."
That is exactly the model I'm proposing. It's just that instead of talking about software license revenue evaporating, I'm talking about a new entrant making it no longer profitable for ad networks to take a cut of the revenue for ads displayed on their partner's page views. An open ad network would force the industry to make money by selling services around the network, instead of taking a percentage of the revenue on the network.
How is this different from Open Ads?
When talking with people about this concept, they tend to gravitate toward the open source ad server - Open Ads (formerly PHP Ads). While I do believe that Open Ads is serving a valuable role, they are not an ad network, but an ad server. Interestingly, they are paid affiliate revenue from networks for encouraging their customers to augment their inventory with popular ad networks inventory.
What I'm proposing certainly could leverage Open Ads as a framework for the ad server. However, it would have to be a hosted solution that simply runs Open Ads as the server.
Conclusion
So what would the effect really be on Google? First of all, this is purely speculation at this point. Someone would need to start the project and then we'd all find out. (By the way, I'm happily running business development and product management at mSpoke, so I'm not going to be the one who does this.) However, since I'm the one speculating, my opinion would be that Google would still continue to grow via ads displayed on their own site. Just like Microsoft has continued to grow, even after open source competitors emerged.
However, if the above model came to be, then Google would have some real short-term earning expectation challenges if it lose a third of its revenue. More importantly, I believe this would dramatically reduce the ubiquitous FOG -- Fear of Google -- that dominates the space currently.
What are your thoughts? This probably will be controversial, so let's discuss in the comments below.
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Looks like all they did was use google custom search to create verticals. Sorry but couldn't anyone do this?
Posted by: Ryan | May 15, 2007 5:23 PM
This is a very interesting article. I think that if Google started to see that they were losing 30% of their revenue they would look to other ways of increasing other sectors, such as their new radio advertising department. Also, this drop would not happen overnight so they would take action against who ever is taking away their share.
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Posted by: Refined Rogue | May 15, 2007 5:38 PM
RightMedia (recently acquired by Yahoo) is very similar to what is described. It is an open ad-exchange (very similar to a stock exchange) - where the exchange is only a market maker (matches bids and sells). Publishers and Advertisers (or their representative ad-networks) connect over the Exchange. An ad-network can represent an advertiser (just like a mutual fund manager represents an investor) or an ad-network can represent a publisher (like an investment banking firm can represent a corporation). There are additional entities required to make an exchange like this work (for example - the equivalent of SEC, or the equivalent of GAAP) - but these can be added over time.
Posted by: jdss | May 15, 2007 5:58 PM
@ Ryan - While all the ads are text ads, many are just matched contextually on a page and not from search results. Therefore, as I tried to argue in the post it would be quite easy to have someone else do it.
@ Refined Rogue - I'm sure Google would take action, but it is hard to compete with free.
Posted by: Sean Ammirati | May 15, 2007 5:59 PM
@jdss - I agree that the ad exchanges are interesting. However, both Right Media & the Double Click exchange still plan to take a cut of the ad revenue as I understand it. I believe free (making money from services instead) would be more interesting and honestly a better approach.
Posted by: Sean Ammirati | May 15, 2007 6:05 PM
Okay, I'm trying to grasp the "open ad network" concept.
The idea is to create an advertising network where the company doesn't take a cut of the revenue, but instead offers service(s) based around the said network? Is this right?
Google keeps roughly 20% of the advertising revenue, which doesn't seem like all that much (at first glance). An example would be a blogger making $100 per month via Google. Instead, they can switch to the open network and make $125 (hell, that's enough to make ME switch). If you're generating $1,000 each month, you're leaving $250 on the table!
Okay, I can see people using it because people don't like to leave money on the table... so what services do we sell to generate actual revenue? Help advertisers position their ads? SEO optimization? Making money is the hard part.
Posted by: Robert Dewey | May 15, 2007 6:55 PM
@ Robert Dewey - It is probably more like you're leaving 40% of the revenue on the table. Google actually doesn't disclose the percentage of revenue they share. However, the other networks will typically start you at a 50/50 split or 60/40. The percentages get better as the # of page views grows -- but 20% would be a really good deal.
In terms of how you make money, I think (1) helping advertisers position their ads (2) helping publishers optimize their content, ad slots etc to maximize the revenue from the network.
Posted by: Sean Ammirati | May 15, 2007 8:36 PM
btw - RightMedia commissions are way lower than what's being quoted for AdSense etc. If you look at stock markets again - the bulk of the value accumlates to the fund managers (who optimize investor(==advertiser) capital placement). But this is also a fragmented market space. There are far fewer exchanges - and they earn a lot less (on higher volume).
It would be interesting to see if value adds like page content analysis and behavioral profiling are extracted out as separate value-adds in this layered world.
Posted by: jdss | May 15, 2007 11:02 PM
This analysis is incomplete and inaccurate.
The real driver for much of this is how much an advertiser is willing to pay. And this is based on ROI. How do you drive ROI higher? By having better targeting. And Google has a clear lead over everyone else in how well their targeting technology performs. Why is this? Probably a combination of better technology and more data.
Unless an "open network" can match the quality of the targeting and the ROI to advertisers, advertisers will prefer to go to Google. If advertisers are all on Google, publishers will prefer to be on Google. If publishers are on Google, then traffic/inventory is all on Google. The open network cannot catch up just because it is open.
As for another part of the article: you actually believe RedHat is successful? Look at their numbers. Sure, they are an ongoing business. But look at their financials and stock prices. Not sure I would call that successful.
And regarding your comparison of open source to an open network. The comparison is contrived. In fact, it breaks down completely here: "Google would still continue to grow via ads displayed on their own site. Just like Microsoft has continued to grow, even after open source competitors emerged". That sentence makes no sense. These two things are not comparable.
Again, this site tries to attack some interesting topics. But the actual analysis is often quite poor.
Posted by: JoeP | May 16, 2007 2:02 AM
JoeP;
What's the problem though? If I'm a publisher, it doesn't hurt to throw YAW (Yet Another Widget) onto my blog or website. If I'm an advertiser, it won't hurt because I'm paying by the click.
As an advertiser, however, I need incentive to switch. Better analytics, better ROI, etc.. Still, I'd be willing to try anything that's performance based simply because it doesn't cost unless it performs ;)
Posted by: Robert Dewey | May 16, 2007 7:16 AM
JoeP: Are you kidding re: Red Hat not being valued well by Wall St. They have a PE ratio consistently greater that 75 -- Microsoft is 22 right now. Obviously, Microsoft has significantly more earnings - but the Red Hat valuation is quite nice from the street.
Also, consider their market share growth in the enterprise space
http://www.informationweek.com/story/showArticle.jhtml?articleID=198001444
Information Week ‚Äúa third of respondents to InformationWeek‚Äôs most recent IT priorities survey have Linux servers on their 2007 project lists‚Äìand it‚Äôs generating increasing interest as a PC operating system, partly as an alternative to Windows Vista.‚Ä?
Posted by: Sean Ammirati | May 16, 2007 8:13 AM
I am about to launch a new European blog network across 8+ countries called Blognation.com which will be written in English (breaking down our language barriers) and also supported by an Ad Network from Adify.
This adnetwork will contain 42 blogs from blognation but also many more affiliated blogs from across Europe in much the same way America has FM publishing and aggregates TechCrunch, GigaOm, Mashable, Read/Write etc. - which oddly did not get a mention in this post even though Read/Write use it?
Google will not get hurt by companies like FM Publishing, OpenAds or Adify because these ad networks are there to help bloggers and websites at the end of the longtail monetise their niche traffic. If or maybe when they do actually start to effect Adsense then I am sure Google will open the cheque book and snap one up. In reality that is why they bought Doubleclick and also recently announced widget ads and in video advertising. Sorry I don't think an opensource adnetwork will hurt Google.
Finally it is not just about an opensource network it is about selling the ad inventory and sadly unless you have a sales team this is hard work. Adify and FM Publishibg have these teams to supplement any ads sold by the individual blogger.
Right no Microsoft and Yahoo are not even in the same ballpark with AdCenter and Panama because they lack inventory i.e sites to place ads so what chance has OpenAds?
Posted by: Sam Sethi | May 16, 2007 8:13 AM
Sam;
Why are people going to switch from a proven method (i.e. AdSense and FM) to your new network? It works both ways.
I do NOT want to leave +$300 per month on the table... or 30% of revenue. As an advertiser, however, the revenue of a publisher doesn't affect me... But, if you give me an incentive to switch (i.e. higher ROI), then I *WILL* switch.
I'm not understanding why some of you can't see this working (and siting irrelevant points). If both parties benefit dramatically, why the hell wouldn't they switch?
Posted by: Robert Dewey | May 16, 2007 8:55 AM
Sam - I mistook your post to mean that you're starting an ad-network... My bad :)
Posted by: Robert Dewey | May 16, 2007 8:57 AM
Sean;
Shoot me an e-mail, it'd be nice to have you in my list of contacts. If I choose to pursue an idea like this, I'd like to make sure that I keep in touch with the originator (and perhaps pay them back if it's successful).
Robert
Posted by: Robert Dewey | May 16, 2007 9:13 AM
My email is:
profitablesignals at gmail dot com
Let me know, I've been thinking about this for a few months and would be happy to discuss further. Although, you or someone else will need to build it.
Posted by: Sean Ammirati | May 16, 2007 11:32 AM
Robert - I'm enjoying your question asking. Would you mind dropping me an email.
Sean - I'll drop you a line. Thanks for the post.
Posted by: Jared Kopf | May 16, 2007 12:18 PM
Great Idea. I have often thought about this but it is flawed.
1) Google has massive traffic which is what the advertisers are attracted to. In addition to that google allows advertisers to receive "additional" traffic from partner-networks.
2) ROI is a big factor for any advertiser. So quality also comes into play. I haven't come across any study or statistics that compares the ROI for traffic generated from partner network compared to google itself.
3) Also a known fact is that the results from google searches does have leverage for those showing google ads. Sure its not on the paper but do you honestly think it is difficult for google to dump all mfa and spam sites? Will they ever do it, I doubt it.
I actually have a possible solution to the above mentioned flaws by hitting the nail on the source of traffic. I would love to get into discussion and possibly participate in getting a system going.
Thanks
Posted by: adil | May 16, 2007 4:14 PM
adil;
I agree with all of your points... However, I think this would be geared more towards sites and services running AdSense, versus the results that are displayed next to search results. In that case, massive traffic really does play a role. In the latter case, a publisher's traffic is the key.
Posted by: Robert Dewey | May 16, 2007 5:03 PM
To answer two questions after my post:
1) Robert: Sure, advertisers may give new networks a shot to experiment. Like you say, they will pay by the click, so what do they care? In fact, ROI may be better there initially because of less competition btw advertisers. But unless this network builds up a lot of traffic (i.e., inventory), thats all it is - an experiment. At the end of the day they will keep going back to where they can get the ROI and the traffic/scale. I'm not saying that a new network cant be successful. I'm just saying that it being "open" is not something that will drive more traffic/advertisers/etc. by itself.
2) Sean: You have got to be joking. You are essentially saying that a high Wall Street valuation (i.e., PE ratio) denotes success??? So the old Ariba/CommerceOne/etc./etc. group from 1999/2000 must have been the most successful companies ever!! Their PE was huge - in fact, it was infinite (since earnings often were 0 or negative)!! Come on, you should now better than that.
Posted by: JoeP | May 17, 2007 3:04 AM
JoeP: No I'm saying that a higher P/E is an indication of really smart people (wall st analysts / porfolio managers) believing the companies' growth prospects on that revenue are higher than other companies' revenue.
Posted by: Sean Ammirati | May 18, 2007 1:42 PM
Sean: 2 things:
1) If Wall Streeters are all so smart, explain to me 1999/2000. And explain to me why the majority of portfolio managers underperform the market. And explain to me why sell side analysts also have mostly bad track records and have been shown to be completely biased in the past by their banks clients. Thats crazy man.
2) In the end, that doesnt even matter. If a company is limping along with little profit, terrible margins and very limited revenue growth, I dont care how big a multiple Wall Street gives it. Its not a successful company.
Sorry.
Posted by: JoeP | May 19, 2007 2:24 AM
I guess time will tell... If Red Hat survives (like they have been doing for the past 14 years), then we'll know for sure if it's not successful. Same goes for MySQL...
Anyway, give publishers more money, and give advertisers a better ROI, and they would switch.
Posted by: Robert Dewey | May 20, 2007 7:03 AM
I would love to see a successful open network. I think eventually online advertising will be driven down in price, but there will still be one or two market leaders, like Google. Smaller networks will continue to make a niche.
Posted by: chris sivori | May 21, 2007 1:09 PM