Strategies for a discontinuous future.

Monday, September 19, 2005

Google vs AOL = Search vs Media 2.0

Rafat notes:

"...As WSJ says, under the current AOL-Google agreement, Google pays AOL a portion of the ad revenues generated from searches by AOL users. In 2004, AOL received about $300 million in revenues from the arrangement. Google says in filings with the SEC that AOL accounted for 12% of revenues in 2004. No other customer accounted for more than 10%, it said."

If you do the math, that means that Google's margin is ~ 20% on it's AOL deal, which is roughly in line with other Google deals/product lines (viz AdSense). Why is this interesting? Well, I think it's important to note that search is probably going to be the lowest margin Media 2.0 business - compare it to, for example, MMOGs or other viral plays.

For a structurally attractive industry - with very nice huuuge natural monopoly dynamics - margins on the order of 20% are (really) low. You could compare to, for example, MS (at 30+%), newspapers in their heyday (30+%), etc. Interesting.

Why is this? I think right now, it's because search hasn't really tapped high-value domains yet. But it's something that bears thinking about.

-- umair // 4:18 PM //


Does your thought about search margins come just from Google's deals with affiliates like AOL? Google as a whole had operating margins of 34% this past quarter, based on gross revenues, and 53% based on net revenues (i.e., after traffic acquisition costs). Either way, these are pretty strong margins.

// Andy // 5:22 PM

Hi Andy,

That's a good question. Here's my reasoning, viz the following para from Google's 05 10-k:

"...The increase in our operating margin in 2004 compared to 2003 (before the charge related to the settlement of disputes with Yahoo) was partially offset by an increase in traffic acquisition costs as a percentage of revenues. This is because a greater portion of our revenues in 2004 compared to 2003 was from our Google Network members� web sites rather than from our Google web sites. The operating margin we realize on revenues generated from our AdSense program is significantly lower than that generated from our web sites."

I expect micromedia/revenue sharing models to make up a larger and larger proportion of the mediaverse; this should put downward pressure on search margins (at least done Google style) - my current expectation is for the industry to hit about a 20% operating margin now that cherry-picking season (viz, the AOL deal) is over.
// umair // 5:35 PM

Thanks for the thoughtful response. It seems that Google may agree with you, given the news about a Google Wallet for micropayments. It will be interesting to see where the media world shakes out, and I suspect we're far from equilibrium today. Do you think that the advertisement model is working for content providers (e.g., bloggers, on-line newspapers). Could the market end up testing the waters on micropayment schemes like $0.05 per article, in such a way that we could have a $100,000 article?
// Andy // 6:06 PM

Hi Andy,

Cool question. I think the ad model will work for content providers, but let me define terms.

To me that means anybody who can make content. Since now that includes pretty much anybody with some free time, a notebook, and a Net connection, the universe of content providers is gonna explode, and average returns to content will fall.

Not great news for Big Media, and we're already seeing it happening. NYTSelect will probably be an instructive case study of what not to do, given the above. Smart players will invest in edge competences - viz, Fox is making an effort (MySpace, NCSoft maybe).

Now, this kind of value chain atomization makes life for the NYTCOs of the world difficult - but it makes life pretty good for, like you said, guys that can produce the $100k article (viz, [email protected] ad revenues/month) - this is what I call the snowball effect.

All this is covered in much more detail in my media econ ppt - you may wanna check it out.
// umair // 6:15 PM

Thanks. I will check it out.
// Andy // 7:14 PM
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