I do a lot of reasoning by analogy. I try to learn from history and from other situations with parallels to the present. (See for example the logical track leading through my papers The Open Source Paradigm Shift to What is Web 2.0?).
As readers of the Release 2.0 newsletter know, I recently became fascinated by parallels between Web 2.0 and financial markets. One of the conclusions I drew from that study was that (as I wrote in an article entitled “An Unorthodox History of Wall Street” for that issue of Release 2.0):
Bill Janeway, former Vice-Chairman of private equity firm Warburg
Pincus and a “recovering economist,” gave us a long term
perspective that provided very useful context for consideration of
possible futures for Web 2.0 markets as they achieve the scale
of financial markets.
Thirty years ago, Bill points out that the price of a trade was
regulated by the exchanges: it cost approximately 22 cents to trade
a share on the New York Stock Exchange. Unable to compete on price,
firms competed on the quality of their investment research, and
brokers’ relations to clients were based on the information and
insights they could provide.
Once the exchanges no longer regulated the price of a trade, prices
fell over time to current levels of a fraction of a cent per share,
or for large trades, effectively zero. As a result, sell-side firms
could no longer afford to do fundamental research. Two things
happened: independent research firms grew up that charge directly
for research, and more importantly, firms began to trade against
their clients for their own account, such that now, the direct
investment activities of a firm like Goldman Sachs dwarf their
activities on behalf of outside customers….
This historical perspective provides thought-provoking fodder for
speculation about the future of other networked information
markets, including Google Adwords.
- Might we see Search Engine Optimization and Search Engine
Marketing as the equivalent of Wall Street investment research? Will
SEO/SEM firms evolve into research firms, or will they start
“trading for their own account”?
- Might link farms that harvest search engine results to
automatically build pages that will rank high in search engine
results and thus collect a disproportionate share of adword
clicks, be seen as the equivalent of program trading? If so, we
can expect this type of programmatically created page to represent
a larger and larger share of results volume unless search engines
get smarter about regulating them.
- Might the direct inclusion of data such as weather and stock
prices into search engine results pages (rather than links to
external resources) be seen as the equivalent of Wall Street
firms “trading for their own account”? If so, does Wall Street
suggest to us that the future of search engines is to produce
increasing amounts of their own content, and to consume a greater
direct share of the available clicks, rather than passing the
clicks off to their external advertisers?
Well, we just saw the latest news on this front, with Google “trading for its own account” as opposed to its traditional role of handing off traffic to web sites it searches, in the Chronicle this morning, Google to host AP News:
“Internet search leader Google Inc. on Friday began hosting
material produced by The Associated Press and three other
news services on its own Web site instead of only sending
readers to other destinations.
“The change affects hundreds of stories and photographs
distributed each day by the AP, Agence France-Presse, The
Press Association in the United Kingdom and The Canadian
Press. It could diminish Internet traffic to newspaper and
broadcast companies’ Web sites where those stories and
photos are also found — a development that could reduce
those companies’ revenue from online advertising.
What other areas do you see (besides weather, stocks, directions, phone numbers, books, and now AP news) where Google might start delivering results directly, thus potentially drying up traffic to the specialized sites that once provided that information? (Note that this is not necessarily a bad thing — like many possible changes in the web ecosystem, it’s possible for it to go either way, depending on the revenue splits to the licensed provider of the information. If that’s greater than the value of the ad revenue or other business model of the current system, everyone is happy. In the end though, it’s unlikely that everyone will be happy. But as long as the value created by the system is greater than the value destroyed, value reallocation between parties tends to work itself out over time.)