Peak Google

Google is presently the big pig at the online advertising trough, commanding by some estimates up to 62% of the $40B online advertising market. I was reading the latest 10-Q quarterly filing from Google, where it quite clearly states:

Advertising revenues made up 99% of our revenues in the three and six months ended June 30, 2006 and 2007.

As you probably know from your own domestic budget, spending practices are based on income but typically lag–a reduction in income takes a while to be reflected in your consumption. The same is true for businesses. Anyone who was around in the last tech bust knows that it took a while for executives to realize that the decline in income was permanent rather than temporary. That’s what savings are for, of course, and Google has $4.5B in cash and cash equivalents and another $8B in marketable securities. They’re spending $2.7B every quarter. That should give them a while to put the brakes on spending and growth should the online advertising market plateau.

Henry Blodget (who arguably contributed to the 90s tech boom and bust) looked into the 10-Qs for Google and Yahoo!. He then built a Google Spreadsheet modeling three scenarios for a downturn in the online advertising industry to see how the companies suffered. They obviously have different pressure points, with Yahoo! more diversified but with a much lower market share of the online advertising industry than Google. The results make for interesting reading, although naturally you should take a critical intellectual approach–financial spreadsheets are the Devil’s whispers.

When I’m confronted with predictions of the future, I always reach for concrete scenarios: “what signs will let us know that this vision of the future is coming true?” Here I think the signs would be:

  • the overall size of the online advertising market plateaus
  • Google’s market share growth plateaus
  • Google and Yahoo! (or whoever is the #2 online advertising broker in the future) begin fighting it out for smaller existing customers
  • the trajectory of revenue growth at Google stalls or is only maintained by artificial measures such as increasing the number of advertisements in search result pages or arbitrarily raising the transaction costs