Peak Google? Not Even Close

Search vs Native Ads

Google owns search, but are they a one trick pony?

A couple weeks ago Ben Thompson published an interesting article suggesting Google may followIBM and Microsoft in peaking, perhaps with native ads becoming more dominant than online searchads.

According to Forrester, in a couple years digital ad spend will overtake TV ad spend. In spite of therise of sponsored content, native isn't even broken out as a category.

Part of the issue with native advertising is it can be blurry to break out some of it. Some of it isobvious, but falls into multiple categories, like video ads on YouTube. Some of it is obvious, butrelatively new thus lacking in scale. Amazon is extending their payment services Prime shippingdeals to third party sites of brands like AllSaints listing inventory from those sites on Amazon.com,selling them traffic on a CPC basis. Does that count as native advertising? What about a ticketbroker or hotel booking site syndicating their inventory to a meta search site?

And while native is not broken out, Google already offers native ad management features inDoubleClick and has partnered with some of the more well known players like BuzzFeed.

The Penny Gap's Impact on Search

Time intends to test paywalls on all of its major titles next year they are working with third parties tointegrate affiliate ads on sites like People.com.

The second link in the above sentence goes to an article which is behind a paywall. On Twitter Ioften link to WSJ articles which are behind a paywall. Any important information behind a paywallmay quickly spread beyond it, but typically a competing free site which (re)reports on whatever isbehind the paywall is shared more, spreads further on social, generates more additional coverage onforums and discussion sites like Hacker News, gets highlighted on aggregators like TechMeme, getsmore links, ranks higher, and becomes the default/canonical source of the story.

Part of the rub of the penny gap is the cost of the friction vastly exceeds the financial cost. Thosewho can flow attention around the payment can typically make more by tracking and monetizinguser behavior than they could by charging users incrementally a cent here and a nickel there.

Well known franchises are forced to offer a free version or they eventually cede their marketposition.

There are sites which do roll up subscriptions to a variety of sites at once, but some of them whichhad stub articles requiring payment to access like Highbeam Research got torched by Panda. If thebarrier to entry to get to the content is too high the engagement metrics are likely to be terrible apenalty ensues. Even a general registration wall is too high of a barrier to entry for some sites.Google demands whatever content is shown to them be visible to end users if there is a miss matchthat is considered cloaking - unless the miss match is due to monetizing by using Google's contentlocking consumer surveys.

Who gets to the scale needed to have enough consumer demand to be able to charge an ongoingsubscription for access to a variety of third party content? There are a handful of players in music(Apple, Spotify, Pandora, etc) a handful of players in video (Netflix, Hulu, Amazon Prime), butoutside of those most paid subscription sites are about finance or niche topics with small scale. Andwhatever goes behind the paywalls gets seen by almost nobody when compared against to thebroader public market at the free pricepoint.

Even if you are in a broad niche industry where a subscription-based model works, it still may bebrutally tough to compete against Google. Google's chief business officer joined the board of Spotify,which means Spotify should be safe from Google risk, except...

Google's Impact on Premium Content

I've long argued Google has leveraged piracy to secure favorable media deals (see the second bulletpoint at the bottom of this infographic). Some might have perceived my take as being cynical, butwhen Google mentioned their "continued progress on fighting piracy" the first thing they mentionedwas more ad units.

There are free options, paid options the blurry lines in between which Google YouTube ride whilethey experiment with business models and monetize the flow of traffic to the paid options.

"Tech companies don't believe in the unique value of premium content over the long term." - JessicaLessin

There is a massive misalignment of values which causes many players to have to refine their strategyover and over again. The gray area is never static.

Many businesses only have a 10% or 15% profit margin. An online publishing company which sees20% of its traffic disappear might thus go from sustainable to bleeding cash overnight. A companywhich can arbitrarily shift / redirect a large amount of traffic online might describe itself as a"kingmaker."

In Germany some publishers wanted to be paid to be in the Google index. As a result Google stoppedshowing snippets near their listings. Google also refined their news search integration into theregular search results to include a broader selection of sources including social sites like Reddit. Asa result Axel Springer quickly found itself begging for things to go back to the way they were beforeas their Google search traffic declined 40% and their Google News traffic declined 80%. AxelSpringer got their descriptions back, but the "in the news" change remains.

Google's Impact on Weaker Players

If Google could have that dramatic of an impact on Axel Springer, imagine what sort of influencethey have on millions of other smaller and weaker online businesses.

One of the craziest examples is Demand Media.

Demand Media's market cap peaked above $1.9 billion. They spun out the domain name portion ofthe business into a company named Rightside Group, but the content portion of the business isvalued at essentially nothing. They have about $40 million in cash equivalents. Earlier this year theyacquired Saatchi Art for $17 million last year they acquired ecommerce marketplace Society6 for$94 million. After their last quarterly result their stock closed down 16.83% Thursday they weredown another 6.32%, given them a market capitalization of $102 million.

On their most recent conference call, here are some of the things Demand Media executives stated:

By the end of 2014, we anticipate more than 50.000 articles will be substantially improved byrewrites made rich with great visuals.

We are well underway with this push for quality and will remove $1.8 million underperformingarticles in Q4

as we strive to create the best experience we can we have removed two ad units with the third unitto be removed completely by January 1st

(on the above 2 changes) These changes are expected to have a negative impact on revenues andadjusted EBITDA of approximately $15 million on an annualized basis.

Through Q3 we have invested $1.1 million in content renovation costs and expect approximatelyanother $1 million in Q4 and $2 million to $4 million in the first half of next year.

if you look at visits or you know the mobile mix is growing which has lower CPM associated with itand then also on desktop we're seeing compression on the pricing line as well.

we know that sites that have ad density that's too high, not only are they offending audiences in nearterm, you are penalized with respect to where you show up in search indexes as well.

Google torched eHow in April of 2011. In spite of over 3 years of pain, Demand Media is still lettingGoogle drive their strategy, in some cases spending millions of dollars to undo past investments.

Yet when you look at Google's search results page, they are doing the opposite of the above strategy:more scraping of third party content coupled with more larger ad units.

Originally the source links in the scrape-n-displace program were light gray. They only turned blueafter a journalist started working on a story about 10 blue links.

The Blend

The search results can be designed to have some aspects blend in while others stand out. Colors canchange periodically to alter response rates in desirable ways.

The banner ad got a bad rap as publishers have fought declining CPMs by adding moreadvertisements to their pages. When it works, Google's infrastructure still delivers (and tracks)billions of daily banner ads.

Search ads have never had the performance decline banner ads have.

The closest thing Google ever faced on that front was when AdBlock Plus became popular. Since itwas blocking search ads, Google banned them then restored them as they eventually negotiated adeal to pay them to display ads on Google while they continued to block ads on other third partysites.

Search itself *is* the ultimate native advertising platform.

Google is doing away with the local carousel in favor of a 3 pack local listing in categories likehotels. Once a person clicks on one of the hotel listings, Google then inserts an inline knowledgegraph listing for that hotel with booking affiliate links inline in the search results, displacing the

organic result set below the fold.

Notice in the above graphic how the "website" link uses generic text, is aligned toward the right, andis right next to an image so that it looks like an ad. It is engineered to feel like an ad and be ignored.The actual ads are left aligned and look like regular text links. They have an ad label, but that labelis a couple lines up from them there are multiple horizontal lines between the label and the actual adunits.

Not only does Google have the ability to shift the layout in such a drastic format, but then withwhatever remains they also get to determine who they act against who they don't. While the SEOindustry debates the "ethics" of various marketing techniques Google has their eye on the prize isdisplacing the entire ecosystem wholesale.

Users were generally unable to distinguish between ads and organic listings *before* Google startedmixing the two in their knowledge graph. That is a big part of the reason search ads have never seenthe engagement declines banner ads have seen.

Mobile has been redesigned with the same thinking in mind. Google action items (which caneventually be monetized) up top everything else pushed down the page.

The blurring of "knowledge" and ads allows Google to test entering category after category (likedoctor calls from the search results) forcing advertisers to pay for the various tests while Googlecollects data.

And as Google is scraping information from third party sites, they can choose to show lessinformation on their own site if doing so creates additional monetization opportunities. As far backas 2009 Google stripped phone numbers off of non-sponsored map listings. And what happened withthe recent 3 pack? While 100% of the above the fold results are monetized, ...

"Go back to an original search that turns up the 3 PAC. Its completely devoid of logical informationthat a searcher would want:

No phone number

No address

No map

NO LINK to the restaurant website.

Anything that most users would want is deliberately hidden and/or requires more clicks." - DaveOremland

Google justifies their scrape-n-displace programs by claiming they are put users first. Then they hidesome of the information to drive incremental monetization opportunities. Google may eventually re-add some of those basic features which are now hidden, but as part of sponsored local listings.

After all - ads are the solution to everything.

Do branded banner ads in the search results have a low response rate? Or are advertisers unwillingto pay a significant sum for them? If so, Google can end the test and instead shift to include aproduct carousel in the search results, driving traffic to Google Shopping.

"I see this as yet another money grab by Google. Our clients typically pay 400-500% more for PLAclicks than for clicks on their PPC Brand ads. We will implement exact match brand negatives inShopping campaigns." - Barb Young

That money grab stuff has virtually no limit.

The Click Casino

Off the start keywords defaulted to broad match. Then campaigns went "enhanced" so advertiserswere forced to eat lower quality clicks on mobile devices.

Then there was the blurring exact match targeting into something else, forcing advertisers to buylower quality variations of searches making them add tons of negative keywords (and keep eatingnew garbage re-interpretations of words) in order to run a fine tuned campaign specifically targetedagainst a term.

In the past some PPC folks cheered obfuscation of organic search, thinking "this will never happento me."

Oops.

And of course Google not only wants to be the ad auction, but they want to be your SEM platformmanaging your spend they are suggesting you can leverage the "power" of automated auction timebiding.

Advertisers RAVE about the success of Google's automatic bidding features: "It received one click.That click cost $362.63."

The only thing better than that is banner ads in free mobile tap games targeted at children.

Adding Friction

Above I mentioned how Google arbitrarily banned the AdBlock Plus extension from the Play store.They also repeatedly banned Disconnect Mobile. If you depend on mobile phones for distribution it ishard to get around Google. What's more they also collect performance data, internally launchcompeting apps, and invest in third party apps. And they control the prices various apps pay foradvertising across their broad network.

So maybe you say "ok, I'll skip search mobile, I'll try to leverage email" but this gets back to thesame issue again. In Gmail social or promotional emails get quarantined into a ghetto where theyare rarely seen:

"online stores, if they get big enough, can act as chokepoints. And so can Google. ... Googleunilaterally misfiled my daily blog into the promotions folder they created, and I have no recourseand no way (other than this post) to explain the error to them" - Seth Godin

Those friction adders have real world consequences. A year ago Groupon blamed Gmail's tabs forcausing them to have poor quarterly results. The filtering impact on a start up can be even moreextreme. A small shift in exposure can lower the K factor to something below 1 require the startupsto buy exposure rather than generating it virally.

In addition to those other tabs, there are a host of other risks like being labeled as spam or having asecurity warning. Few sites are as widely read inside the Googleplex as Search Engine Land, yet atone point even their newsletter was showing a warning in Gmail.

Google can also add friction to

websites using search rankings, vertical search result displacement, hiding local businessinformation (as referenced above), search query suggestions, and/or leveraging their web browser toredirect consumer intent

video on YouTube by counting ad views as organic views, changing the relevancy metrics, andinvesting in competing channels giving them preferential exposure as part of the deal. YouTube getsover half their views on mobile devices with small screens, so any shift on Google's rank preferenceis going to have a major shift in click distributions.

mobile apps using default bundling agreements which require manufactures to set Google's apps asdefaults

other business models by banning bundling-based business models too similar to their own (bundlingis wrong UNLESS it is Google doing it)

etc.

The launch of Keyword (not provided) which hid organic search keyword data was friction for thesake of it in organic search. When Google announced HTTPS as a ranking signal, Netmeg wrote: "It's

about ad targeting, and who gets to profile you, and who doesn't. Mark my words."

Facebook announced their relaunch of Atlas and Google immediately started cracking down on dataaccess:

In the conversations this week, with companies like Krux, BlueKai and Lotame, Google told datamanagement platform players that they could not use pixels in certain ads. The pixels--embeddedwithin digital ads--help marketers target and understand how many times a given user has seen theirmessages online.

"Google is only allowing data management platforms to fire pixels on creative assets that they'reserving, on impressions they bought, through the Google Display Network," said Mike Moreau, chiefsolutions officer at Krux. "So they're starting with a very narrow scope."

Around the same time Google was cracking down on data sharing, they began offering featurestargeting consumers across devices announced custom affinity audiences which allow advertisers totarget audiences who visit any particular website.

Google's special role is not only as an organizer (and obfuscator) of information, but then they get tobe the source measuromg how well marketing works via their analytics, which can regularly launchnew reports which may causually over-represent their own contribution while under-representingsome other channels, profiting from activity bias. The industry default of last click attribution drivingsearch ad spending is one of the key issues which has driven down display ad values over the years.

Investing in Competition

Google not only ranks the ecosystem, but they actively invest in it.

Google tried to buy Yelp. When Facebook took off Google invested in Zynga to get access to data, inspite of a sketchy background. When Google's $6 billion offer for Groupon didn't close the deal,Google quickly partnered with over a dozen Groupon competitors created new offer ad units in thesearch results.

Inside of the YouTube ecosystem Google also holds equity stakes in leading publishers likeMachinima and Vevo.

There have been a few examples of investments getting special treatment, getting benefit of thedoubt, or access to non-public information.

The scary scenario for publishers might sound something like this: "in Baidu Maps you can find ahotel, check room availability, and make a booking, all inside the app." There's no need to leave thesearch engine.

Take a closer look that scary version might already be here. Google's same day delivery boss movedto Uber and Google added Uber pickups and price estimates to their mobile Maps app.

Google, of course, also invested in Uber. It would be hard to argue that Uber is anything butsuccessful. Though it is also worth mentioning winning at any cost often creates losses elsewhere:

Google invests in disruption as though disruption is its own virtue they leverage their internal datato drive the investments:

"If you can't measure and quantify it, how can you hope to start working on a solution?" said BillMaris, managing partner of Google Ventures. "We have access to the world's largest data sets youcan imagine, our cloud computer infrastructure is the biggest ever. It would be foolish to just go outand make gut investments."

Combining usage data from their search engine, web browser, app store mobile OS gives themunparalleled insights into almost any business.

Google is one of the few companies which can make multi-billion dollar investments in low marginareas, just for the data:

Google executives are prodding their engineers to make its public cloud as fast and powerful as thedata centers that run its own apps. That push, along with other sales and technology initiatives,aren't just about grabbing a share of growing cloud revenue. Executives increasingly believe suchservices could give Google insights about what to build next, what companies to buy and otherconsumer preferences

Google committed to spending as much as a half billion dollars promoting their shopping expressdelivery service.

Google's fiber push now includes offering business internet services. Elon Musk is looking intooffering satellite internet services - with an ex-Googler.

The End Game

Google now spends more than any other company on federal lobbying in the US. A steady stream ofGoogle executives have filled US government rolls like deputy chief technology officer, chieftechnology officer, and head of the patent and trademark office. A Google software engineer went sofar as suggesting President Obama

Retire all government employees with full pensions.

Transfer administrative authority to the tech industry.

Appoint Eric Schmidt CEO of America.

That Googler may be crazy or a troll, but even if we don't get their nightmare scenario, if theregulators come from a particular company, that company is unlikely to end up hurt by regulations.

President Obama has stated the importance of an open internet: "We cannot allow Internet serviceproviders to restrict the best access or to pick winners and losers in the online marketplace forservices and ideas."

If there are relevant complaints about Google, who will hear them when Googlers head keygovernment roles?

Larry Page was recently labeled businessperson of the year by Fortune:

It's a powerful example of how Page pushes the world around him into his vision of the future. "Thebreadth of things that he is taking on is staggering," says Ben Horowitz, of Andreessen Horowitz."We have not seen that kind of business leader since Thomas Edison at GE or David Packard at HP."

A recent interview of Larry Page in the Financial Times echos the theme of limitless ambition:

"the world's most powerful internet company is ready to trade the cash from its search enginemonopoly for a slice of the next century's technological bonanza." ... "As Page sees it, it all comesdown to ambition - a commodity of which the world simply doesn't have a large enough supply."

"I think people see the disruption but they don't really see the positive," says Page. "They don't see itas a life-changing kind of thing . . . I think the problem has been people don't feel they areparticipating in it."

"Even if there's going to be a disruption on people's jobs, in the short term that's likely to be madeup by the decreasing cost of things we need, which I think is really important and not being talkedabout."

"in a capitalist system, he suggests, the elimination of inefficiency through technology has to bepursued to its logical conclusion."

There are some dark layers which are apparently "incidental side effects" of the techno-utopiandesires.

Mental flaws could be reinforced monetized by hooking people on prescription pharmaceuticals:

It takes very little imagination to foresee how the kitchen mood wall could lead to advertisements forantidepressants that follow you around the Web, or trigger an alert to your employer, or show up onyour Facebook page because, according to Robert Scoble and Shel Israel in Age of Context: Mobile,Sensors, Data and the Future of Privacy, Facebook "wants to build a system that anticipates yourneeds."

Or perhaps...

Those business savings are crucial to Rifkin's vision of the Third Industrial Revolution, not simplybecause they have the potential to bring down the price of consumer goods, but because, for thefirst time, a central tenet of capitalism--that increased productivity requires increased human labor--will no longer hold. And once productivity is unmoored from labor, he argues, capitalism will not beable to support itself, either ideologically or practically.

That is not to say "all will fail" due to technology. Some will succeed wildly.

Michelle Phan has been able to leverage her popularity on YouTube to launch a makeup subscriptionservice which is at an $84 million per year revenue run rate.

Those at the top of the hierarchy will get an additional boost. Such edge case success stories will bemarketed offline to pull more people onto the platform.

While a "star based" compensation system makes a few people well off, most people publishing onthose platforms won't see any financial benefit from their efforts. Worse yet, a lot of the "viral"success stories are driven by a large ad budget.

Even Google has done research on income inequality in attention economies - and that was beforethey dialed up their brand bias stuff.

Category after category gets commoditized, platform after platform gets funded by Google, andultimately employees working on them will long for the days where their wages were held down byillegal collusion rather than the crowdsourcing fate they face:

Workers, in turn, have more mobility and a semblance of greater control over their working lives.But is any of it worth it when we can't afford health insurance or don't know how much the next gigmight pay, or when it might come? When an app's terms of service agreement is the closest thing wehave to an employment contract? When work orders come through a smartphone and we know thatif we don't respond immediately, we might not get such an opportunity again? When we can't eventalk to another human being about the task at hand and we must work nonstop just to makeminimum wage?

Just as people get commoditized, so do other layers of value:

In SEO for a number of years many people have painted brand as the solution to everything. Butconsider the hotel search results which are 100% monetized above the fold - even if you have abrand, you still must pay to play. Or consider the Google Shopping ads which are now being testedon branded navigational searches.

Google even obtained a patent for targeting ads aimed at monetizing named entities.

You paid to build the brand. Then you pay Google again - "or else."

One could choose to opt out of Google ad products so as not to pay to arbitrage themselves, butGoogle is willing to harm their own relevancy to extract revenues.

A search in the UK for the trademark term [cheapflights] is converted into the generic search [cheapflights]. The official site is ranking #2 organically and is the 20th clickable link in the left rail of thesearch results.

As much as brand is an asset, it also becomes a liability if you have to pay again for every timesomeone looks for your brand.

Mobile apps may be a way around Google, but again it is worth noting Google owns the operatingsystem and guarantees themselves default placement across a wide array of verticals throughbundling contracts with manufacturers. Another thing worth considering with mobile is newnotification features tied to the operating systems are unbundling apps Google has apps like GoogleNow which tie into many verticals.

As SEOs for a long time we had value in promoting the adoption of Google's ecosystem. As Googleattempts to capture more value than they create we may no longer gain by promoting the adoptionof their ecosystem, but given their...

cash hoard

lobbyists

ex-employees in key government rolls

control over video, mobile, apps, maps, email, analytics (along with search)

broad portfolio of investments

... it is hard to think they've come anywhere close to peaking.