| | Barron's...Truth in Advertising.
Why Google's technology contains the seed of its destruction
By THOMAS G. DONLAN
AS MANY LESSER BEINGS KNOW BY NOW, the name "Google" is a mathematics joke. An idle professor designated it as the number one followed by 100 zeros. Google the company carries the name to resonate with the nearly infinite amount of information on the World Wide Web, and to boast of its search engine's command of that information.
What could be funnier to a mathematician than a company called Google, housed in a place called the Googleplex? (Which is the number one followed by a google of zeros.) Is Google a bigger joke than its name? It may be just a math joke, or it may be an investment joke as well.
There's a very old saying that half of every advertising dollar is wasted -- the challenge to the executive is to figure out which half. Once ads are printed on pages or sent into the broadcast and cable waves, the advertiser has no good way of knowing what happened or what they achieved. How many eyeballs were fastened on that ad? How many of the eyeballs were attached to minds possibly interested in buying the product?
Tracking the effect of advertising used to be the exclusive job of market-research firms, who polled, sampled, group-focused and ultimately guessed how effective media were at reaching target audiences and how effective ads were at impressing those audiences once reached.
Much of the attraction of television advertising was its universality, now lost in the transition from three broadcast networks to hundreds of cable channels. In the days of three networks, an advertiser could plan a two-month national campaign that would hit 90% of the country's eyeballs. He couldn't miss the target audience, even though it was certain he was also advertising to people who had no interest in his product.
That's how old media worked in the old economy. Now, with new media, a new-economy advertiser can find out how well his ads work. It's called click-through, and it's dynamite. The question is, whom does it blow up, the advertiser or the advertising medium?
When an advertiser buys access to a privileged position in consumers' Google searches on particular subjects, or buys ads that Google places on independent Websites, the advertiser pays Google every time someone clicks on his ad and is linked to his Website.
Google's standard business arrangements call for advertisers to pay by the click, at a rate set by auction, with the highest bidder getting the best spot. The minimum price at Google is a penny a click.
But who's clicking? Are they legitimate customers? Over the past few years, advertisers and Internet media companies have been dealing with a rising tide of click fraud. A simple example: If your competitor is paying for clicks, then you can raise his costs by giving him too much of what he's paying for. Hire a click farm in which people are paid a little to click on ads all day -- buying nothing, of course. This is a task that also can be automated, and there are many variations, but all such frauds are designed to raise costs for the advertiser and degrade the effectiveness of his ads.
Google and similar outfits say they have the problem controlled with traffic analysis and refunds of fees generated by spurious clicks. But they don't reveal details, or report how much click defenses cost them.
Those few speculators who are bearish on Google cite the threat of click fraud. Their scenario runs like this: Fraudsters move more quickly than defenders, so unthwarted click fraud increases. The cost of advertising to generate a sale increases, making alternative advertising media more attractive. Google has to cut prices; revenue-per-click declines and so do clicks. Google stops being a growth stock and its multiples start to shrink.
The only problem with this thesis is its dependence on the idea of click fraud. Just as dangerous to Google is Click truth. Google's best selling point -- advertisers can learn which clicks produce sales -- is potentially its biggest hazard, because advertisers can also learn which clicks don't produce sales, and scale back their advertising budget so that less of it is wasted.
This may not kill Google in the world of advertising, but it will force it to change every bit as much as Google and its Internet cohorts are forcing TV, newspapers and magazines to change.
Forced change is an opportunity to stumble. And in the world of stock-market speculation, Google -- selling for multiples of future earnings and cash flow that imply impossible growth -- is already a disaster waiting to happen, although nobody knows when or how the market will force a revaluation. |
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