February 27th, 2008
Why It’s Good News If Google Is Vulnerable To A Recession
Tech bloggers and analysts had a collective cow yesterday over the news that January 2008 comScore data suggest clicks on Google’s paid search ads have stopped growing, which implies that Google may be vulnerable to a US recession already underway. Fred Wilson had a sober reflection on why he stands behind his (albeit ill-timed) purchase of GOOG and why he will continue to buy GOOG, arguing that Wall Street has not yet been able to value all of Google’s potential growth opportunities beyond paid search.
Here’s why I think it would actually be, from a long-term perspective, good news if Google proves vulnerable to a recession and a cutback in ad spending — it means Google is a REAL business.
Remember back in 90s when everyone argued that the New Economy wasn’t subject to the same cyclicality as the Old Economy? That New Economy companies were recession-proof? Well, you know how the story ended. The New Economy companies didn’t just slump with a cyclical downturn — they vaporized — poof.
Why? Because they weren’t real businesses.
If Google’s paid search business continued to grow during a recession, during a period of rational pullback by consumers who click on ads and business that pay for those clicks, what would that suggest about Google’s business?
Bubble. Irrational exuberance. Pick your buzzword.
Any business that operates based on cyclical inputs — i.e. consumer spending and ad spending — that appears immune to cyclicality is defying the laws of economic gravity. And when gravity kicks in, it’s not like water rolling down a hill — it’s like Wile E. Coyote realizing there’s no more cliff underneath him.
If Google’s paid search business turns down when consumers and businesses spend less, it makes it far more likely that these consumers and businesses are making rational decisions about paid search advertising — that there is real value there.
Google may slide along with the economy, which is bad news for short-term investors. But it’s good news for long-term investors because it makes it much more likely that when the economy recovers (whenever that is), Google’s paid search business will respond as positively to a resurgent economy as it did negatively to a downturn economy.
It also remains to be seen the response from advertisers who are managing their Google search advertising as a profit center rather than a cost center, i.e. advertisers who can calculate that they get more than $1 back for every dollar they spend on Google search ads.
If you can calculate the profit margin on some of your ad spending, when times get tough, aren’t you more likely to put MORE money into the advertising that you know to be profitable — and do so perhaps by shifting dollars out of the advertising that is of more speculative value, e.g. TV brand ads? Or at least until the profitable advertising ceases to return a profit?
And if Google is indeed a bellwether of online advertising, and it online advertising is rationally tied to the economy, it’s also much more likely the online advertising will accelerate its growth even more when the economy eventually recovers.
Powered by 
Design by 
Scott, I think you overlooked one of the fundamental assumptions held by many GOOG investors — mainly that the online advertising market is underpenetrated.
It stands to reason that even in a period of ad-spending stagnation, Google could continue to grow by capturing marketing market share.
Beware the physical comparisons (ie laws of gravity). Classical economics follow physics 101. A more fitting model of the economy as a complex adaptive system has emerged - yep just like the web is.
If there are less clicks on google ads that may be because the environment is adapting by learning that clicking on these ads rarely comes as a result of a network of trust.
And more old-style advertisers are piling in to use them - with banner ads and less in context related campaigns trying to interrupt the conversation.
The ads are often turning into broadcast events in something that is a networked medium.
It’s not enough to know that the overall CTR is down. What we need to know is on what kinds of ads it is down.
[…] Why It’s Good News If Google Is Vulnerable To A Recession (tags: google advertising) […]
In October of 2007 Google reduced the clickable area of the ads. Previously clicking anywhere on the box the ad was in took you to the destination. Now users have to click specifically on the links in the ad - so the headline and domain are the only clickable areas. That’s a huge difference.
Some say this will actually evens out because it will reduce accidental clicks and increase profits for the advertisers…who will then spend more on advertising since their ROI is increasing. So we’ll see soon how that works out…
It’s ridiculous their stock is judged at all on how many clicks they get through Adsense. Isn’t the important factor how much revenue has come in and profit they’ve made?
Not at all a specialist but surely part of the crowded web publisher wanabee world trying to take a stake in this huge cake than ad spendings I can agree with part of the article, but found it either taking side or over optimistic about Google.
The facts beyond this trivial point of vue (mine of course) are that Google supremacy had let them to send a lot of negative signals to the surfers and the whole websites owners whatever field, domain and categorie it could be.
The proof is simply by taking a quick look of the emerging google wanabees, for sure less strong, often not so mature, probably not going to survive , but after all, more and more specialized, accurate and promising.
Google is probably if not surely getting the Microsoft syndrom, and have waived a bunch of pretty good warriors that will for sure end to be part of the business.
And this is good for the market, but also for the people who are on the quest of unbiaised search and query results.
Doug is right when he says the it stands to reason that even in a period of ad-spending stagnation, Google could continue to grow by capturing marketing market share, but I bet that it will not be in the same config anymore.
When David says that more old-style advertisers are piling in to use them - with banner ads and less in context related campaigns trying to interrupt the conversation, I also agree, but would temper this by
daring to say that websites, publishers and other media will have to test and test again, alterning the formats (banners, contextual ads, embeeded app and so on) even in the structure of their estate which can be broad.
Anyway, this is a trivial statement, but I can’t ignore the fact that neither Google, Yahoo, AOL nor MSN have succeded to dominate foreign markets like Central Europe, Russian Federation and CIS, and the more promising Indian and Chineese.
Of course, we now know, ComScore’s original report was based on flawed data and ComScore has issued a correction …
However, for our own internal analysis, I made the observation that “isn’t capitalism wonderful”? There are so many self-correcting mechanisms. Just when you think Google is going to run away with the game, some dose of reality hits. For every excess, there is an unmet need; for every glut, there is a scarcity. And not every solution fits every need, and so old and new competitors alike get a second chance.
Well, now that you put it that way, I can see your point. I just can’t help but wonder how Google will react to seeing this entry of yours. I’m not saying that they might react negatively. It’s just a curious feeling knowing that being affected by recession can make your seem more real.