Ads, ads or ads, it's time to get out of Google search

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Hunting Cloud Network (Microsignal:) November 23 (Compiled: Oilman)

Editor's note: Ben Thompson, the original author of this article, has worked at Apple, Microsoft and Automattic, focusing on strategy, developer relations, and marketing.

In the third quarter of 2014, Google generated revenue of $16.5 billion and profits of $2.8 billion. At the time, many people thought Google's growth had peaked, and I wrote an analysis. Fast-forward to the last quarter, however, Google's revenues reached $36 billion and profits reached $6.7 billion, up 118 percent and 139 percent, respectively. This is very incredible data!

The first thing to say is that my argument is not that Google's revenue and profit growth are over. On the contrary, like Microsoft in the early 2000s, Google will continue to grow, but its relevance has peaked, in large part because brand marketing will become more important online.

Frankly, this explanation makes things worse in a way: certain types of ads do work much better on platforms like Facebook or Instagram, as I predict. It should also be noted that, compared to direct ads generated by demand (as opposed to direct ads that Google captures demand in searches), most ads are not traditional brand edds, which means that brands are more attractive for future conversions. But, most unfortunately, it also suggests that Google's relevance has begun to decline.


Five years of growth

First, I should have been clear from the outset that the original analysis did not apply to YouTube. Not only is YouTube naturally suited to traditionally video-based brand advertising, but it made little profit at the time. Obviously, YouTube alone has led to tremendous growth.

Second, although I spent a lot of time writing about mobile devices in Stratechery's first years, i underestimated the impact of mobile, especially for Americans who already used personal computers. First, mobile technology has dramatically increased the number of users Google serves in both developed and developing countries. Second, mobile devices have greatly increased the use of existing users, as the Internet can be found not only on desks or backpacks, but also in people's pockets. Google's market is actually expanding.

My biggest mistake, however, was underestimating Google's ability to show more ads to users.


More ads

The first and most obvious way for Google to show more ads to users is to insert more ads into mobile search results. I've been following this development closely and want to know how many ads the company will add. At the time, I wrote:

"True, this observation is largely critical: is Google's revenue growth due to increased actual engagement or simply because the screen is full of more ads?" In fact, the right answer is 'Who cares?' 'And the reason behind it must be something anachronistic, like the modern paid advertising model. "

As it did a decade ago, Google argues that people simply use the Internet, which means they can make more money.

Equally important, Google responds to the threat posed by vertical search alternatives. When I wrote Peak Google, there were a lot of people who said that mobile was a problem for Google because the new application paradigm would make it more likely that end users would bypass Google. They'll use Yelp for local searches, Amazon to shop, or travel with Expedia; of course, URLs and bookmark managers may be too confusing for most users, but "app revolution" means vertical search engines can be done with a single click.

In fact, however, the threat was eventually exaggerated for a variety of reasons.

First, it turns out that users don't want many apps. Search in a built-in browser remains the simplest and most obvious starting point.

Second, Google is willing to pay all the necessary fees to ensure that it is the default search engine for those built-in browsers, including the billions of dollars Apple continues to receive.

Third, Google has set out to change the mobile results to make them more useful: rather than forcing users to click a link for an answer, Google offers them directly. Most importantly, though, Google offers a brand new results page when it comes to vertical search categories.


Expedia TripAdvisor

The reason for this discussion is that Expedia and TripAdvisor have disappointing results. Shares in Expedia and TripAdvisor hit their lowest levels for the year, down as much as 25 percent, CNBC reported. After Wednesday's session, both travel services stocks reported third-quarter earnings that fell as much as expected. Both companies point to a drop in the visibility of Google's search results in the long run.

Mark Okerstrom, Ceo of Expedia, said on Expedia's earnings conference call:

"What we're seeing is that with the advent of other modules, virtually free links are moving below the search page, whether it's flight meta-search or hotel meta-search, and eventually, over time, traffic is moving from SEO channels to other products." Of course, now that it's related to hotel products, we get a certain amount of traffic, but it ultimately leads to more spending on sales and marketing than we used to. We're happy with the returns we've seen, but they're not as good as we've seen from SEO channels. "

Steve Kaufer, chief executive of TripAdvisor, said in a earnings call from TripAdvisor:

"Throughout the quarter, we did see an increase in SEO. It's always hard to know exactly what Google is doing. We think this is our organic result. And I think you're going to see that across the industry, because Google is becoming more and more aggressive. We have been predicting this for many years. We talked about that in our last call. We know SEO is a sustainable trend, and we didn't expect it to turn around. "

Expedia and TripAdvisor used to be the same company, playing in closely related fields. Expedia is an "OTA" (online travel agency where you can book hotels, airline tickets, etc.). TripAdvisor focuses on reviews, but makes money through meta-search engines (i.e. by introducing OTAs to users) (although TripAdvisor has "instant booking" products, not far from OTAs themselves).


OTA and aggregation theory

In aggregation theory, OTAs have always been a special case, like collectors, which serve customers at zero marginal cost and control supply (primarily hotels) by delivering demand. For me, the trickiest part is how they meet this demand: first and foremost, it's from Google.

Expedia's business at Google is important: it can provide highly relevant answers to frequently asked questions such as "Tokyo Ticket" or "Sydney Hotel" and is very good at buying search ads. At the same time, TripAdvisor uses its reviews to give high ratings on all travel-related terms, and then provides booking capabilities based on those reviews.

But it's worth noting in both cases that it's Google that ultimately owns the customer relationship, which is why I've always hesitated to call it an OTAs aggregator: for a long time, this arrangement between OTAs and Google has worked in both hands. Google attracts traffic to OTAs, which can monetize traffic by taking commissions from suppliers. At the same time, Google not only got results that could be found for customer service, but also made billions of dollars from OTA's purchase of search ads.

And it's the hotel module that starts with Google's search results and then extends those results to the financial results of these companies. First, notice how many screens you now have to scroll to achieve natural results, and at least three screens on the 812-point iPhone 11 Pro.

Again, it's not necessarily new. Google has been adding ads, but what makes the hotel module compelling is that, while it's easy to ignore ads, it does work! You'll be shown a city map with prices for each hotel, you can specify your date, and several options for you to click on.

But, at least from an OTA perspective, this is a problem. If you're not sure what these "Google Partners" mean, check out the search results like this:


Photo: Twitter

Everything in the hotel module is advertising, or more accurately, paid advertising. There are no Expedia.coms or TripAdvisors for this particular example. That's exactly what Okerstrom is talking about:


Summary OTAs

At this point, the conclusion seems easy, doesn't it? Google has become evil again. In fact, while I understand the frustrations of Expedia and TripAdvisor, I think it's a little more complicated.

From a theoretical point of view: the market stability structure dominated by aggregators is: aggregator controls demand, and the supplier adds the aggregator in the condition of the aggregator. In other words, there are three players in the value chain: supplier-aggregator-demand. It's worth noting, however, that this is not the case in travel, where Google controls demand, but OTAs control supply.

One way to balance this is to make Google an OTA for everyone. Indeed, this is hard to counter (a concern when Google bought ITA in 2010). The truth is, however, that OTAs have made a huge effort to attract suppliers who have dealt with all the annoying payment and customer support issues that Google likes to avoid. Instead, Google has realized that it can effectively pay OTAs to Google and fix the troublefor slots for them.

With the hotel module, Google can capture demand more effectively, which not only makes Google search more attractive to end users, but also transforms OTAs into a vendor, providing services that Google does not want. Here's what Tren Griffin calls a textbook example of wholesale transfer pricing:

"Wholesale Transfer Pricing- Company A provides B with the bargaining power of a unique product XYZ, which allows Company A to obtain Company B's profit by increasing the wholesale price of XYZ." "

In this case, the only product is the demand- the user. That's where I want to defend Google: at the end of the day, by offering better products, the company dominates its value chain. Search is the best starting point, but Google doesn't hold back: it makes mobile search better, especially by using such modules.

At the same time, I'm generally frustrated with OTAs and Google's suppliers as a whole: four ads can block users, and Google pays the price for everything that becomes the default search engine, is it fair for the company to charge rent in this way?


Compete with Google

Here, we need to consider the largest OTA ever, Booking Holdings. The company reported earnings the day after Expedia reported. Morningstar reports:

Booking Holdings reported better-than-expected third-quarter results. The online travel site's profit was $1.95 billion, or $45.54 per share, up from $1.77 billion, or $37.02 per share, a year earlier. Adjusted earnings were $45.36, up 20 percent from a year earlier. Analysts surveyed by FactSet had an average estimate of $44.50 per share. Revenue was $5 billion, up from $4.8 billion a year earlier. Analysts had expected $4.85 billion. "

Glenn Fogel, chief executive of Booking Holdings, said the company was relatively isolated from Google's behavior: "With regard to SEO, we've seen some headwinds in seo channels, which does put some pressure on us, but it's only a small channel for us. "

Fogel later added: "At the end of the day, the most important thing is that we attract customers to come to us directly." We've talked a lot in the past. I think it's an important thing. For us, having our own future is to create such a wonderful, wonderful service that people naturally come straight back to us. And we don't rely so much on other sources of traffic. "

That's obviously a good thing, isn't it? Booking knows that it can't rely on Google channels, and that innovation and building a customer experience can convince users to go directly to Booking, which best guarantees its future and is a competition that benefits customers!

I had a similar idea when Reading a profile of Yelp CEO Jeremy Stoppelman, who was shocked long ago when the "hotel module" appeared in the "local module" of Google Search. But what always makes me stop complaining about Yelp is that, as I mentioned earlier, the company was once considered a typical threat to Google on mobile devices. Why doesn't the company earn more direct customers, but spend a lot of time and effort on Google's search results?

Instead, Yelp went the other way. It is alert to comments and uses some simple ways to monetize user data. For example, it does not allow businesses to target people who happen to encounter ads. Despite all the rumours, it's hard to imagine Yelp being a takeover target for the tech giant.


Monopoly issues

I am still very concerned about monopolies, especially in consumer technology and digital advertising. The Wall Street Journal story provides a good overview of how Google has made competition extremely difficult (for highly competitive advertising technology companies) and how it has made it extremely difficult to enter other markets (for its customers).

On the other hand, the reason I stopped exploring searchwas is that users are not moved without restrictions. Using Yelp, Amazon or Booking on the web and on smartphones is really easy. Is customer inertia something that needs to be regulated, or is it possible to induce the manufacture of more attractive products?

The answer may lie in Google's behaviour itself: unlike traditional monopolies, it's hard to say that Google's products won't get any better. Of course, OTAs require a fee to use the hotel module, but the hotel module is a real improvement on the 10 blue links. I definitely think this may be Google's unfair expansion in search, but what is more worth considering is the possibility of suppressing innovation directly or with an intention.

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