Google - The Implosion Of An Advertising Bubble And The Company's Perceived Invincibility
This is one of the straggler posts from last year. I wrote this post last fall as the credit crisis was gaining root. I figured I would get it up while it was still timely. So much of the post is in the context of 2008. keep that in mind while reading it.
Over the last year or so The New York Times has reported ad revenue down significantly. That confirms reports of other industry giants McClatchy, Gannett and nearly every other traditional media source reporting ad revenues. Not all but most. There were reports in the second quarter that comScore misinterpreted Google ad clicks. And, that Google's stock was erroneously under pressure. I am quite confident that investors in Google were and are not liquidating the stock because of anecdotal data from comScore.
I think we can now confidently question a claim made by one of the Google founders that the company was designed to be recession proof. A lead Google developer said early this year they will have to see how spending unfolds to confirm if the company is indeed recession proof. That's really quite funny. As we wrote on here before there is no such thing as recession proof. Revenues rising in a normal recession is generally a notion with no validity. In fact, depending on the depth of the recession even sales of staple products can be very negatively impacted. In any event, what does any of this have to do with the price of the stock? As I have said before, the founders of Google were surely capable at creating their very powerful invention but let's keep their aura in perspective. We know they offered to sell the company for somewhere around $1 billion. So, just like Bill Gates, who offered to sell Microsoft three or four times at even lower prices, the founders really had no idea how successful Google would be. And, two graduate students working in a garage with no background in business surely didn't have 'recession proof' as a design point for a concept they were creating. None of this takes away from the brilliance, success or ability of the Google founders. They deserve their just rewards. But hubris simply reminds us that we can all be quite easily convinced of rewriting the past or even the facts.
The anticipated trends for online ad revenue are astronomical. Trend projecting must involve thoughtful consideration of macro factors not seldom understood by industry-specific analysis. Especially when they are related to economics as is the projection for online ad revenue growth. As we discussed before, online ad revenue has been somewhat of an experiment for many companies and there hasn't been strict quantifiable return on investment-ROI-analysis in many cases. It's more of let's throw it out there and see what happens. How do I know this? Because I've actually heard ad executives use this as an argument to increase online ad spending.
So, here's something to think about. We are in a financial bubble that has lead to an earnings bubble. And, the concentration of online ad spending is heavily weighted to financial corporations, globalization and consumers. And, Google became somewhat of a cult phenomenon that the advertising herd jumped on with both feet. Not necessarily because of any reason other than everyone else was doing it. Uh, sort of like Wall Street's repeatable behavior. Given advertising is all about image and prone to significant follow-the-leader dynamics, how could any ad executive resist the Google phenomenon? Seriously?
As corporate earnings drop, and there will be a very sustained drop as we highlighted before, what will CFOs cut? Especially given the macro dynamics of the global economy as it pertains to the focus areas of online ad spending. What becomes expendable? I'll tell you what - unquantifiable ad spending with Google or even ad spending with diminishing or marginal returns. So, might we actually conclude ad spending itself is therefore a bubble fueled in part by the global economic bubble? And, that the online ad growth projections will be completely erroneous? And, that all of the brilliant savants telling us to load up on Google over the last few years were simply caught up in the hubris of a bubble? Could thousands and thousands of ad executives and Wall Street professionals be wrong on this topic? If we look at ad spending and associated GDP, we already see that ad spending has been producing substantially diminishing returns for some years. In other words, it is taking greater and greater ad spending to achieve less and less GDP growth. Looked at another way, the ROI for ad spending has been cratering for some time.
I'm not an ad executive but I do have a fair amount of experience working with companies to personalize marketing and as I wrote back in 2006, this will surely be a future trend in advertising. The type of solutions needed to really drive this effort aren't there yet eithre at the ad level or the corporate level but ultimately whatever the medium, personalized marketing will be a substantial driver of new jobs and technology. Personalized marketing will also very likely put substantial pressures on ad spending instead of the shotgun approach of today. Another factor pointing to an advertising bubble. As an aside, it's also one of many reasons I am bearish on long term trends supporting Wal-mart's business model. This at a time when Wall Street is generally in love with the retailer. Mass marketers and mass manufacturers are in for a major trend shift at some future point. That future may not be so far off either. If Google isn't a leader of personalized marketing, they will be right there with other "mass" missing the new trend. We've already seen the transformation of supply chains and are in the early stages of adopting new manufacturing methods that will help manufacturers and boutique retailers meet the challenges of product and marketing personalization. Future trends could be a death knell to many mass advertisers, mass marketers, mass merchants and mass manufacturers. Not that many of these mass appeal organizations can't transform themselves. They can. But when did you ever receive personalized service at Wal-mart? General Motors? Or others relying on economies of size? The future bodes ill for the business of being a monopoly. There will always be some need for mass appeal but margins and clientele will doom most organizations serving this space to the bottom of the profit barrel. And, that is where I believe Wal-mart is headed at some point. There aren't any aspirational consumers going to shop at Wal-mart unless they have to. Ever. Everyone wants to be an aspirational consumer. The bigger they are, the harder they fall.
By the way, I am confident Google understands this very well. It's simply a matter of whether they will be a leader in this space. Because there are six billion people on earth and a few thousand that work for Google, that isn't likely. It's no different than assuming the next great piece of business software will come from Oracle or SAP. That is just as improbable. Especially if markets are encouraged to embrace competition. The next great anything almost always comes from small or new businesses. Just ask Google. The only hope for established organizations is to be a fast follower or acquire the technology and use their girth to remain competitive. Yet their girth is a hindrance in the long run.
I have been telling readers that Google is a bubble for years. Now that bubble is popping. How often have we said that brilliance in business is often confused with constructive fundamentals of which a company has little control? Google was the right product for the right time in economic history because the fundamentals supported it. Not because its management or founders are bodhisattvas.
Over the last year or so The New York Times has reported ad revenue down significantly. That confirms reports of other industry giants McClatchy, Gannett and nearly every other traditional media source reporting ad revenues. Not all but most. There were reports in the second quarter that comScore misinterpreted Google ad clicks. And, that Google's stock was erroneously under pressure. I am quite confident that investors in Google were and are not liquidating the stock because of anecdotal data from comScore.
I think we can now confidently question a claim made by one of the Google founders that the company was designed to be recession proof. A lead Google developer said early this year they will have to see how spending unfolds to confirm if the company is indeed recession proof. That's really quite funny. As we wrote on here before there is no such thing as recession proof. Revenues rising in a normal recession is generally a notion with no validity. In fact, depending on the depth of the recession even sales of staple products can be very negatively impacted. In any event, what does any of this have to do with the price of the stock? As I have said before, the founders of Google were surely capable at creating their very powerful invention but let's keep their aura in perspective. We know they offered to sell the company for somewhere around $1 billion. So, just like Bill Gates, who offered to sell Microsoft three or four times at even lower prices, the founders really had no idea how successful Google would be. And, two graduate students working in a garage with no background in business surely didn't have 'recession proof' as a design point for a concept they were creating. None of this takes away from the brilliance, success or ability of the Google founders. They deserve their just rewards. But hubris simply reminds us that we can all be quite easily convinced of rewriting the past or even the facts.
The anticipated trends for online ad revenue are astronomical. Trend projecting must involve thoughtful consideration of macro factors not seldom understood by industry-specific analysis. Especially when they are related to economics as is the projection for online ad revenue growth. As we discussed before, online ad revenue has been somewhat of an experiment for many companies and there hasn't been strict quantifiable return on investment-ROI-analysis in many cases. It's more of let's throw it out there and see what happens. How do I know this? Because I've actually heard ad executives use this as an argument to increase online ad spending.
So, here's something to think about. We are in a financial bubble that has lead to an earnings bubble. And, the concentration of online ad spending is heavily weighted to financial corporations, globalization and consumers. And, Google became somewhat of a cult phenomenon that the advertising herd jumped on with both feet. Not necessarily because of any reason other than everyone else was doing it. Uh, sort of like Wall Street's repeatable behavior. Given advertising is all about image and prone to significant follow-the-leader dynamics, how could any ad executive resist the Google phenomenon? Seriously?
As corporate earnings drop, and there will be a very sustained drop as we highlighted before, what will CFOs cut? Especially given the macro dynamics of the global economy as it pertains to the focus areas of online ad spending. What becomes expendable? I'll tell you what - unquantifiable ad spending with Google or even ad spending with diminishing or marginal returns. So, might we actually conclude ad spending itself is therefore a bubble fueled in part by the global economic bubble? And, that the online ad growth projections will be completely erroneous? And, that all of the brilliant savants telling us to load up on Google over the last few years were simply caught up in the hubris of a bubble? Could thousands and thousands of ad executives and Wall Street professionals be wrong on this topic? If we look at ad spending and associated GDP, we already see that ad spending has been producing substantially diminishing returns for some years. In other words, it is taking greater and greater ad spending to achieve less and less GDP growth. Looked at another way, the ROI for ad spending has been cratering for some time.
I'm not an ad executive but I do have a fair amount of experience working with companies to personalize marketing and as I wrote back in 2006, this will surely be a future trend in advertising. The type of solutions needed to really drive this effort aren't there yet eithre at the ad level or the corporate level but ultimately whatever the medium, personalized marketing will be a substantial driver of new jobs and technology. Personalized marketing will also very likely put substantial pressures on ad spending instead of the shotgun approach of today. Another factor pointing to an advertising bubble. As an aside, it's also one of many reasons I am bearish on long term trends supporting Wal-mart's business model. This at a time when Wall Street is generally in love with the retailer. Mass marketers and mass manufacturers are in for a major trend shift at some future point. That future may not be so far off either. If Google isn't a leader of personalized marketing, they will be right there with other "mass" missing the new trend. We've already seen the transformation of supply chains and are in the early stages of adopting new manufacturing methods that will help manufacturers and boutique retailers meet the challenges of product and marketing personalization. Future trends could be a death knell to many mass advertisers, mass marketers, mass merchants and mass manufacturers. Not that many of these mass appeal organizations can't transform themselves. They can. But when did you ever receive personalized service at Wal-mart? General Motors? Or others relying on economies of size? The future bodes ill for the business of being a monopoly. There will always be some need for mass appeal but margins and clientele will doom most organizations serving this space to the bottom of the profit barrel. And, that is where I believe Wal-mart is headed at some point. There aren't any aspirational consumers going to shop at Wal-mart unless they have to. Ever. Everyone wants to be an aspirational consumer. The bigger they are, the harder they fall.
By the way, I am confident Google understands this very well. It's simply a matter of whether they will be a leader in this space. Because there are six billion people on earth and a few thousand that work for Google, that isn't likely. It's no different than assuming the next great piece of business software will come from Oracle or SAP. That is just as improbable. Especially if markets are encouraged to embrace competition. The next great anything almost always comes from small or new businesses. Just ask Google. The only hope for established organizations is to be a fast follower or acquire the technology and use their girth to remain competitive. Yet their girth is a hindrance in the long run.
I have been telling readers that Google is a bubble for years. Now that bubble is popping. How often have we said that brilliance in business is often confused with constructive fundamentals of which a company has little control? Google was the right product for the right time in economic history because the fundamentals supported it. Not because its management or founders are bodhisattvas.
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