As you may recall I utilized employ Scrap Book logic to create a bubble chart of the 2007 collective and individual corporate revenues to visualise what the impact of Google was in relation to the Advertising and Services economy.
As you can see the economic impact of the internet and Google on the Services sector of the US Economy in 2007 was insignificant in dollar terms. Indeed, although they are not in the bubble chart, each of the big four Accountants (e.g. PWC) had significantly higher revenues than Google. So for all the excitement that has been generated about search engine advertising it was pretty obvious that there was a lot more money to be made in “counting beans” and providing “consulting services” than being the internet industry’s market leader.
Indeed a recent report in the New York Times describing how Microsoft’s sales revenues for the Office Suite Division were the equivalent of 80% of Google’s total revenues for 2009 is probably a better indicator of just how far Google has yet to travel before it makes the “A” league table.
This week Google has announced their own economic impact study so I thought it would be interesting to compare notes. You’ll find the Google press release (+ video) and the economic impact report here. In the report Google lays claim to being the economic engine that generates $54 billion of economic activity for American businesses, website publishers and non-profits.
Google’s estimates are based on a couple of assumptions. Firstly that for every $1 an advertiser spends with Google they will make $2 in revenue. The second assumption is that businesses receive an average of 5 clicks on their search results for every 1 click on their ads. So if search clicks brought in as much revenue for businesses as ad clicks, these two assumptions would imply that businesses receive $11 in profit for every $1 they spend on AdWords.
Having defined the Google Profit Coefficient or GPC then all you have to do is establish how many advertisers use the service to calculate the economic value of Google to the state, industry or company. It’s pretty simple mathematics when you think about it. But does it tell the whole story?
Google isn’t the first technology company to claim to be a significant economic engine. Microsoft released a similar report in 2007 on the Economic Impact of IT, Software, and the Microsoft Ecosystem on the Global Economy.
The problem of course with this expanded economic model is it raises much wider issues. Issues like the economic impact of computer viruses and the “blue screen of death”.
If the economic impact of the “blue screen of death” could be measured would you add it or subtract it from the value equation? After all a key component of Microsoft’s wider economic impact are the jobs created in the global economy for installing and maintaining their software. Recovery from the “blue screen of death” is a reinstallation and maintenance task, therefore one could argue it contributes to the economic value of the “Microsoft ecosystem” to the global economy. But what about the lost opportunity and productivity costs to the economy when the “Blue Screen” or virus infection happens? Assuming we could ever establish a figure, do we add that to the economic impact the “Microsoft ecosystem” or do we subtract it?
Economics, like a lot of the statistical professions, is all about what you choose to measure. In economics, as in all the management sciences, you are what you measure.
What’s missing in Google’s Profit Coefficient (GPC) are the supply side factors. After all where are the costs to the “real world” economy involved in achieving this GPC?
These supply side costs are important because, as every economist knows, the cost of supporting a product or service is just as important as the original sales price in calculating the economic impact of a given activity. For example: The current national GDP metrics determines that a car that requires very high levels of maintenance and guzzles vast quantities of gas delivers far more economic value than a car that runs 200,000 Miles on the sniff of an oily rag and never breaks down. It creates work and that, after all, is what measuring economic activity is all about.
To get a more accurate picture of the total economic impact of Google of the US economy we need to establish a wider frame of reference.
One of the things I was interested in discovering when I started this blog 8 months ago was something I called the Google Coefficient.
The Google Coefficient is the simple idea that the economic, or at least the monetary, value of a front page listing on Google should be in some way tied to the volume of references to the search phrase. In simple terms what that means is if a phrase has 1 Million listings in the Google Search Engine then the value of a top 10 listing is worth x. But if the phrase has 100 Million Listings it should be worth 100x.
The rational behind this idea is to create a joint proof for two of the core internet myths. The first myth being that a front page listing on Google is actually worth something in financial terms. The second myth is the theory behind the Wisdom of Crowds suggests search terms or phrases with a lot of pages written about them are hot topics and therefore worth more than search terms or phrases with fewer pages written about them. After all the success of Google search engine is based on how the Wisdom of the Crowd chooses to connect to the rest of the web through hyperlinks.
So far the Google Coefficient has proven elusive. In an earlier posting this year we discovered that a top page ranking on Google for the topic of making money out of developing iPhone apps at the time of the iPad launch wasn’t worth very much. This result set the Google Coefficient at around 20 Hits per day per Billion. A more recent success with “Future of Newspapers” put the Google Coefficient around 75 Daily Hits per Billion. The Google Coefficient for Brand Names is much higher. At the moment my current estimates for the Branded Google Coefficient is 200,000 Daily Hits per Billion. All of which means, as I have long suspected, Google is probably only useful if people already know who you are.
So, to cut a long story short, at the moment I have no definitive Google metric. This means, for the purposes of this exercise, I have to put that idea aside and apply a more fundamental set of metrics: The Google Economic Indicator (GEI) and the Google Economic Value (GEV).
The GEI is the page count in Google (i.e. the number of references listed on the front page of the Google search for the phrase). The GEV is the page count times $25 – with $25 being the nominal sum attributed to the effort involved in creating the content and publishing the page.
What these two metrics deliver is an estimate on the supply side cost to the global economy of delivering the web pages that reference a Brand name.
For example in this table below we can see the estimated cost of the economic activity associated with creating and publishing all the web pages that reference Google and its leading brands over the past 12 months.
| Brand | GEI (Millions) |
GEV (Billions) |
| 6.24 | $156 | |
| YouTube | 2.13 | $53 |
| Android | 0.36 | $9 |
| Nexus One | 0.13 | $3 |
| Blogger | 0.83 | $21 |
| Feedburner | 0.02 | $1 |
| Adwords | 0.03 | $1 |
| Total | $244 |
As you can see the estimated global cost of creating all these pages mentioning “Google” is nearly 5 times that of the $54 Billion in the Google estimates.
If we could establish how many of those pages have been manufactured and served in the USA then we would be in a better position to establish the true wider economic impact of Google on the US economy.
The World Internet Stats suggests the North American audience constitutes 14.4% of the web. The population of the US is 8 times that of Canada so that suggests the US market share is 13%. Applying that to the Global GEV of the Google Brands and we discover a conservative figure of around $32 Billion.
If we add this figure to Google’s Search and Advertising estimates and we now have an economic engine worth $86 Billion to the US economy.
But we shouldn’t stop there. We need to add into the equation all those Corporate Brands, Governments and SME’s that are busy creating web sites, blogs, tweets and social network with embedded SEO designed for Google to find them.
There are now some 3 Trillion+ web pages out there on the net. A great many of them designed to be found by Google’s Search Engine and optimized for a high page ranking. How many of those pages have been created in the USA over the past year?
Let’s make a conservative estimate of 25 Billion pages (i.e. 3 Trillion * 13% / 15 years). That puts the economic impact of the Google Web at $625 Billion before we even factor in the $54 Billion originally calculated by Google’s Chief Economist.
The real question is do we add the $625 Billion to the value of Google’s economic engine or do we subtract it as a cost of delivering the value of Google’s economic engine to the economy? Just how do you define the total economic benefit of a company within an industry? It all depends on what you choose measure and the assumptions and the coefficients you choose to apply to the metrics you gather.
The reality of course is the GEV is not an indicator of “real world’ economic value of these web properties. If anything it is an indicator of the lost “real world’ economic value. A measure of the time and effort spent producing billions of web pages, tweets and posts that perhaps could be better spent on more economically productive activities.
In reality the GEV is nothing more than a “Magic Number”. Its practical value is as useful as the “Distorted Mirrors” people walked past in the old amusement halls. Fun to look at and play with but you wouldn’t try shaving with one. After all, using the GEV method Facebook’s economic outlook looks a lot more impressive. Who wouldn’t be happy with an economic engine worth $146 Billion compared to an estimated ARPU of 25 cents per month? The same goes for Twitter (GEV: $110 Billion) and Yahoo! (GEV: $120 Billion).
As I said before economics, like a lot of the statistical professions, is all about what you choose to measure.
So in the end what I find interesting in these reports is not the statistics and the forecasts but what is being measured and the assumptions that are employed. Because it is these things that provide real insight into what motivates and drives the organisation to compete. Conversely, in their absence, they can also provide insight into what the organisation fears.
Perhaps then the real question is why has Google now chosen to publish an economic impact study demonstrating that Search and Keyword Advertising actually works in the USA?
Further Reading
How The World’s Online Ad Sales Stack Up – paidcontent.org
braddlibby
June 24, 2010
There are several major flaws with the accounting in Google’s study. You mention their failure to account for the “the supply side factors”- the costs associated with their economic impact value – but I list some other problems in this article ‘Intermediate Microeconomics for Google‘ at Search Engine Journal and in this post ‘Google’s Addition Problem is Significant‘ on my personal blog.
Please check them out if you get the chance.