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Google Must Look At Verticalization

Posted on Friday, Apr 17th 2009

It looks as though the recession has finally caught up with Google. Yesterday the search giant announced Q1 results which reflected the troubled economy and more particularly the decline in clients’ advertising budgets. This post discusses Google’s missed opportunity in verticalization.

Revenues of $5.51 billion grew 6% over the year and were in line with the market’s expectations. Revenues, however, did decline 3% sequentially; this was the first qoq decline since the company’s 2004 IPO. EPS of $5.16 grew 7% over the year and exceeded the market’s expectations of $4.93.

Here is a quick look at the company’s revenue breakdown. Google Sites Revenues generated $3.70 billion and contributed 67% of total revenues in the quarter growing by 9% over the previous year and reducing by 3% over the previous quarter. Google’s partner sites, also known as Network Revenues, generated $1.64 billion revenues through AdSense programs and contributed 30% of the quarter’s revenues. AdSense revenues fell 3% over the year and over the quarter.

International revenues of $2.88 billion represented 52% of total revenues, compared to 51% in the previous year and 50% in the previous quarter. Revenues from the United Kingdom of $733 million represented 13% of revenue in the quarter, compared to 15% in the previous year and 12% in the previous quarter.

In the quarter Google recognized a benefit of $154 million to revenue through its foreign exchange risk management program.

Google continued to innovate to improve search monetization by focusing on overhauling advertising tools for AdWords to improve the experience for advertisers and improving click rates through the introduction of Automatic keyword spellcheckers. During the quarter, their Paid Clicks (PPC), which includes clicks related to ads served on Google sites and the sites of its AdSense partners, increased approximately 17% over the previous year and approximately 3% over the previous quarter.

The YouTube monetization strategy seemed to be on track as the video site made good progress on deals with large studios. Google tied up with Sony Corp to add the latter’s films and TV shows to YouTube. Yesterday, it also announced plans to offer free TV shows and full-length movies from Sony Pictures, CBS, MGM, Lions Gate Entertainment and Liberty Media’s Star.

Google’s management said that they will increase their focus on reducing costs. They have reason to do so: growth in the quarter was the weakest in its history since Google went public. As mentioned above, this quarter was also the first ever reflecting sequential revenue decline. Google is blaming its performance on the market conditions, wherein users are searching, but not buying.

But, I feel the blame lies with Google as well. The company spends big money to hire the best engineers. In a season when most companies have downsized, Google has reduced their headcount by a mere 58 people – not even a 1% reduction. What is really sad is that significant revenue growth does not emerge from any internal developments by their employees. Even though further job cuts are expected from the company and it announced nearly 200 job cuts to the sales and marketing team, Google does seem slow to react to the market’s challenges.

Google also shook up its sales team. Nikesh Arora, currently president of International Operations, is set to take over global sales from Omid Kordestani and will be responsible for revenue and customer operations while Kordestani will be a senior advisor to the Office of the CEO and Founders. Earlier this year, Tim Armstrong, head of the Americas operations, left Google to become CEO of Time Warner’s AOL unit. Sukhinder Singh Cassidy, who headed Latin America and Asia Pacific, also left.

Whatever growth Google has achieved has been through acquisitions. At current valuations, acquisitions might be the way to grow, but doesn’t Google need to shake itself up as well? Of late, there has been growing talk of the company using some of its $17.8 billion cash to acquire Twitter. However, CEO Eric Schmidt said that Google was looking at advertising partnerships with companies like Twitter, not acquisition. Google’s Vertical Search strategy still remains unaddressed, as does a compelling Web 3.0 endeavor. Acc. to the IAB’s 2008 report, newspapers still constitute $34.4 billion of the total advertising budget, with Internet advertising at $23.4 billion. The most likely budget shift in 2009 will be from Newspapers to Internet Search Marketing. Google is clearly well-positioned to benefit for this, but the movement would be much more rapid if Google were able to deliver on vertical search to contend against vertical classifieds, one of the mainstays of newspaper advertising.

In the after-hours session, the stock crossed the $400 mark before falling to $388.24 with a market capitalization of nearly $125 billion.

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I totally agree with you that Vertical search and Web 3.0 are the unchartered territory that search industry needs to embrace.

At Cazoodle, we are doing just that. Our technology can understand the semantics of the data on the Web. We use this to enable organic structured vertical search such as Apartments, Shopping, and Events.

http://www.cazoodle.com

Govind Kabra Friday, April 17, 2009 at 2:29 PM PT

Vertical search may also be the way out for search quality? I am a heavy user of web search and empirically I distinctly feel web search even for the classic ‘needle in a haystack’ use case has become more tedious — There are too many indexed webpages out there and the flat search techniques don’t seem to scale wrt signal versus noise, albeit Google is still the best and still remains my dominant starting point so far.

Rakesh Saturday, April 18, 2009 at 1:47 AM PT

I agree with Rakesh, Google will probably remain the starting people for many people for a very long time but creating vertical businesses has worked very well. Take Indeed.com and Snooth.com for example both very profitable vertical search engines (for jobs and wine respectively).
My current company is trying to do the same thing for the online cooking industry.

Andy Sunday, April 19, 2009 at 2:16 PM PT

I want to make a couple of counter points here, followed by the data and information that drove me to these conclusions. The bottomline: even though all the comments above in favor of Google going vertical or acquiring vertical search companies make intuitive sense, my data doesn’t necessarily back that up.

(i) Apparently Google is doing pretty OK on its own. Google Books being an average product at best is getting higher CPM than Kayak, a specialist in travel search.

(ii) Online jobs market was ~6B in 2007 ( http://sramanamitra.com/2007/07/25/facebooks-monetization-strategy-part-1/ ) . But most of the pie is coming from subscriptions etc. and not just from ads. So even if Google were to enter a vertical, it would be taking only part of the slice as its expertise is really in search and advertising and not transaction handling.. of course unless it changes its focus.

Now the data:

In Q1 2009, Google’s revenue was as follows:

(99% from ads)
3.7B Google.com
1.6B Network
~100m licensing

Following are the top Google properties:

1 http://www.google.com 134M
2 maps.google.com 51M
3 images.google.com 48M
4 mail.google.com 32M
5 video.google.com 14M
6 news.google.com 13M
7 clients1.google.com 12M
8 books.google.com 8M

Total monthly unique users ~ 500M

Google Books makes money from ads just as most other Google properties do.

If we were to make a very rough guess from the traffic numbers above =>

Google Books ~ 2% of 3.7B = 74M

Note that I have assumed that eCPM of all Google properties is the same.. a highly inaccurate assumption. However, since Google Books is a “vertical”, we should expect its CPM to be higher than other Google properties. So 74M a quarter (or $300m) seems like a conservative estimate.

Now let’s take Kayak – top travel search engine.

Kayak’s monthly unique users = ~6mm

Annual revenue ~ $150mm
~50% comes from ads.. => $75mm

Saad Fazil Wednesday, May 20, 2009 at 7:13 PM PT

Saad,

This analysis is incorrect. Google Books, my guess is, is a lightly monetized portion of the site. Google makes money from AdWords, AdSense, & Doubleclick, primarily. You need to study the business models of those specific businesses inside Google.

Then, you need to ask the question how Travel within Google AdWords stacks up against Kayak or Mobissimo, and how Jobs within AdWords stacks up against Simplyhired and Indeed. And you need to compare CPM/CPC/CPA rates for each to get to the heart of the matter.

Here, you are comparing apples to oranges, and with inaccurate data.

Sramana Mitra Thursday, May 21, 2009 at 10:54 AM PT

Sramana,

I did mention that I was making some assumptions, which could be wrong. I agree with you that it’s not a good way to measure revenue for Google Books for example. The revenue will depend on the following factors:

1. number of pages/impressions served (Google Books)
2. click through rate for different keywords
3. Average CPC for each keyword as it pertains to Google Books

I think in my (inaccurate) analysis, I averaged out 2 & 3, and estimated revenue just based on 1. The reason being that 2 & 3 are hard to estimate.

So in order to estimate revenue for “travel” category, here is what needs to be done:

1. list/guess popular keywords for travel search using Google AdWords Traffic Estimator/Keywords tool

2. Estimate # of searches for each of the keywords

3. Estimate (avg) CTR of each of the keywords

4. Estimate avg CPC for each of the keywords

1 = relatively easy
2 = my guess is that there should be a software / website that can give an estimate on this. any ideas?
3 = difficult
4 = difficult

Let me know your thoughts

Saad Fazil Monday, May 25, 2009 at 4:22 AM PT

Hi Saad,

Yes, this would be an interesting analysis to do. The analysis you are looking for may be possible with Enquisite’s analytics engine. Look up my recent pieces on the company, and see if you can work with them. I will make introductions if you like.

Sramana Mitra Monday, May 25, 2009 at 9:14 AM PT

Just previewed Bing. Microsoft acquired Farecast in 2008, and seem to integrate that very nicely with the search engine Bing. I think Google is missing out a large market by having them go to Kayak or somewhere else to search for travel for example. Several people who are looking to search travel won’t even go to Google but directly jump to Kayak or whatever else sie they are familiar with.

Saad Fazil Friday, May 29, 2009 at 10:10 AM PT

Exactly as I recommended, Saad. There are volumes of my writings on this topic over the last 2 years …

Sramana Mitra Friday, May 29, 2009 at 10:15 AM PT

it is only a matter of time before Bing Microsoft acquires Yahoo search engine-‘`

Aaliyah Wood Wednesday, August 11, 2010 at 9:39 AM PT