Google: Prioritize and conquer January 30, 2012
Posted by David Card in Uncategorized.Tags: online advertising
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You would think 25 percent revenue growth would satisfy Wall Street. But not for Google: An earnings quarter most companies would kill for disappointed Google analysts. The same week, a new privacy policy added more bad press to that surrounding the company’s product integration strategies. Wall Street is unhappy and confused. The numbers show the two areas that Google needs to prioritize to increase growth: Vertical search and display advertising. Other products, including mobile search and advertising, should be moved to the back burner.
Search is still a great business. Google’s profits (33 percent operating margin in Q4) are far better than other ad-driven companies whose margins are historically half that rate. But it is increasingly difficult for Google to grow search revenues. Google already has dominant market share in general web search in western markets, while China remains problematic due to government censorship and Baidu’s market leadership. The next big source of search volume will come from smartphones, which will be harder to monetize. Compared to the web, a mobile searcher will almost certainly be less likely to complete a purchase transaction or fill out a registration form, leading to lower cost-per-click pricing than web search.
Search underperformed in Q4 because, although clicks were up 30 percent, prices were down 8 percent. Google blamed cost-per-click declines on a natural result of volume growth, foreign exchange rates and ad format changes, but some observers thought mobile ads and search might be responsible. Google bragged that display ad sales were on a $5 billion yearly run rate, probably to compare with Yahoo and Facebook rather than as a piece of its own total $36.5 billion ad business. Casual observers might think this is new, but Google has always had a big display business. It’s just that it derives mostly from its DoubleClick and AdSense networks.
Where Google should focus now
What the quarterly numbers mean is that Google has to drive up the value of paid search clicks and sell more of its own display inventory. Google’s slightly botched integration and privacy strategies are integral to both. For immediate payback, Google needs to prioritize and shift resources to two areas:
Vertical search. Rather than bias its search results to its own properties, Google should accelerate its efforts in vertical search beyond travel and financial services. It could build out price-comparison properties around other markets like apparel and electronics relatively inexpensively by filtering its own results and licensing consumer reviews from companies like Bazaarvoice and Power Reviews. Searches done on vertically targeted microsites would command higher CPC rates because searchers would be “prequalified” leads. If Google’s microsites were effective, they would show up in organic search results naturally, and Google could even buy some of its own paid search listings.
Display advertising. Google needs to sell its own space – keeping the whole sale rather than a 20 percent to 30 percent network fee – and garner high CPC and CPM rates from targeting. Google’s privacy policy switch that shares user data across its properties is necessary so it can target display ads on YouTube, the only place it has its own inventory for fancy brand advertising or sponsorships. Those microsites would be great locations for display ads, too. But Google is correct to build out Google+ company pages that will benefit search and ad network sales immediately rather than trying to sell ads on Google+ pages and risk user resistance. I have written how data cross-licensing agreements among Google, Facebook and Twitter, possibly through a third-party clearinghouse, would ease tensions and improve the products and ad-targeting capabilities of all three. Right now, it appears that tensions between the bunch are increasing. That might be public posturing to gain negotiating leverage, but I wouldn’t expect any major deals in the next 6 to 12 months.
De-emphasize less-critical businesses. I have already described how mobile search is challenging; mobile display advertising is also a long-term play, and who knows how Google could improve Motorola profits. A handful of apps wins doesn’t prove a compelling case for competing with Microsoft Office. TV advertising is a pipe dream for now, and progress in branding display advertising will build relationships with advertisers and agencies that can feed TV ads in the coming decade. Google could reallocate resources and budgets away from these projects and zero them in on vertical search and display ad platforms and sales.
Finally, a little more reporting clarity wouldn’t hurt. Google could be more consistent in how it describes its biggest businesses — paid search, the different ad networks by CPC and CPM accounting, display ads sold directly for its own properties — instead of burying their financial results under two ad sales categories. That way it could demonstrate progress in each and make clearer comparisons with competitors. Then investors would really know if Google were gaining share versus Yahoo, Facebook, AOL, Microsoft and Groupon, its biggest rivals in online marketing.
Question of the week
Facebook’s app ecosystem is still missing a piece of the puzzle January 23, 2012
Posted by David Card in Uncategorized.Tags: apps ecosystems, consumer electronics manufacturers, Content discovery, link sharing
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At its f8 developer conference last September, Facebook CEO Mark Zuckerberg laid out a grand vision of a new class of lifestyle apps enabled by Facebook’s technology platform. Last week, at a subdued event that attracted far less media coverage, Facebook sketched out its progress and showed some 60 apps. Facebook’s apps ecosystem is showing positive signs of evolving, but it still lacks an effective marketplace for app promotion and monetization. Such a marketplace would reinforce a virtuous circle: It would attract more developers and help generate more money for them and for Facebook.
Signs of progress
You will recall that one of the powerful — and potentially creepy — features of Facebook’s Open Graph was “frictionless sharing,” where apps could automatically post user activity without requiring the press of a Like button. Facebook has done some fine-tuning to its privacy and auto-sharing controls, including prominent instructions on how to opt in and how to focus sharing among particular friends, even for existing apps. But Facebook still mostly relies on users’ increasing acceptance of activity broadcasts. That seems appropriate for all but the most privacy-conscious rights organizations.
Facebook also has opened its apps approval process, offering simple guidelines that appear less restrictive than, say, Apple’s App Store. Facebook claims it wants to open up the ecosystem, but it remains to be seen if it has the staffing needed to enable speedy approval for hundreds of apps.
Developers appear to be excited about Actions, a key new technology from September’s announcement. Actions expands the vocabulary of sharing beyond Liking and Sharing to shopping-oriented terms like Own and Want as well as the media-focused Listen and Read, adopted successfully by the first wave of new apps like Spotify (which has added 4 million users since f8) and Yahoo (which has enjoyed a sixfold increase in referrals). Developers like Facebook store builder Payvment think these new Actions will better suit commerce and shopping than Likes, while others like Foodspotting expect them to broaden the type of activities people use their apps for. Even if generating transactions on a social network remains a challenge, Facebook’s new tech seems to be gaining developer attention. Ticketmaster’s new app even mashes up Actions to present concert information based on listening behavior, a smart idea.
Missing marketplace
My GigaOM Pro colleague Greg Sterling wonders if Facebook is poised to challenge Apple and Google in app stores. Facebook’s app ecosystem has already produced Zynga, a bigger company than Apple’s biggest star, Rovio, but I would estimate Facebook’s yearly take from virtual goods sales is measured in the low hundreds of millions of dollars, while Apple’s apps and music sales approach $1 billion a quarter. That is partly a function of app volume, but, just as important, Facebook lacks a store or marketplace to focus app discovery and sales.
Facebook told Sterling that a marketplace “would probably make sense at some point.” OK, but pointing to apps from an About menu link is no substitute. Right now, Facebook depends on Likes and frictionless sharing by friends to drive app discovery. Facebook filters a very limited number of app activities into a user’s news feed: Users spend the plurality (27 percent) of their Facebook time there, but Facebook doesn’t want to clutter or spam their major communications stream. The company is adding features to display app activity on profile pages, where users spend 20 percent of their time. In other words, Facebook is working hard on viral app discovery among friends, but it has a weak story for a user who wants to explore related interests outside his own circle of friends.
What Facebook needs is an app store with the necessary merchandising. Facebook should copy Apple, Amazon and Best Buy. That means featured products, apps ranked by category and popularity, sortable consumer ratings and reviews, and a merchandiser’s “editorial” voice as well as algorithmic promotion, sales on virtual goods, and so on.
Facebook’s marketplace should also do something that the others don’t. It should emulate paid search listings and enable developers to buy prominent promotional positioning via auction. Sure, that entails some serious effort, but Facebook has tons of user behavioral and preference data it could use to enforce paid link relevance to eliminate scams, spam and irrelevant promotions. This would be bold app store differentiation, and perhaps Facebook is nervous about appearing to be “for sale.” But paid promotions aren’t payola if they are transparent and fair, with enforced relevance.
An effective apps marketplace would accelerate the growth of Facebook’s ecosystem and add revenues for Facebook and for developers. With its expanded Actions that crucially work outside the Facebook site, Facebook could effectively extend its marketplace web-wide and build momentum for a potential mobile network.