It’s no secret that Google’s in hot water.
Recent testimony in Google’s antitrust hearing included an internal email from May of 2019 stating, “We are short [redacted]% queries and are ahead on ad launches so are short [redacted]% on revenue vs. plan.” The email goes on to discuss possible ways to increase the volume of queries from Google’s existing user base, such as modifications to the user experience.
Since that time, Google’s average ad revenue per US user has grown from an estimated $173 in 2018 to $309 in 2023. The company clearly figured out how to wring more revenue out of its users. But how much more is possible?
The shortage of queries Google identified back in 2019 is tied to smartphones – one of the main platforms for internet search queries – having reached mass adoption by 2018.
But since then, smartphone sales have been in decline. And Google has had to rely on vectors other than an increase in search volume for growth. Without proper protective legislation in place, however, the result could be a dangerous one.
Searching for revenue
Google monetizes ad space by targeting consumers who have searched for terms that indicate intent to buy products or services, such as “Where to lease a Nissan Rogue,” “Best snow blower,” “Disney World deals” and so on.
For years, new users brought a fresh supply of query-driven ad space. Increasing spend coincided with an increased supply of search behavior.
Meanwhile, prices in Google’s ad space auctions stayed relatively stable with supply and demand growth. With no additional supply of these queries and continued new demand from advertisers, the prices spent per user/query continue to rise.
However, looking at the volume of items consumed in the US over that time frame (using average pounds of wheat flour or number of cars sold/leased as a representation of consumption in the chart above), there is only a minimal difference in how many items are actually being purchased.
In addition to query supply constraints, another driver of Google’s increased revenue per user in recent years is likely inflation, which rose by more than 24% between January 2018 and October 2023. The trend caused households to significantly increase the amount they were spending for the same goods and services.
Peak Google?
With very few potential users left to acquire, and inflation cooling off, it appears that Google is reaching a peak state with its advertising business. This explains the increasing dependence on new revenue sources outside of advertising, such as Google Cloud, which were highlighted during the company’s recent Q3 earnings call.
As Google continues to mine other forms of advertising monetization, media companies are beginning to rebuff further encroachment. Take Gannett’s recent lawsuit alleging that “Google controls how publishers sell their ad slots, and it forces publishers to sell growing shares of that ad space to Google at depressed prices.”
Similarly, a recent News/Media Alliance study raised concerns around Google’s “pervasive unauthorized use of publisher content to power generative AI technologies” in response to Google introducing AI search features that surface news content while removing the need for the user to visit the actual publisher website.
While this strategy supports Google’s need to increase the amount of revenue generated per user, it directly limits publishers’ ability to earn income from content at a time when they already stand to lose up to 70% of revenue due to cookie deprecation.
What is the future without regulation?
Distribution of advertising revenue fuels healthy competition between news, sports, entertainment and other media outlets. That competition leads to society having access to a wide variety of coverage from sources that are kept honest by market forces. Access to better information naturally then promotes informed decision-making, free-thinking and greater cultural integrity.
Today, AI within the Google user experience is beginning to circumvent contextual media models that many different media outlets depend on and threatens to consolidate more of that revenue with one entity. At the same time, deprecation of cookies in Chrome threatens to disintermediate the other advertising technology companies that fuel publisher revenue.
Yet, as publisher revenues erode, so will the number of journalists on staff. It is then likely that demand for current information will be met by user-generated content or AI-synthesized content that is designed to be as “sticky” as possible – aka click bait.
Google’s dominance in the search market and its investments in AI could position the company to take maximum advantage of this new paradigm.
Even if Google reinvents itself to be fairer to advertisers and publishers, regulators should have the final say in what the company looks like going forward. It’s the best path forward for the industry at large.
“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.
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