Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Google Is Really Bad At Monetizing Content Yet CEO Schmidt Lectures Newspapers

Posted by Tom Foremski - May 7, 2009

ericschmidt.jpegEric Schmidt, Google's CEO, loves to tell the newspaper industry what it needs to do to be relevant in today's online world. A sample of recent headlines:

Eric Schmidt Tells Newspapers: Create Products People Want And ...

Google CEO Eric Schmidt to newspapers: Innovate your way out of it ...

Eric Schmidt wishes Google could save newspapers

Google CEO Eric Schmidt to Newspaper Association of America ...

Schmidt to Newspaper Execs: I'm From Google, and I'm Here to Help ...

Schmidt Lectures Newspapers - The Daily Beast

Yes, the newspaper industry needs to get wiser about how to adapt to the online world, but Mr Schmidt's lecturing is the pot calling the kettle black. Google is about as bad at monetizing content as the newspaper companies Mr Schmidt likes to lecture. And Google is getting worse at it! The evidence is hiding in plain view.

Take a look at GOOG's 2008 financial results. Total revenues = $21.8 billion.

- About 66% of revenues, $14.4 billion came from advertising related to search. This is Google's AdWords program where companies buy keywords related to search terms and Google serves up their ads on the search results page.

- About 31% of revenues, $6.7 billion came from advertising around content on non-Google sites; these are partner sites that run Google's AdSense program on their pages and it includes many media companies. This is where Google monetizes content, it serves up contextually relevant ads next to the content on a web page.

If we look at profitability, search advertising is many times more lucrative for Google than content advertising.

- In 2008 search ads produced a profit of about $5.65 billion on revenues of $14. 4 billion or a 39% profit margin.

- In 2008 content ads produced a profit of about $302 million on revenues of $6.7 billion or a 4.5% profit margin.

Search advertising produced 19 times more profit than content advertising.

If you look at GOOG's financial trends you can see that the company is shifting revenues away from content advertising to search advertising.

Since 2006 content advertising has dropped from 39% of revenues to just 30%. In addition, total content advertising was down 3% in the most recent quarter, year over year, yet search advertising grew 9%.

A recap:

- GOOG's profit margin on search advertising is 39%

- GOOG's profit margin on content advertising is about 4.5%

Google is great at monetizing search but really bad at monetizing content.

Media companies are better at monetizing content. The New York Times Co. in 2008 had an operating profit of 5% (not including impairment of assets costs.)

News Corp., in its most recent quarter reported operating income of $755 million on revenues of $7.4 billion, or about a 10% profit margin.

Granted, these aren't exactly apples to apples comparisons but they do show Google doesn't have a magic wand for monetizing content, it's performance is mediocre. Also, let's remember that Google has withdrawn from offline businesses such as its ventures to make money from placing advertising in print newspapers, and on radio and TV. Again, it shows Google is great at search but really bad at monetizing content.

How soon before it ditches its content advertising business altogether?

Currently, its overall profit margin is about 30%. If it ditched content advertising (AdSense) it would jump to about 39%. Google would become nearly one-third more profitable overnight.

Mr Schmidt knows there is little money to be made from advertising around content and that Google has been gradually shifting away from that business for several years -- yet he continues to lecture newspapers on how to be successful at something that Google isn't. Remarkable.

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