

Ask HN: What will happen to Google when somebody disrupts AdWords? - gfaremil

I invested some portion of my saving into GOOG. But I'm concern that 90% of revenue are ads.<p>Is it possible at all to disrupt advertising system Google is dependent on?<p>Just want to ask smart people of HN what they think...
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ChuckMcM
Short answer: As long as the portion isn't dominant in your portfolio, and you
re-evaluate it at least twice a year and rebalance, its all good.

Longer answer, looking at Googles rates of return on capital is like watching
a very, very, fast train driving along straight track. Google's nominal
operating mode burns a lot of money, that burn rate leaves them vulnerable to
down turns. What the most likely scenario is not that they get disrupted so
much as others meet them at parity but run at an operationally much more
efficient way. Say that M$/Bing inexorably creeps up into a neck and neck race
with Google in terms of search reach, and the combination pushes down
advertising rates. The spending brakes go on at the 'plex, the company
changes, the bean counters rise in power beyond reasonable measure, and the
company 'flips'. Out go the creative, inventive, people and in come the
'lifers' who know how to make their job look important without actually doing
anything. The mechansim which makes this happen is really hard to avoid since
from the board room things look fine, even after they aren't fine. And there
is a fine balance of disbelief that is held between the employees and their
condition that, once disrupted, cannot be re-established. Cisco, HP (Tandem),
Sun, and Intel are all places where I've known folks who lived through the
flip. Nothing is the same afterwards, if you can't re-invent yourself like
Apple did, it gets a lot harder.

That being said, there is (as others point out) usually some time to cover for
that.

I cannot stress enough however that financial planning is serious business and
you should take your time with it. I believed them when they said if I started
putting money in my 401K in 1986 that it would be worth multiple millions by
now thanks to the 'miracle' of compound interest. They missed the part about
the 'miracle' of the nations worst economic debacle deleting that value in a
heartbeat. I don't believe them any more :-(

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rachelbythebay
Some would say the "flip" has already happened.

I'd peg it to early 2009. Whenever they changed the shuttle schedules, if
anyone remembers.

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hardtke
AdWords is a natural monopoly, so it is unlikely that someone will ever create
a successful competing keyword driven advertising network. In order to
generate high prices for the search ads, Google needs to have multiple bidders
competing against each other for each keyword. Advertisers will only bid if
there is lots of inventory to buy (lots of searches on those keywords). 10% of
the search market does not generate 10% of search advertising revenue because
of this lack of market participants -- on second tier pay-per-click
advertising networks whole swaths of keywords are not competitively bid. The
Bing-Yahoo search merger was an attempt to address this problem, but it hasn't
worked so far according to the most recent financial reports. Google still
generates 50% more revenue per search than Microsoft due to the network
effects.

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alphaBetaGamma
I don’t understand this argument. Why would advertisers only bid if there is
enough search volume? For each venue you advertize on you have a fixed cost
that is the cost of setting up and maintaining your ad campaign on that
platform. So there is an incentive to use high search volume sites, but this
hardly qualifying as a natural monopoly.

Or am I missing something?

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prasunsen
I don't think you are missing anything. There are advertisers who prefer other
networks like Chitika, Adbrite, Clicksor etc because of the lower
competition/lower click prices there (and not only).

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dave_sullivan
Not to make a "I think there is a world market for maybe five computers" type
argument, but I don't think it's Adwords being disrupted that you should worry
about. As long as people use Google to search for things, particularly goods
and services, Adwords will be an effective way for businesses of all sizes to
reach their target audience at a perfect time (when they're actively searching
for what you're selling) and the auction system adwords uses automatically
helps maximize profits across different keywords/categories.

That being said, not sure what your investment goals are, but if you're
looking for the long term I'd suggest something more along the lines of a few
broad ETFs that cover a few different markets, rather than trying to place a
bet on only a handful of high flying companies... basically, are you looking
to invest or gamble? Either is ok, but they are different...

edit: seeing a couple other comments, I'll admit that adblocking being
included automatically in a browser that gains dominant marketshare is
something that would be terribly disruptive to a lot of businesses, google
included. What's interesting there, is it would essentially _destroy_ a
tremendous amount of revenue for large and small companies across many
industries without offsetting it with a new profit center. It wouldn't be like
cars replacing carriages, it would be like teleporters you can assemble at
home with $5 of drugstore components replacing the auto industry. I guess
consumers would win, but they'd probably have to start paying for gmail and
google maps access...

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hemancuso
You should be asking yourself not about disruption, but what would happen if
GOOG can't figure out how to keep AdWords revenue increasing. Like other
commenters note: nobody has ended up disrupting Windows on the desktop, but
Microsoft never figured out a new stream of growth to fuel growth in their
share price.

If your primary concern is share price growth, look at a smaller cap stock -
or try to convince yourself that Android or one of their other projects will
ever move the revenue needle.

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benologist
Of course it's possible - the giants of today aren't always the giants of
tomorrow.

But like the other giant corps their demise will be a very slow process with
plenty of time and capital to find their next big thing.

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mmurph211
Google will buy them out.

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samlevine
Just like how Microsoft bought out Google and IBM bought out Microsoft.

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doyoulikeworms
None of these once up-and-comer's markets were properly established before
their respective companies came along. AdWords is an established product in an
established market-- Google's on the watch.

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ori_b
What happens when Adwords gets disrupted? Well, first, it will take a long
time for the competitor to establish itself. Businesses don't change
overnight. Second, even if the competitor manages to steal ALL of Google's
income overnight, Google has billions in the bank.

There will be years for them to find a way to recover, or, in the absolute
worst case, years for you to reinvest.

~~~
RuadhanMc
_There will be years for them to find a way to recover, or, in the absolute
worst case, years for you to reinvest._

No, there wouldn't be years for him to reinvest. If it was revealed that
Google's best days where behind them -- i.e. revenue was shrinking and they
were dipping into their cash reserves to keep things rosy -- then investors
would sell, sell, sell and drive down the stock price in a relatively short
period of time.

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ori_b
There tends to be a tipping point when stock prices drop, from what I saw. But
there are years of warning signs and slow decline before this happens. If you
were watching RIM, for example, their trouble started when the first iphone
came out, but it took years for it to reflect strongly in their stock prices.
Nokia was in a similar state -- they had problems for years, but it was only
recently that their stock dropped heavily. It was declining, but there were
warning signs in the company long before.

However, it should be mentioned stock prices already go up and down like mad.
Diversify, regardless of how solid a company is.

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damoncali
Google will be screwed. If something that works significantly better comes
along, that money will evaporate very quickly. And when you take into account
Wall St's grow or die mantra, the results would be catastrophic for Google.

However, I'm not sure it's possible to disrupt AdWords. Disruption in the
classic sense implies "way cheaper, but not as good". You can't make
advertising "way cheaper" without leaving metric tons of value on the table,
and nobody is going to do that. After all, the quality of advertising _is_ the
price you pay for customers.

More likely is a scenario where everyone else catches up - but that's a slow
process and will give Google plenty of time to find another trick.

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pigbucket
If a company has access to hundreds of millions of profiles, can figure out an
effective way of delivering targeted ads, and can effect a fundamental shift
in the way most people find content on the web (i.e., a shift from keyword
search to social search/sharing), then Google's advertising revenue could fall
significantly. The obvious existing threat is Facebook. Facebook ads are not
good enough yet, but could be relatively soon. I think the question for Google
is whether it can catch up on social before Facebook catches up on search and
ad targeting.

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sek
I heard these arguments before but nothing happened so far, facebook has still
one of the worst return rate in the industry.

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fanboy123
Diversification is usually a huge waste of money. It is hard for one
company/culture to make money doing lots of things. Be glad they know their
niche is ads and that they are doing everything they can to protect their
castle (as a shareholder).

Relentlessness will enable them to hold on to their position for longer than
other companies would. However, all companies will eventually fall to
competitors as t approaches inf.

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yason
Not sure about that, doesn't sound true.

It is certainly _simpler_ to make a lot of money in the short term by focusing
on one core business only. But diversification and redundancy are known
survival techniques. Think IBM and Microsoft: both companies do a lot even if
they have some sort of a core. But even the core is somehow intermingled with
much of the else they do.

It's also not so simple to connect different dots if you only have one kind of
dots. Google can combine stuff in novel ways because they're kind of a
technological crossover. Not so easy if you've purged out all that clutter
that doesn't fit in your core work.

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jefflinwood
I've wondered this myself - what happens when ad blocking technology becomes
integrated into mobile devices, or the general public starts to use it because
the newest, shiniest browser now bundles it by default?

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gcp
The technology is available (Adblock for Firefox Mobile) but given that Google
controls the default browser and ad revenue is important to Mozilla, it won't
be defaulted for a while.

Apple is another matter. Maybe they like to keep their options open, too.

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cjoh
Google will be in the transportation and shipping business by then.

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ristretto
Brain scanning devices that will be used to navigate web browsers. ETA 5
years.

