Why Google Continues to be the Best

As many have already seen, Google just posted some great third quarter figures. Both revenue and operating income were each up 23%, and Traffic Acquisition Costs (the revenue paid to AdSense partners) were at an all-time low of 25.7% of ad revenue. They also broke out some never-before-released sales figures: $2.5 billion a year for non-text display ads, and $1 billion for Google’s mobile search (driven mostly by use of their Android OS). But one part of the conference call caught my attention:

This is why we’re incredibly proud of Google Instant. Many of you guys speculated that we launched Instant to make more money. Well, let me tell you, that’s simply not the case. We launched Instant because it’s so much better for the user. In fact, from a revenue standpoint, its impact has been very minimal. And from a resource standpoint, it’s actually pretty expensive. So why did we do it? Well, we believe from a user standpoint, Instant is outstanding—and the data that we’re seeing actually bears this out.

The above was from Jonathan Rosenberg, Google’s SVP of Product Management. So, Google Instant was an expensive, non-revenue-producing upgrade to their lucrative search product. They did it, said Rosenberg, because it’s a huge improvement to the user experience. But how can that be measured? This got me thinking about what kind of metrics are truly important to Google in a broader economic sense. In Google’s financial reports they tout improvement in metrics like Traffic Acquisition Costs, Cost-Per-Click, and total number of Paid Clicks. All important to their business, but none that really capture Google’s overall business model. The most important metric to Google, I believe, is Revenue per Unit of User’s Time (or RUUT, for short).

Translating Time into Profit

Time is the ultimate scarce resource. Most businesses capture a portion of their customer’s wallets in exchange for a good or service. But businesses like Google (and TV networks, and most new media/web-based companies) capture a portion of customer’s time first, then translate that time into revenue.

Because time is scarce, when consumers choose to devote their time to a product or service, they are doing it at the exclusion of something else. So that company is literally capturing their customer’s time.  Before Google and other search engines, when people wanted to “find” something, they went about it a multitude of ways: white & yellow pages, classifieds, a library or bookstore, or just plain leaving your house and searching (hard to believe, I know). These things took up a lot of people’s time.

So when search engines and the internet came along, it hugely reduced the amount of time it took to find something when needed. This made searching and information-access very efficient, and instead of spending an hour or so searching for something in a library, you could use Google instead and it would only take a minute or two. So let’s say before the internet people spent an aggregate of 10 million hours “searching” for things. Then Google comes along, and because of their great product, they “capture” people’s search time. People now spend 1 million hours searching through Google and 9 million hours doing something else with their time (fictional numbers, but you get the point). So that’s the time part of the RUUT equation.

Google’s operating and capital costs—data centers, content acquisition, site service/maintenance—are for the most part commodities. Commodities is probably too harsh a term for Google’s talented and well-paid employee base, so let’s just say (ala Michael Porter) that Google’s suppliers have little bargaining power. In other words, ongoing operating costs are never going to be a problem for Google. Hence cost metrics aren’t really important to look at when determining Google’s future success.

In 2001, Google had already captured a good portion of user’s search time. Larry and Sergey knew that it was very valuable time, and they just needed the most efficient and user-friendly way to monetize it. The method Google came up with was to sell text-based ads on a cost-per-click basis and price them trough a Vickery Auction. When searching for something, people are much more likely to click on an ad if it is something related to their search. This is unlike other advertising methods like TV, newspaper, yellow pages, etc. The conversion rate for advertisers is much higher. And because of that, this “time” that Google sells is very valuable.

So the total amount of ad revenue that Google collects per unit of their user’s time measures how efficient Google is translating time into profit. Their main Google.com search has the best RUUT figure. Other ancillary services like Gmail or YouTube have much lower RUUT figures, but they still incrementally add to Google’s dominance. It follows that they can increase this metric by either increasing revenue through more efficient ad selling, or increase the time efficiency of Google’s users.

Back to Google Instant…

“It saves about two to five seconds a search,” says Rosenberg, “and users absolutely love it. The percentage of people that select Instant results before they finish their query is steadily rising. So, in other words, the more they use it, the more they like it.”

Saving two to five seconds on Google’s billions of searches a day adds up. They may not be increasing revenue with this new feature, but they are increasing the value of their product and the efficiency of translating time into revenue.

Rosenberg summarized Google’s advantages over other web companies when he said that “search is still the most monitizable moment on the web.” In other words, on the basis of Revenue per Unit of User’s Time, Google is the best out there. I think other companies that use the “time > profit” model like Facebook and Twitter will have an extremely difficult time matching Google in this regard. They may still be successful, but not nearly at Google’s level.