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Self-referential

October 31st, 2005

My column in last weeks Fin (over the fold) was about the implications of blogs and wikis, particularly Wikipedia for the business model of Google, Yahoo and similar firms. Looking at Wikipedia a few days later, not only did I have an entry (not there last time I looked), but my piece had already been quoted. Clearly Wikipedia is as collectively self-aware as any of us self-Googling narcissists.

Open slather on the net

The news that the share market valuation of search engine Google has topped $100 billion brings back memories of 1999, when speculative mania pushed the NASDAQ share index past 5000. Admittedly, we are nowhere near the absurdities of the dotcom era, when companies with neither earnings nor revenues could be valued at billions of dollars, and investors seriously entertained business plans based on absurdities like home-delivered petfood.

Nevertheless, there’s plenty of optimism in the market. Google’s current market valuation is around 40 times annual earnings. That would make sense if investors believed that Google was going to wipe out its competitors in its core market, for search and internet advertising. But Google’s main rival, Yahoo, commands a similar multiple, and Microsoft is also doing well, at least in part on the strength of its MSN business.

Just to match the return on government bonds, Google and its competitors need to double their earnings, then sustain them at high levels. Despite some impressive growth in recent years, that’s not as easy as it might sound.

The only significant revenue stream from which growth can be expected is advertising. Although Internet advertising has recovered from the slump that followed the dotcom crash, the potential for growth is limited. Most people in developed countries, and nearly all of those who are attractive demographic targets for advertising, are already online. So growth relies on getting more advertising to the same market.

An even bigger challenge will be sustaining profits over the period needed to justify high valuations. The Internet is changing all the time, and no single model can be sustained for long. In particular, the phenomenal growth of primarily noncommercial productions like blogs and wikis is transforming the landscape.

Blogs (or weblogs) have come from nowhere five years to play a significant and growing role in the media landscape. Many accept advertising, but their large numbers (around 20 million at last count) make them tricky to handle. Already a large proportion of new blogs are ‘splogs’, spam blogs designed specifically to manipulate Google’s pageranking algorithms and attract advertising dollars.

An even bigger challenge is Wikipedia, the collaborative online encyclopedia.Wikipedia is increasingly becoming the first port of call for the kind of general query that Google made its name by answering better than its predecessors. If you want to know, say, when Alexander Downer was first elected to Parliament, Wikipedia will give an accurate answer. Google points to Wikipedia first, then gives dozens of mostly useless links. Since Wikipedia is resolutely noncommercial, there is no prospect of advertising dollars here.

The main response from Google and its competitors is to to offer a bundle of services so compelling that, they hope, users will freely provide large quantities of information, thereby enabling the provision of precisely targeted advertising. To this end, the major players are engaged in a complicated minuet, seeking to buy or sell strategic assets like internet messaging and telephony services, social software and so on.

But this general strategy has been tried before, and failed. The superstar of the dotcom boom was America Online, with its ‘walled garden’ strategy aimed at keeping its millions of users focused on AOL sites. The peak of the boom was reached in the merger between AOL and Time Warner, which valued the company at around $150 billion. But with the arrival of broadband, users began drifting away. AOL is now a mere bargaining chip in the negotiations between the big players, likely to sell for around $10 billion.

The Internet has made a huge difference to our daily lives, and has been a major contributor to productivity growth over the past decade. But sustainable profits from Internet ventures have proved elusive.

The fundamental problem is encapsulated in the slogan of the first-wave Internet ‘information wants to be free’. That is, given that information can be shared without any loss, networks based on free distribution are likely to outcompete those that put barriers in the way of access, even the requirement to read an advertisement.

In the Internet of the late 1990s, the claim that information was naturally free was only a half-truth. Once created, information is a public good, but the creation of information (or ‘content’) had to paid for. The explosion of blogs and wikis has shown, however, that many people are willing to provide information (some useful, some not) free of charge. Google and its competitors must adapt to the new reality or die.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

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  1. Seeker
    October 31st, 2005 at 16:55 | #1

    I am seriously impressed by wikipedia. It has not led me astray on factual info yet, and I love its underlying philosophy. It is one of the most interesting, encouraging and useful phenomenon to emerge on the web.

  2. Factory
    October 31st, 2005 at 17:31 | #2

    Once created, information is a public good, but the creation of information (or ‘content’) had to paid for.
    “had to _be_ paid for”, surely?

    An even bigger challenge is Wikipedia, the collaborative online encyclopedia.
    Not really.
    – Wikipedia is an information source just like any other still needs to be searched, atm I find the best way to search wikipedia is google.
    – Wikipedia has it’s limits, even now there is talk that wikipedia has got ‘enough’ articles and they should instead concentrate on improving the quality of articles.

  3. October 31st, 2005 at 20:54 | #3

    a couple of years ago I wet, wiki, o yeah right, now i visit nearly every day

  4. Dogz
    October 31st, 2005 at 21:26 | #4

    The big difference between the internet of today and 1999 is that people have worked out how to make money from advertising. Google makes an average of 12c per search and 62c per ad link clicked. That’s twice Yahoo, because google ads are better targeted.

    Wikipedia and blogs won’t change that. The searches that generate ad clicks are by-and-large orthogonal to the searches that generate wiki/blog clicks. You click on ads if you’re shopping, wiki links if you’re looking something up, and blog links for current affairs or opinion.

    The demand for ad links to click on is real, because people increasingly shop online. Even if the web changes, the only way the advertising dollars are going to reduce is if people reduce their online shopping, and that ain’t gonna happen.

    Even if people start clcking on blog links rather than ad links when shopping (for example, a product review-type blog), they’re still going to eventually click on an ad link when it comes time to make the purchase. That ad link may be on the blog, rather than on google’s search hit page, but google make money off that anyway because they supply the advertiser links and the advertiser network that goes with them to the bloggers.

  5. SJ
    October 31st, 2005 at 22:25 | #5

    Wikipedia and blogs won’t change that.

    God these RWDBs are stupid.

    The point is that Google’s traffic is being short-circuited by Wikis and blogs. If I want something about Lucius Junius Brutus, I don’t have to go to the Brittanica pay-site, nor do I have to go through Google to find an alternative. I go to Wikipedia where it’s free, and unaccompanied by links to password cracking programs called “Brutus”.

    Google isn’t the information gatekeeper that it used to be.

  6. Andrew Reynolds
    October 31st, 2005 at 23:06 | #6

    PrQ,
    Interesting to see you have edited your own page. It seems you have an anonymous user to thank for the article – any idea who Sien is?

  7. November 1st, 2005 at 00:27 | #7

    Why is Wikipedia a threat to Google when most people find Wikipedia articles through Google?

    Admittedly, it helps here that Wikipedia has a crappy internal search – only article names are indexed, not the full text of the articles – but using Google also helps to find Wikipedia articles only when they are good (some Wikipedia articles are crap, but since they aren’t so well linked to from outside, Google presumably ranks them less well).

  8. metric system
    November 1st, 2005 at 02:28 | #8

    I notice the Wikipedia article has now been edited to remove ‘Wiki-narcissism’ – that is, the quote from the AFR article is gone on the grounds that it’s ‘not a major part of Quiggin’s bio’. So maybe narcissism is universal, but not omnipotent.

  9. Dogz
    November 1st, 2005 at 02:36 | #9

    SJ,

    God these RWDBs are stupid… If I want something about Lucius Junius Brutus…

    The point is, if you want something about Lucius Junius Brutus, you’re not doing a search that is likely to cause you to click on an ad, so it doesn’t matter how you get the information. In fact, if you bypass google and go straight to wiki you’re doing google a favour, because they don’t have to waste infrastructure serving a query that is never going to generate them revenue.

    OTOH, if you’re searching for “digital cameras” you’re much more likely to be close to making a purchasing decision, hence a good target for advertising. Even if you bypass google in that case, and go straight to, say, your favourite digital camera blogger, the ads on the blogger’s page are still served by google. So when you eventually click, google wins either way, although it is true that they get more if you click on one of their search engine ads (adwords) rather than a blogger’s ad (adsense).

    Google is two entirely distinct things: 1) a content site (the search engine), and 2) an advertising network with attendant targeting technology. Even if you took away 1), 2) would still make money for them.

    Don’t call me stupid, _stupid_

  10. jquiggin
    November 1st, 2005 at 06:21 | #10

    Ok, enough with calling each other “stupid”, please.

    To restate my point Dogz, if people stop using Google for general search, it’s vulnerable to displacement in the search for commercial products also. Shopping-only search engines have been tried before and failed.

  11. Dogz
    November 1st, 2005 at 08:37 | #11

    Ah yes, the old double standards: calling someone “stupid” only becomes a problem when an “RWDB” responds to such name-calling.

    But leaving that aside:

    Shopping-only search engines have been tried before and failed.

    I don’t think that’s true. There are several quite successful ones that I can think of, eg shopping.com, pricewatch.com, and then more specialized ones such as orbitz.

    Google serves up results from a much vaster array of queries than just wiki-type searches. I just don’t by the thesis that a small blip in the wiki results will affect them much at all. It’s not argued in your piece, except with the catch-all “Information wants to be free”. Problem is, free information distributed across 8,000,000,000 web pages is no use to anyone. Google’s value-add is organizing that information so it is more accessible.

  12. Patrick
    November 1st, 2005 at 08:49 | #12

    I think jquiqqin is clearly right – see further a9.com which has an easy one click option for searching wikipedia and puts the results in a separate pane. They only want to be your first stop for information, counting on the fact that a) being the first stop for information means that even 1 in 100000 searches might finish in a purchasable form of information, and b) being your search page means lots of exposure for any ads it does run, and c) tracking your searches is the best way to target those ads, not to mention target their recommendations.

    Google, on the other hand, wants to be a one-stop shop for webservices. They think they are at the point where they can deliver ‘computing on demand’ and they want to. So their gmail has huge memory and no delete and internal searching: the idea is that this becomes your online archive, and slowly you at least don’t see the border between your computer (microsoft) and the web (google).

    But wikipedia is only of limited use on more obscure and difficult subjects. I recently looked up the separation of powers and it was a mess, and most of it just ignorant. It is better now, fortunately, but was in that state for some time.

  13. jquiggin
    November 1st, 2005 at 09:03 | #13

    “h yes, the old double standards: calling someone “stupidâ€? only becomes a problem when an “RWDBâ€? responds to such name-calling.”]

    Dogz, I didn’t check the blog between 10:25 when SJ’s comment was posted and your reply at 2:36 am. The comment “stop calling each other stupid” was directed at both of you, but for the record, SJ started it and is warned not to repeat it.

  14. Dogz
    November 1st, 2005 at 09:59 | #14

    Patrick, I don’t understand why that supports JQ’s argument.

    I tend to look at it from a more abstract perspective: Google’s revenue is advertising revenue. They are the best in the world at targeting ads to web pages in the sense that A) they have the biggest advertiser network, and B) they have the best targeting technology. They also have one of the most popular destination sites on the planet, one which generates huge click through rates for their own ads.

    So there are two aspects to any argument that google is going to somehow be hurt by changes in the way people use the web. First, that the change in behaviour means people use google’s search-engine less. That is basically JQ’s argument with respect to wiki, but I don’t buy it because there is a big unjustified assumption that a significant portion of the (revenue generating) searches on google are wiki-related searches.

    Second, that the change in behaviour means people click on ads less, regardless of where they are placed. That I don’t buy either; ecommerce is growing rapidly, not shrinking.

    As a final point, no-one is better-placed to respond to any changes in web behaviour than google. I won’t be buying GOOG at current valuations but I sure as hell wouldn’t short them either.

  15. Terje Petersen
    November 1st, 2005 at 22:56 | #15

    Isn’t eBay a giant big search engine devoted to helping people in finding products, sellers and prices?

  16. Patrick
    November 4th, 2005 at 08:22 | #16

    Yes, and google is planning a system which enables you to post information about items on a globally searchable database. From which, bidding shouldn’t be a huge addition.

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