Microhoo “Post-Mortem Post” – Part 3: Delusions of Scale

The ups and downs of the Micro-hoo saga continue unabated, with renewed Carl Icahn intrigue being the flavor of the week. The noose that irate shareholders have been verbally tying around Jerry Yang’s neck seems to be getting tighter all the time.

But this time even usually stalwart Micro-hoo cheerleader Michael Arrington of TechCrunch is saying that Microsoft may be going too far in its Machiavellian machinations to want to feast on Yahoo’s carcass.

Meanwhile David Kirkpatrick, senior editor of Fortune Magazine, argues that Microsoft will inevitably buy Yahoo, making the case that it has gotten personal for Redmond ever since Google wrested the crown of perceived "greatest and most powerful tech company" away from them.

But in arguing that Microsoft desperately needs Yahoo’s scale, Kirkpatrick falls into the same "scale will solve things" thought trap that is deluding Microsoft, and plenty of commentators throughout the blogosphere in both posts and comments as well.

Currently Google’s monetization advantage vs. Yahoo (confirmed, and likely similar vs. MSN/Live Search), that comes from their focused execution is somewhere around 50-100%. And it has NOTHING to do with "scale".

It has everything to do with the advertisers being able to afford higher average bids due to higher average conversions. Period.

Conversion is the only thing that ultimately matters to an advertiser. Scale is a straw-man. If YHOO or MSFT had equal or better conversion numbers for the same keywords, then advertisers would jump on that. The individual advertiser could care less about the total query share numbers, or total number of clicks, they only care about their ads converting when they are being shown and clicked on.

If you mail a direct response ad, do you care what total percentage of the region or nation that mailing list reaches? No way. You care about the conversion numbers, because if an ad doesn’t convert you can’t long afford to mail/run it. In search ads, if you fail to convert the clicks you get, as a small business you can be bankrupt before you know it. It’s that simple.

The total volume of searches or even clicks for a keyword on Google, Yahoo, or MSN/Live has little or nothing to do with it. It’s simply that at lower conversion rates on Yahoo or MSN/Live, advertisers have a harder time making the economics work for them.

Steve Ballmer should change his tune at the next Microsoft company meeting:

Conversion, conversion, conversion…

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Why recent Google Q1 Earnings should have your ears prick up

Google MoneyWith wild stock market swings becoming a fixture in recent weeks, the one that was brought on end of last week by Google’s unexpectedly strong Q1 earnings report – sending it’s stock up from $455 by almost $100 since Friday, is clearly worth a detailed look to all with an interest in seach marketing.

As CNET blogs, Google earnings may make Microsoft yearn more for Yahoo, but the real meat here is in the post’s Google quarterly earnings chart since Q1/2005. It shows that Google was making about as much all the way back then as Yahoo is expected to earn this quarter ($1.28-1.35 Billion).

Only Google has been killing it in these last three years, and just last week announced earnings of $5.2B.

You do the math, that’s about 4 TIMES as much as Yahoo.

But what is much worse, if the ComScore search engine stats have any semblance to reality at all, Google in e.g. December of 2007 had about 5.6 billion searches (a 30% year-over-year gain) to Yahoo’s 2.2 billion, or only 2.5 times as many. That means they are monetizing searches much more efficiently.

And this is the big damn secret that often gets overlooked by the mainstream media, including the financial analysts, because they do not understand paid search and it’s offspring very well:

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