The Perfect Media Business Model
March 14th, 2010 | Published in Business Models | 2 Comments
Google’s biggest contribution to the Internet and the world of media advertising may not be the engineering prowess of its search engine. The bigger innovation for Google is how they monetize their search ads.
Google charges advertisers through a pay per click model. Advertisers match their ads to the search terms that are most relevant to the product or service they are advertising. The innovation? Google implements an auction system to price their advertising inventory. Each time an advertiser chooses a search query to associate their ad to, they make a bid price on the amount they are willing to pay per user click.
With the auction system, Google was able to transform themselves into the perfect media company. In traditional media the more ads you purchase, the cheaper the cost per media is. With Google, the more advertisers want to associate their ad to a specific keyword, the higher the cost per media (click) is. The result? — Google revenues grow exponentially with the increase of both their audience and their advertisers.
Google will only reach its ceiling when it hits click inflation for a number of major keyword search terms. Click inflation happens when advertiser demand increases so much for a specific search term that the cost per click becomes prohibitive. Thankfully for Google, click inflation has only happened for a few of their search terms in a limited number of markets. For them and for the other websites that have adapted their business model, the sky’s the limit.
May 1st, 2010 at 4:57 am (#)
What a great resource!
August 13th, 2010 at 9:29 am (#)
Just a comment here. I agree that Google is the closest thing to a perfect media company there is. But not exactly for the reason you cited here “In traditional media the more ads you purchase, the cheaper the cost per media is. With Google, the more advertisers want to associate their ad to a specific keyword, the higher the cost per media (click) is.” While this is partly true because of discounting based on scale purchases, both old and new media follow the principles of supply and demand. Google shares this aspect with traditional media but transposes keyword demand to say TV’s rating points. The proper analogy would be “in traditional media, the more advertisers want a particular time slot and media property, the higher the cost.”
The main difference is the dimension of time which operates on different vectors for traditional and new media. Since TV programs are time bound (e.g. prime time, so many commercial gaps, etc.) it necessarily operates in a capacity model just like an airline which has a finite number of fares that will disappear once it is not sold and the plane takes off. The time vector for new media is more persistent because of its nature (accessible on demand) and in that prime times of usage (and therefore exposure) are user-determined and also because there is no regulation for maximum exposures (or ratios of content to advertising). Theoretically, the advertising potential would be infinite unless you factor in diminishing efficacy from over-exposure. Just my two cents worth.