Ask HN: What will happen to Google when somebody disrupts AdWords?
I invested some portion of my saving into GOOG. But I'm concern that 90% of revenue are ads.
Is it possible at all to disrupt advertising system Google is dependent on?
Just want to ask smart people of HN what they think... 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 :-( Some would say the "flip" has already happened. I'd peg it to early 2009. Whenever they changed the shuttle schedules, if anyone remembers. 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. 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? 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). Best comment so far, the search monopoly guarantees AdWords.
The only way to do this is by breaking search and this is incredibly difficult. Google is a single pony like Exxon is with oil. 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... 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. 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. Google will buy them out. Just like Yahoo (the established player at the time) bought Google out in the early 2000s, right? http://news.cnet.com/8301-10784_3-6071461-7.html And then how Yahoo failed to compete with AdWords because of corporate politics, worries about existing revenue streams, etc.? http://www.wired.com/wired/archive/15.02/yahoo.html Disruption doesn't only happen from a head-on challenge. Effective disruption is often not considered relevant until its way too late, and often couldn't be acquired even if seen. Consider how Craigslist destroyed the newspaper classifieds business, and that buying Craigslist would not have helped a newspaper at all. Of course this will likely happen when a decent alternative presents itself. This is not guarenteed to happen though. The same could have been said about 'search' when Google wasn't around. 'Yahoo will buy them'. They had the chance but did not see the potential Google had as a searchengine. Whith this in mind it could potentially happen that a new company comes up with a better idea and grows too big too fast for GOOG to buy them. But that's the whole idea behind investing in the stock market: past revenues are no guarantee for the future... Just like how Microsoft bought out Google and IBM bought out Microsoft. 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. I was about to write some vanilla response, and then I saw this comment. Kudos for making me laugh and for most likely being correct. 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. 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. 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. Not only would they have to steal ALL of Google's income, they would have to steal ALL of Googles network. Highly unlikely at any point in the future. Not to mention the google search product IMO is better than any other available. No, they'd have to steal just enough income from Google to slow its growth rate. Google's high P/E ratio is based on an expectation of rapidly increasing revenues over time. If its revenues became flat, its stock price would plummet. Stock prices may change dramatically whether or not Google remains a going concern. Any share investment involves risk. 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. 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. I heard these arguments before but nothing happened so far, facebook has still one of the worst return rate in the industry. 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. 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. > However, all companies will eventually fall to competitors as t approaches inf. Depends. There are other ways for companies to fail, too. 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? 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. Google will be in the transportation and shipping business by then. Brain scanning devices that will be used to navigate web browsers. ETA 5 years.