This is a risky post since I will likely be proven right or wrong within a few months. Where Google has so far weathered the economic turmoil relatively well, I think it may be inevitable that they take a hit like everyone else. Here’s why I think that has to happen. (for those that will rewrite history, be careful I didn’t necessarily say their overall revenue will decline, for them to take a hit is only to grow less quickly than they have)
The majority of Google’s revenue is made up of advertising, specifically AdWords revenue from businesses paying to show up in targeted searches and related 3rd party websites. The search placement is based upon an auction model where advertisers willing to pay more are placed in higher positions. Generally in competitive markets with low barriers to entry (such as drop-ship ecommerce) the cost for the top placements is so high that only those companies with the best conversion rates and lowest operating costs can afford to compete. That means a slight drop in conversions and a whole category of top merchants can no longer survive. To put it into perspective these merchants may be paying Google 95% of their gross margin already.
- Scenario #1: Even if there are the same number of searches for a particular product it’s likely that less people would actually buy during a recession. Ie. You must assume that conversion will drop at least a few % as shoppers decide they don’t really need whatever item they are looking for or choose to shop a little more before making a decision. “Shopping a little more” is a death knell for the type of competitive businesses I mentioned above. The margins are razor thin and one or two more clicks even if the purchase is ultimately still made will cause some merchants to exit the scene.
- Scenario #2: Less people are searching for products in general. This will pretty obviously affect Google’s revenue. With some complex hypothetical calculations we could also predict how it might affect the ultra-competitive business categories described above. Likely they would also suffer acute pain.
- Scenario #3: Moving “down market”. From some things I’ve read about consumer behavior in a recession everyone moves down market a notch or two. Ie. If you normally eat at Chili’s then maybe you instead go to McDonalds or Taco Bell. If you normally eat at Ruth’s Chris maybe you instead go to Chili’s. For Google and Internet merchants this could offset #1 and #2 above. Instead of shopping at Circuit City (which apparently isn’t happening nearly enough these days) then consumers may choose to take their purchasing decision online. Under this scenario my prediction would turn out to be false because Google may weather the storm just fine. However, my belief is that many purchases are made on impulse or as part of entertainment so they may not materialize anywhere. Ie. a family goes to the mall every Saturday afternoon or everytime it rains, etc. It will remain to be seen whether moving down-market includes moving from offline to online in any great number. This could turn out to be the back story for the entire recession if this does in fact occur to any significant degree.
Although Google’s stock looks attractive at is current price of $300 and I think it has tremendous long-term prospects to dominate the Internet landscape. I feel the stock price might take a further hit if either #1 or #2 play-out to any large extent, and if that does occur the economy could be in for a difficult vicious cycle. So in that regard I hope I’m wrong as I’m not sure any economists have taken into account the huge number of people self-employed by eBay and web businesses in comparison to traditional payrolls.
