Twitternomics and Googlenomics

Economics news from two companies we cover...Twitter and Google:

Twitter first - they are signalling that they too have to exit the Freeconomic world and make real money, and - as we (and, to be fair, many others) predicted at least a year ago, they will tax those companies who are trying to make their own fortunes by riding on top of Twitter's ecosystem. Not only that, but they will not let these 3rd parties insert their own Ad-clients into the stream - the rotters!. The only surprise is that anyone is surprised.

More amusing though is a lesson in Googlenomics - plus a video from their Chief Economist, Hal Varian. Googlenomics can best be defined as taking all the benefits (and I mean all....) and ignoring all the costs. They can't get away with that for their own accounts of course - accountancy rules see to that (everyone tries, of course - Enron ring a bell?) but when it comes to measuring your economic impact on the economy to try and charm Washington's legislators to look the other way, they make some claims that even a Web 2.0 PR would blush at:

....we conservatively estimate that for every $1 a business spends on AdWords, they receive an average of $8 in profit through Google Search and AdWords. Thus, to derive the economic value received by advertisers, we multiply our AdWords revenue on Google.com search results in 2009 – what advertisers spent – by 8.

So what's wrong with this picture, I hear you ask?

The argument made here - and pretty much throughout the report, in essence is that if you advertise on Google lo and behold then customers come and spend money with you, and Google counts that money you made as value they added all on their lonesome. They have been "conservative" in merely multiplying the Ad dollar's impact by 8. Their argument has 5 main holes:

Firstly - That claimed 8 fold impact is not on revenue, mind you - but on profit! Profit is what I have after I have deducted costs from my revenues. So adding $1 of Google Advertising COST generates 8 fold more PROFITS. Hell, that is a perpetual money making machine (or, as I strongly suspect, Googlenomics doesn't actually recognises costs and treats revenue as the same thing as profits )

Secondly, its a zero sum game - if I spend my Ad dollar elsewhere, presumably that outfit can also claim an 8-fold increase in impact. Big picture - Ad spending is a fairly constant % of GDP (1-2% depending on the country) and this number is changing very slowly year by year. So, if Google is taking that Ad dollar all it means is someone else is losing it.

Thirdly, its double counting. If everyone who supplies services to my company claims they therefore have an 8-fold knock on impact on my revenues (never mind my profits) because I can serve my customers , its a perpetual GDP-growth machine (better known as Greeceonomics ).

Fourthly, it pays absolutely no attention to, ahem, the costs of being a Google. Lets have for starters:

- An uncompetitive market for online Ads, run by in effect an operational near-monopoly. If there was more competition, Ad prices would be lower - now that would be a real benefit to my company.

- The reduction in revenue from all the content based industries that Google search and its other tools have hollowed out, never mind the digitisation of copyrighted books. While its been great for me to catch up on all that stuff on YouTube for free, don't kid yourself that its not a real but unaccounted for loss - or "market externality" as its called by economists - to someone else.

- As with IBM and Microdsoft before it, its sheer scale, use of its muscle and so on is actually probably having a value reducing effect on some new and high value markets. How many startups has Google bought and throttled? How many ideas have died as a piece of Google vapourware hits the A List blogs?

Fifthly, there is the cost to an economy of dealing with rogue companies. Google is no longer a "Do No Evil" company, the episodes with the WiFi sniffing, User Data holding despite EU orders, Buzz and email etc tell you that this company is going to cost a lot of money for regulators etc to watch and restrain.

Interestingly, they also count the (far smaller) donations to not-for-profits they have made, but interestingly enough do not claim a multiple impact here (odd that, if anything I would have thought it was easier to argue as most of those services would not exist otherwise).

What can one say - I just think its laughably ham fisted, if they were really trying to convince they should have put in a few negatives, the odd market externality or two.

Afterthought - What is really odd though is that they have not counted the impact of their major service - search - on reducing friction in transaction costs, which probably has had a huge impact - that is in my view wher the real impact is. The Ads and underlying datamining are actually the cost to the user of using the services where Google really adds value. But then, as I noted above, Googlenomics doesn't count costs....