I have written extensively on the brilliance of aggregation construct where companies make money on raw materials generated and created by users. For example, Facebook feeds on our photos while Google depends on our websites, to run their businesses. The assumption has been that these IT utilities would remain gatekeepers making it harder for others to break in.
Under the aggregation construct, the companies that control the value are not usually the ones that created them. Google News and Facebook control news distribution in Nigeria than Guardian, ThisDay and others. Because the MNCs tech firms “own” the audience and the customers, the advertisers focus on them, hoping to reach the readers through them. Just like that, the news creators have been systematically sidelined as they earn lesser and lesser from their works. But the aggregators like Facebook and Google smile to the bank. The reason why this happens is because of the abundance which Internet makes possible. Everyone has access to more users but that does not correlate to more revenue because the money goes to people that can help simplify the experiences to the users who will not prefer to be visiting all the news site to get any information they want. They go to Google and search and then Google takes them to the website in Nigeria with the information. Advertisers understand the value created is now with Google which simplifies that process.
But Google’s 2017 fourth quarter results do show that while Google could technically use all contents on our websites for free, it would need to put money on the table to have access to other aggregators. Last quarter, Google spent approximately $6.5 billion to pay such aggregators for traffic.
Even without the one-time tax charge, Alphabet’s adjusted earnings came in at $9.70 per share in the fourth quarter, which still fell short of the $9.98 per share that Wall Street expected. The disappointing earnings came as Google’s traffic acquisition costs, the amount it pays to partner websites, continued to rise in the most recent quarter, jumping to $6.45 billion (or 24% of Google’s ad revenues) from $4.8 billion in the same period a year earlier. The company has said that its traffic acquisition costs will likely continue to rise as it shifts more of its ad business to mobile search. Google’s aggregate paid clicks also increased by 43% year-over-year in the fourth quarter
LinkedIn is one of the aggregators selling aggregated contents to Google. If you type any name, not a celebrity on Google, the first search result is usually from LinkedIn. Google pays LinkedIn for that information. Another is Twitter whose feeds or tweets are now part of Google search results. Something new is happening here: these large aggregators can find revenue beyond advertisers; they can make money from companies like Google, Bing and Baidu by commanding hefty amounts on data they have aggregated from users in their ecosystems. I call this Double Aggregation Construct: aggregating data which has already been aggregated from users who originally created them.
Certainly, this has implications to Google business: if these companies have this strong market positioning, Google’s margin would be weakened over time. Twitter has the best real-time data than any ecosystem within the free open web at the moment (Facebook is largely closed). LinkedIn has the best human business diary which is also valuable to Google. These firms can see themselves as movie production companies, producing contents, which are then licensed to search engine platforms in bulk. The only difference is that the produced contents are our data which we give out for free.
Investors did not like the results. The fear is that if Google continues to pay this money, nothing would stop the companies from asking for more. That is the reason the stock fell 4% after the earnings call. You may wonder why it is even necessary for Google to pay in the first place. It is paying because it wants to keep Google Search extremely valuable to users since it is the oasis in the Alphabet empire. If it does not, and Microsoft Bing takes over the agreements especially for Twitter, it could see a massive loss of market share.
---Visit our Store for my books, cases, notes, etc. Now, enjoy our consolidated subscription for all contents (past, present and future).
-- We offer Advisory Services (tech, strategy & Africa).