Saturday, May 19, 2012

Why Google earns more from its ads

                     Google earns most of its revenue from online advertising. Despite the rise of Facebook, Linkedin, Quora, and a plethora of other websites and social networks, it's place in online advertising has remained unchallenged. Claims of Facebook being "the next Google" have been around for a while. But I seriously doubt whether those claims will come true in near future.

                   The investors' reaction to the highly anticipated Facebook IPO illustrates that many investors still feel that Facebook is a risky bet. They wonder if the company really matches the hype it generated. The closing stock price was $38.23, up just 0.61 from its starting price.
                   So why does Google earn more compared to its rivals? Well, because, in the online world, the relevance of the ads matters. People use Facebook to connect with friends and family. They use Linkedin for developing professional contacts, but users do not visit any of the social networking sites to obtain information.

                   When you are looking for something, you still go to Google. And that's when you pay attention to advertisements that appear along with the search results. In contrast, you rarely notice the ads Facebook places on its site. This is partly due to the fact that engineers and graphic designers try to be discreet when displaying ads. But Facebook has become a bit too discreet in that regard. Also, in a social setting, where there are people to talk to and you are reading the updates of your friends, chances are remote of you following an ad.

                   The new move by Google to integrate all the data from its services to build a profile of its users is a master stroke. It leads to personalized ads. While this move has been a troubling one and Google has faced a lot of flak over this new policy, especially from privacy advocates, when it's seen through a financial lens, the move makes perfect sense. Online advertising is a great source of revenue only if people see and follow your ads. Otherwise, it's a loss.
                   Does this mean that Facebook cannot beat Google? It's hard to say. Especially because both companies are constantly innovating and finding new ways to retain users longer. Google's browser Chrome now is second only to IE and I expect it will become first soon. The Chrome web browser also leads users to the Google's site- Yet another example of how Google ensures that users visit its site.
   So, while Facebook has a huge potential with its treasure trove of data, Google still retains it's edge when it comes to ads. There is still a substantial way to go before Facebook can become "The next Google".