Google envy blinds Microsoft to the bigger opportunity

In my previous posting, I wrote that by limiting itself to advertising, Google is missing out on more lucrative opportunities. The same is true of Microsoft's current determination to play catch-up in the online advertising space.Google's profits are vulnerable, but is the prize worth all the effort? As I told delegates in my keynote presentation at WebSideStory's user conference last month in Santa Monica, it amuses me to see Microsoft peering enviously out of the $120 billion software marketplace at the $500 billion advertising marketplace and saying, "Yep, we'd like some of that." There are a couple of reasons why the company ought to be looking elsewhere.

The first reason is that it might not be so big a market after all, once online advertising really takes hold. A few days before I stood up to speak in Santa Monica, Scott Karp wrote an insightful piece on his Publishing 2.0 blog that posed the question: What If Media 2.0 Is Less Profitable Than Media 1.0?. It was so pertinent that I devoted an entire slide to quote a core passage from his blog:

"What if the transfer of marketing and advertising dollars online is not 1-to-1? What if the Internet has fundamentally lowered the marketing and advertising costs for big companies as it has for small companies? What if large companies can achieve the same sales objectives for a fraction of the cost of traditional mass media advertising?

"... the Internet may be doing more than make advertising more efficient and measureable, ie reducing wasted dollars — it may be fundamentally lowering its unit costs."

Maybe, I told the Santa Monica audience, Microsoft isn't chasing a share of a $500 billion advertising market after all. Maybe it will only be a $250 billion market. In subsequent postings, Scott has suggested even that may be optimistic:

"The network effect turns everything into a media platform, while at the same time obviating the need for media as a marketing vehicle because brands can use the network itself as a marketing vehicle," he wrote on May 4th. "So, you have the new media/technology industry orienting its collective business model toward advertising ... at the precise moment when the paid media advertising pie may be on the verge of shrinking."

"Advertising is in a death spiral," he added last week. "I can’t predict how long it will take, but the evidence is mounting daily. If you’ve got content or a web service, better hope someone will pay for it directly, because the days of the convoluted advertising subsidy business are numbered."

My sentiments exactly. Scott's key insight is that the current rise in spending on new media by large advertisers is more likely to be spent on the media itself than on advertising. Remember the Web is not only a platform for advertising. It's also a platform for ecommerce itself. And yet Google and Microsoft each ignore the retail market that Amazon.com is focused on. At a rough guess, that market totals some eight trillion dollars worldwide. It's such an enormous market value that I had to truncate the bar to fit it on the same chart as the software and advertising industries (even without any collapses there). And what about the mother of all markets, the total value of all transactions? That's the market eBay targets. Equivalent to world GDP, it's a $60-trillion market value.

I've said it before, but I'm quite happy to say it again and repeat it over and over until I'm blue in the face:

"The world does not revolve around advertising, it revolves around trade. Businesses need to be able to make and sell stuff before they have any money left over to spend on advertising. By definition, therefore, there is far more money to be made from directly supporting businesses in the making and selling of products and services than there is from vying for the small change they have left over for advertising. The majority of on-demand revenues will come not from advertising but either from taking a slice of people's sales revenues (the Amazon.com and eBay model) or by providing services that help them operate more efficiently (the salesforce.com model). Google is not the model to follow, not until it manages to wean itself off its total dependence on advertising and expands into other services."

In fairness, I should add that in a small way I applaud the strategy Steve Ballmer outlined the other day for Microsoft to achieve leadership in the online advertising market. In its own way, Microsoft has correctly identified what I outlined in my previous posting: that Google's fat profits are mainly due to first-mover advantage in providing advertising-as-a-service. Those profits are vulnerable to a sophisticated technology-based challenge, which is what Microsoft seems to be planning. But is the prize worth all the effort of winning it? I very much doubt it.