Monday, April 13, 2009

Monkey in the Middle? Not.

The recent tribulations of traditional media companies is again shining a spotlight on Google's role as an intermediary. Scott Karp of Publishing 2.0 summarized his perspective here:

"Those who argue that Google is a friend to content owners because it sends them traffic overlook the basic law of supply and demand. The value of “traffic” is entirely relative. The more content there is on the web, the less value that content has — because of the surfeit of ad inventory and abundance of free alternatives to paid content — and thus the less value “traffic” has. The more content there is on the web, the less money every content creator makes, and the more money Google makes by taking a piece of that transaction".

The dilemma around generating sufficient margins to support content development and distribution really goes beyond traditional publishers and into the fabric of most for-profit internet sites too. An exploding distribution channel is affiliate networks. Firms that rely on affiliates to drive traffic and revenue will, for the most part, inevitably experience diminishing returns as affiliates compete to capture a share of the clicks and dollars in their chosen vertical as they insert themselves into the value chain as yet another middleman trying to game the Google system. Those that add real value and are rewarded with sustainable traffic will prosper, but firms that rely on a search engine arbitrage by buying placement more efficiently will be commoditized.

We are witnessing the rise of the middleman's middlemen. SEO firms are paid a slice of the pie to game the Google algorithm, affiliates are paid a slice of revenue for capturing traffic and the list of fractional middlemen has spread throughout the internet value chain. Unfortunately, the weight of all this 'optimization' breaks two fundamental drivers of the internet economy. Permacheap groans under the weight of so many hands in the revenue or margin pocket and trust suffers from SEO wrath.

Nick Carr, recently posted an interesting perspective here where he argues:

"Where the real money ends up is at the one point in the system where traffic is concentrated: the Google search engine. Google’s overriding interest is to (a) maximize the amount and velocity of the traffic flowing through the web and (b) ensure that as large a percentage of that traffic as possible goes through its search engine and is exposed to its ads".

Taken another way, the goal of Google is to encourage permacheap content and to lower the price of conducting commerce. These are noble and reinforcing objectives. Free quality content drives traffic. Traffic brings advertisements and companies that are middlemen in the ad placement business then prosper. Likewise, internet commerce drives internet based advertising. Google's success has been around throwing friction out the door. It's unfortunate that Google's ecosystem looks for an open window enabling friction, under another name to jump right back in.

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