Should We Pay For Google

from the take-an-economics-class! dept

MW writes “Thought you might be interested in this Google vs. Yahoo analysis from Jimmy Guterman. He asks the all important pay-for-content question – If Google is the most useful site on the Internet, shouldn’t we be willing to pay for it?” I’ve always found Guterman to be a thought provoking columnist who I very much enjoy reading, but I also think that he doesn’t have a very good grasp on economics. This is why his most recent (failed) venture, Media Unspun, discovered that it couldn’t charge for content. So, now, in an effort to vindicate himself, I guess he’s trying to bring back the idea that paying-for-content makes sense. He thinks that most people would end up paying to use Google, if they instituted a “toll-booth”. Leaving aside the fact that Google has found a way to be profitable without needing to do that, this also doesn’t make any economic sense. Putting tollbooths across the internet decreases the overall usefulness of the internet, and takes away many of the opportunities. By keeping Google free, it allows them to leverage all of their visitors into something greater. Guterman’s “charge for everything” strategy is short-sighted in that it doesn’t look at the overall landscape to figure out where the most reasonable money making strategy is. Instead, it looks for the easiest target for money – which, in turn, cuts off much larger and more sensible money making ideas. If they were to charge, it would destroy Google. It would (1) make them lose all of their ad sales business, which accounts for 2/3 of their revenue while (2) bringing in incredibly tiny amounts of revenue from paying subscribers. While some people certainly would pay the toll, it wouldn’t nearly replace the ad sales they’re making. Part of Google’s strategic advantage is the eyeballs they bring in by being the best in search. Google is trying to leverage that asset by doing things like selling ads. Guterman’s strategy is to try to destroy that asset by taxing it.

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Comments on “Should We Pay For Google”

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Chronic Blunt says:

Well, what would YOU propose?

What would YOU propose in this scenario, Mr Long-winded Economist, expert on every subject? I think Guterman’s analysis is as good as any, there’s no need to bash the guy just because he leans towards a for-pay structure. However, I’m not surprised at all to see you portray his view in a negative light, considering your well-established tilt towards music piracy and generally getting things for free.

You should really get a better grasp of economics yourself dawg!

Mike (profile) says:

Re: Well, what would YOU propose?

Google is profitable with their current plans. They have incredibly happy users and continue to improve both the quality of their search and the variety of services they offer. What else do they need to do?

I’m not bashing the guy, I’m just saying that his economics are wrong. People simply won’t pay for it. That’s all. As much as he wants them to, they won’t.

The economics are simple. Marginal cost equals price in a competitive environment. The marginal cost of reproducing a digital good is zero. Thus, the price will get forced to zero. This isn’t a theory of what I want to happen, this is what happens. Thus, trying to charge for a digital good is a dangerous proposition, unless you can guarantee some sort of monopoly power over the market.

Which part of my economics is wrong?

CounterPoint says:

Re: Re: Well, what would YOU propose?


The “marginal cost of reproducing a digital good is zero” statement is simply not accurate. It may be low, but it is never zero. Where such a reproduction takes time, there is always an opportunity cost.

What are the mechanics involved with executing a search? Are you saying that it doesn’t cost Google any cpu cycles to execute a search? Even idle cpu cycles could be used for grid computing that could yield money for Google. Opportunity cost. Are you saying that it doesn’t cost them anything to maintain a database? That their hosting costs are nil? Even for a marginal search, there are costs.

Even taking the most extreme example — the fiber that connects Google to the backbone — there are issues. Where conduits with nearly-infinite capacity exist, there is always the cost to maintain those conduits. Managerial accounting concepts prevail upon the amortization of many fixed costs over some notion of steady-state usage, such that a marginal transimission may not incur any variable costs but certainly deserves its portion of the amortized fixed costs. Absent any collection of those fixed costs, the assets tend to be neglected; maintaining circuits does cost money.

The cost of delivering a search is not zero, but they’ve found a way to offset those costs through advertising. That said, price and cost are often only vaguely correlated: Google has a product that many people would pay to use. Why wouldn’t they exploit that? They may also have the ability to differentiate service for paying customers and free customers, pleasing both. So, regardless of their cost structure and the managerial accounting they employ, if they can charge customers, who in turn feel they receive solid value for those charges, then why wouldn’t they?

(it is also worthwhile to note that price tends toward marginal cost in a competitive, homogenous industry. This occurs in the mythical long run. Furthermore, I believe the search industry is far from homogenous. Where there is differentiation among search companies, you then enter monopolistic competition, where different price mechanics apply).

Mike (profile) says:

Re: Re: Re: Well, what would YOU propose?

All very good points… though, I think that your wrong to assume that amortized fixed costs are the same as marginal costs.

I also agree that this isn’t a truely competitive market, and different pricing mechanisms do apply. HOWEVER, when making pricing decisions it’s always important to remember the basic economics of how your competition could play out. So, sure, Google has something of a monopoly now – but there are plenty of other companies gunning for them (and rapidly improving). If they were to start trying to charge monopoly rents on their users, they are only hastening that competition, which clearly will undercut them. Then, they lose out on their paying customers to other search engines – and they no longer have their core “free” audience to make money on advertising.

Your strategy assumes that the status quo will remain and that their monopoly can’t be lost.

That’s dangerous.

My point is simply that when making pricing decisions, it’s important to understand the basic economics of the good you’re trying to sell. If there’s *any* chance that you may face something close to a competitive market, you’re risking quite a bit in basing your strategy on selling a good far above its marginal cost. You’re practically begging for long term trouble.

That said, I also have problems with the idea that every individual thing must be charged for. Good businesses look at the whole of their business and figure out how to leverage some areas to sell others. Even if the marginal costs per search aren’t zero they’re so close to being zero that I still believe they’re effectively zero. In those situations, you are MUCH better off using that “good” as a promotional item to sell some other good.

Think about it. It’s really “free” advertising. The cost of the promotion is zero. And you leverage that to sell *other* stuff. That’s exactly what Google is doing. They’re leverage the free promotion of their search to sell advertising and corporate search solutions. It’s the right strategy.

Your strategy, in my opinion, invites competition, destroys the promotional benefit they get from their search, and undermines their core business advantage.

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