Google: Good Service not Arbitrage

RE: Seth on Arbitrage from John Battelle’s Searchblog

Thanks for the great blog. I have to disagree with this post however. First, I think Google chooses not to disclose more to investors mainly because the founders don’t go along with conventional wisdom. They would rather examine whether something is a wise use of management resources, and if not, don’t just do something just because most everyone else does. I don’t think the keeping trade secrets has much to do with their reason for not feeding the wall street analysts.

Google’s IPO is another example of their decision to take a different path than other companies. Also the stories I have read about how the founder’s reacted to venture capital requests (demands is probably what the venture capitalists thought they were until they capitulated) showed the founders tendencies to go their own way. They could get the money they needed without having to go along with the rules others wanted to impose on them. It is a great benefit to Google that management can focus on more important things, but it will likely become an issue again when the incredible growth of profits Google has been achieving eventually slow.

Second I disagree that what Google does is arbitrage. They do have a great money making machine. But what they did was provide a service that people liked. Then they found a way to get those who wanted access to their users (to advertise) to pay Google well for the privledge. And Google did a good job of finding a solution that those paying the bills liked. That it has worked for those paying the bills shows the advantage of designing a system that benefits you and your customer. Many internet companies got their customers (other companies) to pay them lots of money but when their customers failed to make money (and many then went out of business) then you had fewer (or no) customers left. Just like teaching someone to fish provides a greater benefit than giving them one fish, a customer that is able benefit from your service and prosper and continue to be your customer is better than a customer you lose (because they don’t benefit from the relationship with you).

Then Google expanded the market by modifying their technology to provide other web sites a way to be paid by advertisers. The system Google had developed did a great job of getting advertisers to bid against each other to increase Google’s revenues. And Google then modified their display of ads to reflect their analysis of the page content to again take great advantage of their existing technology. In this case, Google took some of the money the advertiser pays for the service that Google provides.

For Google to be using arbitrage they would have to, for example, pay your site some amount each month to run ads and then sell that right to someone else. Since they don’t, in fact, pay you to run ads on your site with the hope they can charge others more for the right to use the ad space they bought from you. Google takes a percentage what the advertisers pay, that is not arbitrage.

Google, to use a internet bubble phrase, is doing a good job monetizing eyeballs. However, that is not arbitrage it is just doing a good job of maximizing revenue and profits. Yes Google is able to make money because they are paid more by advertisers than it costs them to deliver what the advertisers want. But I don’t see how that is more like arbitrage than Toyota selling a car for more than it costs them to make the car.

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