What Will Happen If The Bubble Bursts?
In my last column, I weighed in on the debate about whether or not the Internet economy has created a bubble that will burst like 2000/1. I felt compelled to respond to Mark Simon's column speculating that we're heading towards a "doomsday scenario" in which Google misses badly on earnings, leading to a stock sell-off and the ripple effect of advertisers pulling online ad budget.
Ultimately, I pointed to a commitment to use experience by today's Internet power players as the major reason why we're not going to see the industry flame out as it did in the early 2000's.
Mark elaborated on his point of view in a follow-up piece last week reiterating his assertion that the current situation is "clearly unsustainable" and giving advice on what to do if "the whole search industry (God forbid) collapses." I recognize that sensationalist statements like these are designed more to spark controversy than deliver irrefutable evidence ("SEO isn't rocket science" comes to mind) so, in that spirit, I'll take the bait and fire back with....
The only thing we have to fear is fear itself
I used this mantra in my analysis of the Google-DoubleClick deal and I think it's appropriate in this context as well.
For one thing, we avoided the first step in Mark's doomsday scenario when Google recently announced Q3 results beating the consensus. Of course, with expectations becoming increasingly far-fetched, it's quite possible Google won't be able to keep up. So let's play out what a bad quarter might mean for the industry.
Mark suggests that the result would be "panic selling" of Google stock. Now I'm no financial analyst -- but seeing Google's share price rise $140 between the time it missed expectations in Q2 '07 to announcing Q3 results inspires some confidence that investors are thinking long-term here. And seeing Mad Money's Jim Cramer recently proclaim Google one of the biggest bargains on the market leads me to think that we won't see a mass sell-off anytime soon.
But, just as I do every time I watch a James Bond flick, I'll willingly suspend my disbelief here and go with the proposition that a Google miss leads to investor panic. What then? Mark speculates that a Google sell-off would cause keyword prices to crash as marketers reign in budgets. And "with search spend weakened, overall online ad industry spend weakens, severely depressing CPMs."
For what it's worth, I don't see a correlation between investor confidence and marketer confidence, nor between stock prices and keyword prices.
So here's my sensational headline...
Marketers shifting budget to online media is an irreversible trend
Let's say the bubble bursts and the economy softens. As we all know, marketing dollars are the first to go when companies want to cut costs. Back in 2000/1, the first part of the plan to get cut was the Web. There are 2 main reasons why this was the case. First, the online channel was still relatively unproven in terms of performance. And second, as I noted in my last column, when times got tough, Web publishers sold their souls for every dollar they could get, sacrificing user-experience to generate revenue from pop-ups and spam email. And thus, the self-fulfilling prophecy was complete as performance bombed and marketers pulled back further.
Today a bursting bubble would have quite a different impact. Marketing would still be the first line item cut from the budget, but online would not be the first to get the boot. Tough times would call for increased accountability of every dollar spent on marketing. And, of course, there is no more accountable medium than the Web. And, within the online channel, there is no better direct-response tactic than search.
If a recession were to hit, can you really imagine a CMO giving orders to cut search budget to retain a TV or print presence? Sure, maybe some CPGs that don't transact online and rely on offline media to stimulate demand would react that way. But today's big search advertisers -- eBay, Dell, AT&T, etc. -- not only wouldn't pull back on search, they'd likely increase spend at the first sign of decreasing keyword prices.
And, as for those keyword prices, I don't see how a Google stock sell-off would lead to lower keyword prices as Mark suggests. Bid rates reflect marketer demand, which is typically a function of performance. And performance is a function of user activity. Is there any reason to suspect people will stop using Google as a result of what's happening to the market?
The only reason I can think of is if the search landscape goes the way of pop-ups and spam, as all online media did in 2000/1. However, I strongly believe...
Commitment to user-experience is an irreversible trend
Back in the early 2000's the top Web players had not yet found sustainable business models. The AOLs of the world were still trying to replicate the old media model -- where interruptive ads subsidize free content. Today, nearly 50% of all online ad spend runs through Google and Yahoo. And, no matter how bad things get, they're not about to start spamming their users.
For proof, look no further than Yahoo's past couple years. From January 2006 to September 2007, its stock lost almost half its value. But we haven't seen Yahoo selling its user-data or launching pop-ups left and right. Instead it's been steadily making acquisitions and creating ad platforms that will deliver value to end-users, marketers and shareholders alike.
As for Google, its stock could go down 50% and it'd still have enough market cap to bid on the $4.6 billion wireless spectrum or throw down $15 billion for Facebook.
Bubble, Bubble, Toil and Trouble
My advice for search and online media professionals worried about the bubble bursting? Relax. It's the traditional ad world that should be quivering in its boots.
Although, maybe I'm a bit biased here -- as my close friends will tell you, I've always relished the idea of living in a bubble.