Study: Google Overestimated Its Economic Impact

• by Laurie Sullivan  @lauriesullivan, July 27, 2011

"Grossly exaggerated" is how independent analysis describes Google's 2009 and 2010 Economic Impact report, in which the search company claims to have generated $54 and $64 billion, respectively, in activity for American businesses.

Could it be that FairSearch.org, which released the analysis by Allen Rosenfeld, a Ph.D. economist, Wednesday, is working the numbers in its favor?

FairSearch.org, a coalition of travel sites and tech companies, spearheaded efforts to persuade the Justice Department to block Google's purchase of ITA Software, which provides flight data. Coalition members include Expedia, Kayak, Microsoft, Sabre Holdings and Farelogix. During the opposition, Google responded with a blog post explaining the reasons for wanting to purchase the company.

The analysis from FairSearch.org concludes that Google overestimated its U.S. economic impact by more than 100 times the value of the actual contribution of its search engine.

The analysis details the fundamental flaws of Google's impact on the U.S. economy from its search engine advertising business, examines the validity of each of the explicit assumptions and the association between advertising spend and economic activity.

Findings suggest that Google "contradicted economic logic" and did not account for costs of doing business. It also ignored the results of previous empirical economic studies, and failed to consider negative economic impacts of the company's market dominance. As a result, "Google's net impact on the economy could well be negative" after accounting for these impacts.

Rosenfeld claims that determining Google's impact on the economy must take into account the company's "unusually high profits, search engine dominance and market power." The analysis claims Google did not take into consideration its 75% dominance in search engine clicks; 76% in search engine ad revenues; and profit margins that far exceed those of competitors and average Internet and U.S. companies.

The report specifically points to Google's claims that its AdSense program for publishers accounted for roughly 10% of its overall economic contribution. The revised analysis in the report found that Google's estimation of the impact from its AdSense program is 10 times the value of its actual economic contribution. Digging deep into the numbers, Rosenfeld calls Google's donations from nonprofits -- less than 1% of Google's estimated total contribution -- "unjustified," since the donations represent redistributions of some of Google's profit margins and do not reflect further economic activity.

Without listing all assertions, a revised model of Google's economic impact suggests:

1) The advertisers' surplus is less than $1 for every $1 spent on AdWords, since the cost of search advertising must also account for fixed costs, resulting in costs equal to (1.20)(spending), rather than (1)(spending) assumed by Google.

2) For every 3 clicks on paid ads, businesses get 7 clicks on unpaid links, rather than 5 unpaid clicks for each paid click as assumed by Google.

3) The conversion rate of clicks into sales for organic links is only 51% of the conversion rate for paid ads, not 70% as assumed by Google.

4) Sales from free clicks result in only 15% as much revenue as sales from paid clicks rather than the same revenue, as assumed by Google.

5) A cost to businesses, for optimizing organic search links, of 25 cents for every dollar spent on paid-search ads replaces the zero cost assumed by Google.

6) The contribution of search engine advertising to revenue is estimated to be $1.30 per $1.00 of ad spending, rather than $2 for each dollar of ad spending as assumed by Google.

Google did not respond to requests for comment based on the analysis.