December 25, 2011

Firefox and Google - "Traffic Acquisition Costs"

There are a number of articles around the web this week making all kinds of guesses and predictions about the Google and Firefox search relationship. I realize that this is mostly inside baseball, but I'd expect those covering this as "news" to be a little more familiar with how this stuff all works. Apparently they don't so here's a quick tutorial on "the economics of the Web".

The economic model that's driven the Web for most of its existence is advertising. Back in the day it was banners and pop-ups. Today it's AdWords and AdSense.

The model works a lot like the previous era of television or newspapers. Advertisers pay content providers to include ads alongside their content. Content providers make most of their money from advertisers. Users get a "free" service.

Google is one of the most successful companies on the Web because they were the first to figure out and sell highly effective ads on the Web. Their innovation was highly context sensitive ads that are more likely to get clicks than the previous generation of ads. When you search for something, Google knows precisely what it is you're after and they can serve ads to you based on your search input (and anything else they know about you from your other Google interactions.)

Google started out as a search company. But that's not what they are today. Google's primary business is advertising. From their SEC filing on the nature of their operations, "We generate revenue primarily by delivering relevant, cost-effective online advertising."

Google brought in $9.7B in revenues in Q3'11. 96% of that revenue was from ad sales. They bundle those ads with some great "free" products like Google Search, YouTube, Gmail, etc. so I'm not complaining here. It's a good deal for lots of users. I use some of Google's services and I visit lots of sites that depend on AdSense to pay the bills and keep publishing great content and providing valuable services.

Not all traffic to Google ads is "organic" though. To help drive ad sales, Google pays for traffic to their ads. They paid out $2.21 billion, or 24% of their ad revenues in "Traffic Acquisition Costs". That money goes to revenue shares with their AdSense partners and to "distribution partners" -- presumably browser makers, PC OEMs, and mobile OEMs and operators.

This is Google's business. They sell ads alongside "free" content, and they buy additional traffic to make those ads more valuable.

For years, many in the tech press have presumed that Google is "donating" money to Mozilla. They're not. They're no more donating to Mozilla than they are to Opera or Apple, both of which derive significant revenue by sending search traffic to Google. For Opera, that appears to be about $50M in the last 12 months. (Apple doesn't disclose the details of their arrangements with Google.) They're no more donating to Mozilla than they are to the handset makers and carriers they pay to distribute Android. It's a simple business deal. They sell ads and they do what they can to put eyes in front of those ads.

Now, and again, I'm not saying there's anything wrong with that. It's a fine model and it's the model that most of the Web depends on today. Take it away and we would certainly have fewer of the great things we all love about the Web and we'd be paying subscriptions for what remained. But Google is not a philanthropist "donating" money to Mozilla or any other "traffic acquisition" partner.

Posted by asa at 11:14 AM

 

reactions, thoughts, comments, etc.

Still these stupid comments appear every time news is posted about Firefox. I think Firefox needs a great looking FAQ specially crafted for press. It would give short easy answers to the most common questions and mistakes and links to more thorough answers. Subjects would be: Google money, memory hog, benchmarks, updating, extension problems, 64 bit, palemoon/waterfox, why choose Firefox, version number.

Posted by: Ferdinand | December 25, 2011 1:45 PM

And the flip side: Google isn't the only company out there in the advertising business.

If Google were to, for whatever reason, walk away from the deal with Mozilla. Then some other company would make a deal. For the same reasons. Perhaps the terms would be different (more money? less money?)

Mozilla has a huge resource: the eyeballs of zillions of its users. Mozilla rents them out to Google, but if any other company made a better offer...

Posted by: Smee Jenkins | December 25, 2011 2:14 PM

What I don't understand is why Mozilla doesn't create an ad network of it's own.

Just as the world is better off with an open web, it would be better off with an open ad distribution network.

Creating walled gardens and making the user a product - like Apple, Google, Facebook et al does - doesn't have to be the only solution.

Should Mozilla compete with AdWords etc it would certainly put some pressure on the aforementioned companies to disclose more on what they do with the data they acquire.

Posted by: Rasmus Wikman | December 25, 2011 2:47 PM

Rasmus,

Advertising is not one of Mozilla's core competencies. And anyway to work in advertising you need to sell your soul to Lucifer.

Phil

Posted by: Philip Chee | December 26, 2011 2:17 AM

Since 2008 (which was when the last Google/Mozilla deal was signed) Firefox's market share has remained either flat or has fallen about a percentage point (depending on which stats you look at). But the deal signed with Google this time was for $300,000,000 - almost *three times* that of the 2008 deal.

Since the terms of the deal aren't 'open', here's a few questions I wondered if you could answer:

1) Was Google the sole 'bidder' for the default Firefox search option?
2) Was there a 'bidding war'?
3) Was it simply a case of 'highest bid wins'?

The last question is important to me. Google seems to have some draconian privacy policies which hve been called out a number of times on this very blog. Google's own browser bundles a proprietary Flash plugin which prolongs the use of Flash and is bad for the open web. I wonder therefore if Mozilla are happy that they are actively encouraging their own users to use the services of someone who will undoubtedly plunder their data in order to generate a higher return on their ad impressions, which ultimately funds the continued development of a browser which might not be that good for the open web, and one which is increasing market share at the expense of Mozilla's own.

Does the question of 'ethics' and 'values' come into it at all, or did Mozilla simply pick the bidder who waved the most cash?

Forgive me if I've made some ignorant assumptions here. But the terms of the deal are Closed, despite being signed by two organisations who profess to support being Open, so the viewing public are left to guess.

Posted by: Phil Hampton | December 26, 2011 4:18 AM

Phil, Mozilla has never and never will make decisions based solely on financial considerations. We certainly have to take sustainability into account -- without income, the project would move a lot slower. But, money is not what motivates us and it will never be the deciding factor in the product we build and deliver to hundreds of millions of users. That's why we're organized as a non-profit public-benefit organization. It not only gives us the freedom to put users first, it mandates that we deliver on our mission not on maximizing revenues.

Posted by: Asa Dotzler | December 26, 2011 10:30 AM

You guys need to constantly inform public with a FAQ page as people have hard time understanding how it works.
Opera is a publicly listed company, not a non profit and even they have hard time explaining how they make money for years. When people don't understand how "free" is possible and strict industry terms such as "eyeballs" are used, they start conspiracy theories.

Posted by: Ilgaz | December 27, 2011 12:38 PM

What do Google spokespersons mean when they say that they decided to pay Mozilla so much money because Mozilla is committed to "the betterment of the Web"? Is it reasonable for consumers to be concerned about the privacy implications of Google's investment? Are there any terms in the deal that require Mozilla to develop and promote technologies that make it easier for Google to track users across the Web (like html5 web storage)?

Posted by: Jim | January 11, 2012 5:03 PM

Jim, Google has zero influence on Firefox features or development. They pay for search traffic and that's it.

- A

Posted by: Asa Dotzler | January 13, 2012 10:36 AM










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