Submitted by Morgan Smith as part of our contributors program.
Gone were the days when content driven platform would have to hire full-time employees to do fill up contents on their site. Take for example, Google (GOOG) AdSense’s business model. It is a free program that signs up bloggers to earn from their advertising program. The bloggers provide the content for Google and gets paid for it every time a visitor clicks on the relevant Google display ads. For advertisers who signed up for Google, the benefit is that it will have exposure based on targeted audience’s interests from valid clicks and impressions.
This has been profitable for the company for the last 10 years. In fact, its advertising revenues accounted for more than 95% of its total revenues albeit growth from the company’s other revenues. Specifically, this has been a profitable venture for the company. It has generated revenues of more than $10 billion in 2011 with an average growth of more than 20%. Over the last 3 quarters, it has generated revenues of almost $3 billion per quarter.
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Despite the outset of several advertising network such as Chikita, Adbrite and others, it is indeed surprising to see double digit gains from this set-up. The reason is that advertisers still trust Google and content providers get paid handsomely. Even other Google websites such as YouTube count on content. Majority of Google’s revenue comes from these sites. For the last 2 years, Google websites generated more than $20 billion in revenues. This also translates to growth of more than 25% for the period. Given the profitability of a user-driven advertising platform, Google’s competitors are catching up in the hope of chipping away some of Google’s market share in the advertising industry. Yahoo (YHOO) has partnered with Microsoft’s (MSFT) Bing and Media.net to launch a similar network with contextual ads. The program also allows web publishers, including blogs, online publications and similar sites to set up an Adsense-like income on their websites.
Although Google will still be the dominant player in this space, advertising with Bing and Yahoo could mean reaching out to new consumers. Recall that Yahoo abandoned this model in 2010. Yahoo CEO Marissa Mayer decided to give this business model another try this year. Mayer targets to grow as fast as its competitors in online search, display advertising, mobile applications and invest in products. The strategy is to revitalize Yahoo’s existing business and focus on small acquisitions of less than $100 million. I expect Mayer to follow the same lines as Google given her exposure in the company’s product division. In contrast, Microsoft has been looking for partners and acquisitions to boost its search engine. The result has been not that great so far. Microsoft CEO Steve Ballmer has admitted that it has failed to catch up with Google’s advertising model. In fact, it has taken a $6.2 billion write-off and expects that the business will not grow as expected. In short, this so called crowdsourcing the content model works best for search engine giants such as Google and Yahoo.
The idea of crowdsourcing is to tap into the collective intelligence of the crowd to complete business transactions that a company would normally either perform itself or outsource to third party. The main attraction of the model is that it lowers its fixed costs such as salaried employees but also broadens its talent pool. This also gives the company insights into what customers really want.
This in turn will result to higher productivity for companies and creativity while reducing labor and research expenses. In terms of financials, this translates to higher operating margins. Google’s operating margins have been in the mid-30’s range, significantly higher than any American company. I expect that this will continue as it continues to carry significant competitive advantage over its peers.
This model is not confined in the advertising space. As long as there is a need for content, crowdsourcing will work perfectly fine. For instance, crowdsourcing works well on exam content and preparation. There is a site called TestDesigner.com, an online resource that utilizes member generated content to assist professors in developing quality exams and activities. The website was launched in 2005. The good thing is that one can create his or her own questions or just pick out good questions from other members. The site has different categories divided into different subjects such as Arts, Math, Science and Social Studies. One could also search on a particular user who has created various questions that matches one’s need and preferences. The site has been gaining traction over the last few months, which would result in more users and quality exams questions.
This model has also been adopted in the financial industry as more venture capitalists are crowdsourcing raising capital. As mentioned above, the community of users can improve the process of trend research and moving away from the focus groups. These customers will be key factors in the operational functions of the company like marketing, branding and product development. Over time, this will yield to better profitability for the company. There have been money practitioners in the field already such as istockphoto that lets both amateur and professional photographer to contribute, Netflix (NFLX) which uses algorithms to offer customer recommendation and Threadless.com allowing online members to submit shirt designs and vote on ones that should be produced.
A weaker argument for crowdsourcing is that crowds are not employees. In short, the company’s executives do not have control over them. These users also demand intangible goods such as satisfaction, recognition and freedom in lieu of cash and monetary incentives. Also traditional companies would have hard time adapting this kind of model given the centralized environment it has. Despite these negatives, I believe that many new age companies is expected to adopt this kind of business model as its positives certainly outweighs the overall negatives.