Why sell ads when you can sell goods?
An interesting article in Venture Beat, “What if Google and Facebook got it all wrong?” outlines the challenges facing two of the world’s most successful companies in light of mounting evidence that advertising is a less efficient source of income than selling stuff directly to users.
Actions speak louder than words. Google’s business model, which grew out of imitating somebody else’s due to overlapping an activity, the search, which it didn’t know how to make money out of, has given rise to a giant that, while making it a lot of money, still means that most of that money is made by the companies who close the transactions that start in their ads. Google makes very few transactions as such: a quick look over its annual results shows that it is essentially a one-trick pony, with 90% of revenue coming in from advertising.
Facebook, which is now trying to move into transactions, is similar to Google: 97% of the company’s revenue comes from advertising, and the incipient sales it is beginning to generate seem more like a way to justify greater investment in advertising on the platform by companies looking to sell their goods, rather than an actual source of revenue for Facebook.
Then we have a series of companies, led by Amazon, but with a growing role for major players in the Chinese market, where transactions are the goal. These companies’ strategies are to create an environment in which others develop the activity, but where the activity is about sales rather than advertising, a approach that appears to deliver substantially greater profits. Google is now increasingly under pressure: a significant part of the most profitable searches, those that end with a purchase, are on Amazon, while interaction with companies takes place on Facebook.
Meanwhile, in China, an unlevel playing field keeps out the western giants, and where local players like Tencent and Alibaba are e-commerce platforms where sales is the name of the game. Anything that appears on any of the Tencent or Alibaba pages can be purchased with a few clicks, and each of those transactions creates revenue for them. Similarly, WeChat is an instant messaging tool, but its focus and commitment to sales is clear and compelling: it can be used to locate anything on the official channels of virtually any company and quickly buy it. This is clearly a more solid business model, with better margins than advertising alone can provide, and which markets and client companies both tend to prefer. As advertising facing increasing challenges from ad-blocking, they seem to show a way forward.
At this late stage, Google and Facebook will have their work cut out if they want to develop e-commerce platforms: both are trying, but the market has already dealt most of the cards, and getting users to change their habits will require a lot of time and important investments. Advertising, which at one time was seen as the ideal business model for search engines and social networks that attracted many users, is now beginning to reveal its limitations. If you want to make money and grow, selling products seems a better approach than selling ads.
(En español, aquí)
