Google Will Do Well Even In a Recession

There is a growing fear of what we should expect for online industry now that the entire world economy is facing a recession. The major concern is that real-world companies will spend less on advertising, thus online businesses will face revenues falling since the majority of web companies rely heavily on advertising. But even if we should probably expect cut in advertising expenses everywhere, there is one company that is positive it will do well even in a recession - and that company is obviously Google.

Yesterday during a press conference Google CEO Eric Schmidt discussed a number of topics about the corporation’s plans for the near future. The most important part was about Google - Yahoo advertising deal. Speaking about the deal, Schmidt said that Google was not planning to delay it much after October 11^th - the deadline from the contract between Google and Yahoo - even if anti-trust regulators don’t complete their investigation of the deal and its consequences for competition in the internet business.

Schmidt confirmed that Google was planning to go ahead with the deal to display Google ads on Yahoo search engine result pages because this partnership was so vital for Yahoo and because of Google’s desire to help Yahoo out since the Yahoo co-founders Jerry Yang and David Filo persuaded Google co-founders to make Google a company 10 years ago. What’s more, Google is not even planning to make all that much money off the deal because the largest share will go to Yahoo for creating content alongside which the ads are displayed. And while this extraordinary generosity is no doubt to be admired, there was one more thing at the meeting with journalists that is particularly interesting to me - and that was Google executives expressing their confidence in the fact that Google will not suffer because of the recession.

This statement can be considered as too confident for a company that makes money off online advertising mostly - when everyone predicts decline in advertising spend. But there is a simple explanation to this confidence - the nature of Google’s advertising network. The thing is that with Google advertisers don’t pay for Google pushing ads to as many eyeballs as possible - advertisers only pay when people click their ads.

The recession may hurt CPM advertising networks (where advertisers pay for every thousand impressions their banners get) because companies will not be very much willing to pay for showing their ads to people that will buy less and less goods and services. But when it comes to CPC advertising (where companies pay for every click on the ad), the situation is dramatically different simply because clicks demonstrate some interest of potential consumers in buying the advertised product and this interest will often convert into a purchase.

Even during a recession a purchase still means revenue - and revenue means the company will want to pay some fraction of that revenue to ensure more purchases in the future. What’s more, some advertisers may very well be willing to move from CPM advertising to CPC where they pay for what they really get and not for some abstract brand exposure - after all, when the overall financial climate is not all that favorable, everyone will start to think more about optimizing their costs. So Google (as the largest CPC advertising network) may further benefit from some advertisers turning to AdWords as a more feasible alternative to CPM ads.

To me Google’s arguments sound quite logical and even if some companies will cut their advertising spend (for example, those internet businesses that rely on CPC ads to bring more visitors to their own ad-supported sites where they happen to sell ads at a higher price than they pay to bring people in), the vast majority of real-life companies will continue to pay for clicks that will convert in increased sales volumes for them.

So even if the entire ad-supported internet industry may face quite a difficult time ahead, Google will continue to be strong and growing even stronger if advertisers do switch from CPM to CPC. We’ll see if this rosy future described by Google executives will help the company overcome yesterday’s price drop of their stock by $28.44 to $414.49 per share - which constitutes a 40% drop compared to the end of last year.