Valuing Clicks

Think of this as Volume 12, Number 39 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

Let's go back to Internet Commerce a moment or two. That's what A-Clue.Com was created to cover in 1997.

A click's value is easy to state but very hard to calculate.

It's worth what you can get for it.

The corollary is also true.

It costs what it costs.

In absolute terms this means a page view is worth the advertising (or commerce revenue) you can generate from it, less the cost of getting the page view and serving the page.

V= A – C

These values vary tremendously by site, and ignorance of the underlying equation leads to ferocious misunderstanding wherever e-commerce is discussed.

Take Twitter, for instance. We can't really value it, because we don't know the real value of A. Twitter has made no attempt to monetize its clicks. You don't see ads on a Twitter page. There is some commerce going on, with companies using Twitter to capture clicks for their own sites. But this is a pittance next to Twitter's real potential.

And remember, this value should also be applied to the clicks it gets on a mobile phone, as when Eric Cantor sits in the House chamber "twittering his tweets" rather than listening to the President speak. If Twitter could just monetize its mobile page views, Cantor's actions would not be valueless. But in an economic sense they are nearly so — the only outfit making anything is his mobile carrier.

Now let's look at C. C is also misunderstood. But we can understand it if we look at Google.

Google has spent a lot of money to lower its C as much as possible. That's why it started with a very clean home page, and stayed with it. That's what its PC server farms were about. That's why it bought dark fiber. That's why it has regional centers around the world. All this is done in the name of lowering the basic cost of doing business, the cost of serving a page. 

Now consider the second part of C. Just as it costs Google very little to serve a page, it costs very little for it to get an order for a page. Its service is its advertising. It doesn't run TV ads or newspaper ads or radio ads or buy billboards. It just does its thing, and people order its pages. So its cost of doing business are all the C it has — there is no advertising cost, and the editorial cost is spread over a vast base..

Because Google has a very low value for C, Google can make money with a very low value for A. Google AdSense makes sense for Google, because no matter how little people are paying for those ads, it's costing Google less to serve those pages.

There are many people, even business analysts, who misunderstand the business model. They call Google an ad agency. It's not. It's an ISP. The money comes from ads, but the profits are based on its cost structure, one no other company can match.

This has created an enormous barrier to entry for Internet Commerce. Google pays less to get people to order pages, and less to serve pages, than any other company in the world. By far. You should calculate these numbers based on millions of pages, and multiply the average CP/M of A by 1,000 to make it comparable.

You can understand this better by applying numbers to the equation. Let's say Google gets just $1 for every thousand impressions of its pages. Now let's assume it costs $500 to deliver 1 million of those pages and to have you order them. Pretty reasonable assumptions. In this example Google is making $500 for every million page views it generates.

Compare this to anyone else online. Can any other company — Microsoft included — serve 1 million pages (including the cost of getting people to click them) for anything like $500? Nope. Companies can only compete in this market by increasing the value of A. They either charge a higher CP/M (the media company method) or they do some business with you.

This is why Amazon is such a powerful company. Their A value may be higher than anyone else on the Web, especially when compared with their cost. Even if, say, Overstock.com could sell as many goods and services for each click as Amazon can, Amazon's past investments in infrastructure (it overbought to such a great degree it wound up in the cloud business) guarantee Amazon's greater profit potential.

Wash, rinse, repeat. Amazon and Google are in fact direct competitors, and always have been. The difference between them lies in how they get people to click on them, and how they get paid.

That's why so many big companies, starting with News Corp., want to overturn network neutrality and change the rules of the game.

That's what this nonsense from Holman Jenkins is about. The Internet has made Google an "incumbent," so "innovation" means changing the rules of the Internet game to favor some other "competitor" — the outfit that delivers bits, or the media company trying to monetize clicks.

Unfortunately this brings us back to politics. Specifically the Administration's attempts to maintain "network neutrality."

I have been writing about this at SmartPlanet, and it is amazing how little feedback I get on it. The mobile Internet is completely carrier-controlled, and its potential is stifled by that. Not only do the carriers say "not over my dead body" when it comes to making the mobile Internet like the regular Internet, they are also fighting like mad to make the real Internet less like itself.

Take Comcast for instance. A few years ago there was a huge controversy over Verisign hijacking clicks with a service called SiteFinder. Instead of getting a "404" error — domain or address not found — users were directed to a Verisign page filled with ads. Under pressure, Verisign disabled the "service" within weeks. There's even a name for this game — typosquatting.

Well, open a new window and, if you're a Comcast customer, mistype a URL. (Go ahead, I'll wait.) What you'll get is a "service" nearly identical to SiteFinder, branded to Comcast.  Comcast has, in fact, been fighting the FCC every step of the way over net neutrality, figuring if you're its customer it owns you, and all the clicks (or mis-clicks) you might give it. 

The fight over net neutrality is important, because on it hangs the question of whether the Internet playing field will be level or tilted. Google has built barriers to entry, true, but it has done so honestly. Are we going to let these be taken back, or reversed, through the instrument of government?

I hope not, because the more level the playing field — the more we can make V=A-C  the international standard for competitive advantage — the more use we'll get from the resource, and the more money we'll all make from it.