Peak Google Revisited

Almost a year ago, I noted that while a few prominent tech pundits had pronounced “Peak Google” at the beginning of 2015, Google was actually as strong as ever 12 months later.

In my post, I said that since no company keeps succeeding forever, anybody that predicts the demise of a company without giving a specific timeframe will always eventually be right. That is to say, any prediction without a timeframe is utterly valueless. I also noted that giving a timeline is extremely difficult.

However, I think we now have enough information to give a rough timeline on when we can expect “Peak Google” in financial terms.

Data points

I will lean on the following data points.

  1. The historically constant size of advertising spending
    In 2014, Eric Chemi writing for Bloomberg noted that the US advertising industry has always been about 1 percent of US GDP since the 1920s. This is significant because the US is much wealthier than it was 100 years ago, and it has gone though many ups and downs, even one world war in this time.
  2. The share of internet advertising within the whole advertising market
    According to eMarketer, total digital ad spending in 2017 will be 38.4% (77.37 billion USD) of total media ad spending. It will surpass TV ad spending which will be 35.8% of total.
  3. Google’s US advertising revenue is 31.00 billion USD in 2015, calculated from 67.39 billion global revenue of which 46% comes from the US. This is close to half of total digital ad spending (77.37 billion USD as noted above).
  4. Facebook’s 2015 advertising revenue was 17.08 billion USD. This is roughly a quarter of Google’s.
  5. As noted by Horace Dediu, economic growth in developing nations is not accelerating Google’s revenue growth. Despite rapid economic growth, developing nations are not becoming a larger part of Google’s revenue.

Assumptions

I will also assume the following;

  1. Google will not find a new revenue source that will be large enough to significantly add to its top line.
  2. Google’s revenue growth will continue to be dependent on and on par with growth in the US.

Logic

  1. Since the size of total media ad spending is constant as a percentage of GDP, this is the hard ceiling of advertising growth in the US.
  2. Digital ad spending is rapidly approaching this ceiling. With already close to 40% of total ad spending, there is less and less room left for digital to grow.
  3. Google has close to half of total digital ad spending. Of the remainder, it is likely that Facebook is taking half of this. Google has little space to grow by increasing its share within the total digital ad market. In fact, it is more likely that Facebook will eat into Google’s ad market share. Note that one estimate suggests that Google & Facebook own 85% of the US the digital ad market.
  4. Since Google’s ad revenue growth has largely been independent of developing countries, it is reasonable to assume that this will continue for the mid-term.

In simple terms, there is no longer room in the advertising industry for both Google and Facebook. Since Facebook has more momentum, it is likely that we will see Google being increasingly squeezed. Although the total digital ad spending will likely still see mid double digit growth, Facebook will take the majority of this growth and Google will probably drop to single digit growth before 2020.

What to expect in the future

We are already seeing signs of more disciplined spending at Google/Alphabet, most likely in anticipation of a slow-down in growth. Given the highly talented people at Google, it is no surprise that they understand that the end of double digit ad revenue growth is near.

However, disciplined spending can significantly alter what projects companies chase. Unlike the current Google which constantly throws spaghetti on the wall, a fiscally disciplined Google would probably be more cautious. Within the next few years, I expect that we will see a very different Google from what we are seeing now.

Update

One important thing to note is that “Peak Google” will be a result not of any strategic mistake made by the company, but rather a result of the saturation of the digital advertising market. This has the following implications;

  1. The whole digital advertising industry will suffer along with Google. In fact, smaller and less established players are more susceptible to adverse environments. This is already happening

  2. The saturation of the digital advertising industry also means the saturation of the ad-driven Internet. Startups without a monetisation model will find it harder to bolt-on an ad-driven one later.

  3. Being the most established brand in digital advertising, it is likely that Google will maintain a very strong position in the market for years to come. Like Apple, the issue will be the lack of rapid growth.

  • obarthelemy

    I’ve been reading about peak Google, Google dropping Android…. for years. It’s become quite amusing. On the other hand, nobody much seems interested in looking into peak Apple. I’m wondering why, probably a large coattails-riding effect. It doesn’t have to be all about advertising, there’s significant growth opportunities for Google in China, Desktop, Devices, and new markets (AR, VR, home automation…); Google seem well aware of that.

    The one comment I liked about Google is that they need to learn to ship products, not ideas. I think as far as devices (maybe even OSes/apps/web services) are concerned, that’s very much their biggest issue.

    • That’s strange because I though people were talking about peak Apple all the time. At least Apple’s stock price suggests that we are past peak Apple.

      I agree that there is opportunity for Google if they can move beyond advertising. As of yet, they have not and this is why I have assumed that they will not succeed in doing so before 2020. I have also mentioned that Google is probably aware of an upcoming slowdown in advertising growth and is acting accordingly.

      • obarthelemy

        I don’t have time for many sites… techpinions is still purely hit pieces on Google, fluff pieces on Apple. I’m guessing because they’re all purely Apple users, and as consultants it’s easier to drum up “be like Apple” business than “be like Google”.

        • Pointebasic

          obarthelemy,
          Maybe try a search on ‘Peak Apple’ or perhaps ‘Apple is Doomed’. Plenty of articles. Granted the ‘Apple is Doomed’ search returns more articles making fun of the Apple is Doomed’ narrative (at least on the first page results).

          Of course ‘be like Apple’ is a better sell than ‘be like Google’:
          Be like Google – develop a monopoly product, collect monopoly revenue ;v)
          Be like Apple – develop several hit products in series, especially in already existing markets,

          Certainly you have run across a “few” ‘Apple is Doomed’ articles over the past 30+ years??!! Pretty much ever since the first Macintosh was released!!

          It will be interesting to see how/if Google can push past their monopoly in search advertising cash cow to other significant revenue streams. So far they haven’t really demonstrated this ability (YouTube maybe, but still advertising revenue).

          It will be interesting to see how/if Apple can push past the iPhone revenue stream, as well. iPhone revenue overshadows Apple’s other revenue streams in such a way as to make them look insignificant (which they are not, just w/respect to iPhone revenue). Apple has demonstrated over the company’s existence the ability to add new significant revenue streams: Macintosh, iPod, iPhone, iPad, media). The stock market perpetually seems to price APPL as if the company will not ever do so again.

          • Like Google + Facebook are starting to saturate the advertising market (which has a fixed ceiling), it is likely that tech also has a ceiling that is close. That is, I don’t think that consumers are willing to pay much more for tech gadgets (TVs, robots, phones, PCs, etc combined). (Non geek) Consumers have better things to do with their money.

            Hence for Apple (and tech overall) to grow significantly, tech has to enter other parts of our lives where we spend large sums of money. Housing, healthcare, transportation, education, banking/insurance, food, etc. Look into your household expenses and see where your money goes. Apple can also penetrate corporate IT where there is also huge money moving.

            Apple is dead serious in quite a few of these areas (and people are whining because they’re discontinuing routers).