Google == AOL 2001?

Brian S. Hall and I share some views about Google’s situation. Earlier this year, I said:

Google has to be worried even more about the decline in the desktop pie, given that according to their own SEC filings, 96% of their revenue comes from web browser clicks – and people aren’t clicking those ads on their mobile devices. Google’s entire revenue model falls apart on mobile and so far, they’ve had no answer for that.

Christmas day, Mr. Hall said:

As I’ve also said for 3 years now, the money Google makes from PC screens connected to the stationary web is not necessarily transferrable to the social, mobile, real-time web! Not search advertising, text ads, display ads. Even if every phone in the world was an Android, there is no guarantee that Google will *grow*.

Google’s business is dying. The source of nearly all their revenues — and profits — has maybe 5 years left.

We agree on the basic assertion, but I think the tail will be much longer than five years.

People very much over-estimated the decline of landlines. Ten years ago, I was thinking that the dial-up Internet would be dead in 3-5 years. I was wrong. If we look at AOL (or my former employer, EarthLink), we find it’s taking much longer. After ten years, AOL still has over 3 million dial-up subscribers and the decline has flattened. Perhaps this is a good model to use to think about Google’s future. There are a lot of parallels. In both cases, we have a business with a large established cash-cow, high-margin, revenue source that is poised for disruption and assured decline. A sweet type of revenue, a dominate position in that segment, but with the segment itself in decline. In one case, it’s dial-up subscribers replaced by broadband. In the other, it’s PC screens replaced by smartphones and tablets. Here’s some data for AOL dial-up, 2001-2011:

AOL Dialup

If we add ten years to this, perhaps Google 2011 is AOL 2001. In this analogy, the yellow graph would represent the number of PC screens instead of dial-up subscribers and the years 2011-2021 instead of 2001-2011. The chart provides a model for how the PC screen, and Google’s PC screen ad revenue (96% of their total revenue), will decline over the coming years.

In AOL’s case, over those ten years, we find a 75 percent reduction in revenue, with the lion’s share of that decline happening after the first five years, that is, after 2006. AOL lost about 40 percent of their dial-up subscribers in the first five years of this ten-year period 2001-2006. During the next five years, 2006-2011, that remaining subscriber base was clobbered by 77 percent (86 percent loss over the entire ten year span).

Many say the rate of PC screen decline is going to be much faster. I’m not so sure. If we use the dial-up subscriber decline as a basis, then by 2016 we can expect there to be a 40% reduction in the number of PC screens available for Google ads. What will that mean for revenue? If the AOL analogy is any kind of indicator, the decline in revenue for Google may not be that dramatic over those first five years 2011-2016. However, that’s where the rubber meets the road: if Google hasn’t found a similarly sweet, high-margin alternative revenue source by then, that’s when the revenue numbers will really start to show it, starting in 2016. If the experts are right, and PCs disappear faster than dial-up modems did, it could be sooner for Google. But I would not be surprised if it runs a course similar to the dial-up Internet example and it takes ten years (starting from 2011) for Google’s PC ad business to really feel the revenue pain, to the tune of a 75-80 percent reduction.

This means that for 2021, if Google hasn’t managed to solve this problem, their revenues will decline from their current projected revenue of about $45 billion to $10-$12 billion per year and flatten out. To put that in perspective, Facebook’s 2011 revenue was $3.7 billion. So even if this plays out like this, essentially an AOL-like doomsday scenario for Google, it still doesn’t mean Google would be dead (they’d still be bigger than Facebook 2011), just a lot smaller, and a lot different — a lot less of a “thought leader” for sure. And if you’re wondering, Apple reported annual revenue of $156 billion in 2012.