The Newsonomics of profit: Google’s and newspapers’
[Each week, our friend Ken Doctor — author of Newsonomics and longtime watcher of the business side of digital news — writes about the economics of the news business for the Lab.]
Last Friday, Google finalized a modest acquisition. It bought On2, a video compression company for $124.6 million. A few days earlier, it bought reMail, a company put together by Google alums that has perfected a better email app for the iPhone, price undisclosed.
In the few months before that, it bought social search startup Aardvark, display ad tech company Teracent, collaborative real-time editor AppJet, VoIP provider Gizmo — and, most significantly, mobile ad network, AdMob, the latter for $750 million, in November.
Basically, Google’s been buying up companies at at least the rate of monthly, as CEO Eric Schmidt had bluntly forecast last September.
Of course, Google can buy lots of companies. That buying power is a rare commodity these days, especially if you compare it to what newspaper companies can do.
Google’s buying profit derives from its out-sized profits. Those profits reached almost $2 billion in the fourth quarter of 2009 alone, and totaled $6.5 billion for the year — and that the year of the Great Recession. Yes, Google hit the pause button as the country and the world tottered on the economic brink, but ticked the play button quickly as soon as it was clear the worst was over.
Google’s acquisitions in the last six months total something more than $1 billion.
Now let’s compare Google’s profit to that of newspaper companies.
Gannett — the largest news company in the US and second worldwide after News Corp — reported total revenue of $1.5 billion in the fourth quarter, and profits of only $133.6 million in the same quarter. Of course, the fourth quarter was Gannett’s best. For 2009 overall, profits totaled $441.6 million, after special items were taken out. That’s less than a half billion dollars in profits, or about 7% of what Google earned. And that’s the biggest U.S. news company.
The New York Times eked out a yearly profit of $19 million. McClatchy, a gain of $54 million. Media General, a loss of $35 million.
Positive or negative, those are all small numbers. They all point to the same reality: newspaper companies’ place in the business world is greatly reduced. They simply don’t have the wherewithal to acquire businesses that will be the building blocks of tomorrow’s growth. Their low profit numbers are proxies for their reduced horizons, their reduced reporting impact and their reduced institutional and community clout, as well, though those are issues for another day.
For Google, its profit has allowed it to lay the groundwork for growth. Its financial performance is hugely impressive today, but almost all of its revenue has been based on desktop/laptop paid search. As many have said, it’s a one-trick pony, but with the best trick found in the 21st century digital business. It knows that business is maturing, so we can see the theme in its company-a-month buying spree: mobile, social, video. That combo, what I call the new trifecta for this digital decade, anticipates where digital use — and ad spending — is going. Google is not only providing us pictures of our urban topography through StreetView, it is laying new roads for its own highly profitable future.
Ken Doctor | Feb. 25 | noon
Tags: Aardvark, acquisitions, AdMob, AppJet, Gannett, Gizmo, Google, Lee, McClatchy, Media General, New York Times, newspaper companies, On2, profit, reMail, Teracent
Great post Ken. The numbers are staggering when you look at the way media is going. So many newspaper people claim there’s no money on the internet…ha! I think they’ll eventually figure out ways to make the money match up, but these growing pains are getting too harsh.
The Italian court case is interesting in that there is a possibility that Google wil be reclassified as a media company and have to moderate what it hosts and distributes. That will eat into its profits. Plus, if it is reclassified as a media compay, its stock market value will fall through the floor. No wonder it doesn’t want the world to look at it as a media company but it is: it publishes pages of content with advertising around it. What’s *not* being a media company about that?
It’s not a technology company. You can’t buy any technology from Google. It is a technology-enabled media company.
The newspaper companies have to maintain large editorial teams but Google does not (at least not yet.) I think the economics of Gogle’s business will move towards the economics of the newspaper business over the next few years.
They will never “match up” and Google will never move towards the economics of a newspaper business.
But one thing to learn from Google’s acquisitions is that there is still room for entrepreneurial innovation.
There lies potential, but that ability is a far cry from the culture and speed with which any traditional company I have ever seen is moving.
If I owned or ran a large media corporation, I would invest in startups or spawn new busineses completety separate from the existing businesses.
Hearst does so.
That is the only way to compete in this landscape.
And let the traditional companies continue to try to compete. But I think the conflicts of interest are too great in many of them that by the time they are ready to really change, the market they sought after will have been filled by an up and coming that was willing to cut their throats.