Google Tax


vacuum_smallDM CONFIDENTIAL – The performance marketing world has generally relied upon a fairly straightforward approach. Find/build offer; buy traffic, watch performance, tweak, and scale. Historically, the traffic piece has been a key component and changes in traffic have dramatically altered the nature of performance marketing to date.

In the earlier iterations of arbitrage based performance marketing, access to traffic meant, for the most part, owning your traffic. In a world where today’s total performance marketing budget exceeds the entire internet advertising budget of this era, it makes sense that different barriers existed.

The mechanics of the game were similar, but instead of being able to place ads on existing traffic, you had to first figure out how to buy traffic. That meant knowing the co-reg game, knowing where to buy cheap opt-ins, and then where to pull offers from to make more than you paid for the name.

Like any arbitrage/monetization schema, those who figured it out early on farmed some very fertile fields. This was a period characterized by higher barriers — it took more money to enter and the strategies for making money were closely guarded.

The world of search changed all of that. Thanks initially to Overture and then Google, anyone could buy traffic. Buying traffic meant tapping into the world of intent. For the arbitrager, it no longer meant building up an email list through co-reg or display. It meant being able to tap in to one of the largest streams of traffic with little friction.

The biggest players and the smallest players could operate on a level playing field. And, similar to the scenario with creating email lists, those who dabbled early, generated some impressive returns. Know how was the biggest barrier. Not surprisingly, it was only a matter of time before more and more people would find out, which raised the bar for the skill sets necessary to successfully make money on search.

For several years, the traffic landscape looked incredibly one-sided. It’s not to say that email lost its significance, far from it. From a mind-share and wallet share perspective though, nothing could compete with Google, especially during 2006 through the end of 2008 and even into the early part of 2009.

If you wanted traffic, you had to go through Google one way or the other. It wasn’t just arbitragers that found their livelihoods depending on Google, just about everyone did. Their whims, preferences, and rules dictated how you ran your business if you wanted any chance of spending money and earning money online. They were the piper and needed to be paid. You had to pay the Google tax were you to have any sort of search presence.

Even if you didn’t want to have a search presence, you often had to pay the Google tax. If you didn’t bid on your brands terms, someone else probably was. By default then, you had to spend some money with them. The Google tax was the price you paid to be in business. It varied by company, but it was almost universally applicable. And the better Google got, the greater the fine became.

For many performance marketing firms — from individual affiliates to lead aggregators and even online travel agencies — if your company bought traffic to back out into per action pricing, you found your margin consistently eroding. If you could buy profitably on Google, they saw that as a weakness in their algorithm and kept looking for ways to squeeze the profit to almost zero. The Google tax is so massive, that an entire ecosystem has been created of service platforms trying to help companies pay as little in taxes as possible.

From a revenue perspective nothing still can touch Google, but enough competitive pressures loom on the horizon that it gives people hope. More than hope, what we’ve seen in the last sixteen months, and more so in the last six to twelve months are customer acquisition businesses that have managed to avoid the Google tax.

Our article two weeks ago about the billion dollar customer acquisition business touched on a few of them. In the attempt to describe the variety of businesses looking to break the billion dollar mark, what was lost in translation was how several of the most promising have achieved multi-hundred million dollar revenues while paying Google less than many affiliates do in a single month.

Those who must buy traffic will always have some form of a tax. Instead of Google, the latest crop of companies and arbiragers have shifted some of the tax from Google to Facebook. Many have shifted to Facebook completely and do almost nothing on Google.

Facebook not only has enough traffic to generate well north in a billion dollars in self-service ads, but it has spawned an ecosystem of companies with revenues into the hundreds of millions, exits higher, and enterprise values at north of a billion, all without having to pay Google one cent. These companies though, are for now, quite beholden to the Facebook ecosystem, so there is a looming and increasing Facebook tax.

The most interesting and enviable, though, are those that have achieved what we all dream of, marketing messages people actually want. It’s the return of the inbox. We’ve come almost full circle from where we started except these email lists are for some, free.

Imagine having a business that generates as much, if not more than any ad network, as much if not more than the largest vertically focused performance marketing companies all with the push of a button. It’s amazing to think, completely worth despising for those who labor in email today, but also exciting to see that models exist where you can scale a business, a performance-based business no less, without the Google tax.

The inbox is in again. It brings with it a new set of challenges as the inbox is in vogue, a new set of share of inbox problems, but when we step back, what we see is a shift in the way companies can make money online. And what we see is a whole new set of opportunities for those in performance based marketing.


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