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Exporting Electrons
Everyone knows that Caterpillar is an exporter. But last week Google reported record profits and Google stock rose nearly twenty percent. Why were profits up? Google's foreign revenues shot head of its U.S. revenues because of a weaker dollar. Google is an exporter. Who knew? And what does Google export? Patterns of electrons.
Thanks to David Levy for discussion.
Posted by Alex Tabarrok on May 1, 2008 at 07:35 AM in Economics | Permalink
Comments
I'd say it's as much a currency trader as an exporter--as is any company that reports earnings in a single currency and prices its contracts in several different ones.
Posted by: Johnnyo at May 1, 2008 8:48:20 AM
Exporting Electrons
It's enough to make your hair stand on end.
Posted by: Andy Wood at May 1, 2008 8:54:50 AM
I still do not understand how Google makes money. I use their search engine, gmail and blog reader, and I doubt if I click more than one ad a year. I have definitely never even considered buying something after clicking an ad.
Assuming Google doesn't make money from secretly manipulating search results for cash, or from selling info about me personally to others, I really don't see how they make money from me. And they claim not to do those two things.
Posted by: Great Zamfir at May 1, 2008 9:55:00 AM
this is one of the reasons I am suspicious of the data we see on outsourcing.
If a manufacturer outsources a component to a foreign manufacturer when it is imported it passes through a choke point at the harbor or airport and is recorded in the import data. So we have good data on the import of goods and the impact of that form of outsourcing.
If a service provider outsources a segment of its production process to India or Ireland, etc, it shows up as a stream of electronics in someones office first thing of a morning. It does not pass a point where it is recorded in the government data as an import like a physical component does.
But it is a serious question, are we being mislead by the data because it is not capturing this stream of electrons. the data collectors say no, but I have my doubts.
Posted by: spencer at May 1, 2008 11:06:19 AM
Hi, I am a viral anti-IP meme. Please post me on all intellectual property threads, and include this intro.
Information is just ones and zeroes. Do I not have the right to order the ones and zeros on my computer however I wish? I own my computer, while information just floats around. When informed of it, I order the ones and zeroes differently. What moral crime (not paper crime) have I committed? I own my computer. No one "owns" information.
Posted by: Person at May 1, 2008 11:13:55 AM
or as a normal non-pedantic economist would say, they export a service.
Posted by: what at May 1, 2008 11:22:57 AM
Interesting thought, but you need some more representational agnosticism. Those electron patterns are converted to photon patterns for fiber optic transmission, so the real thing being exported is the mathematical pattern itself. Google is really exporting mathematical abstractions. Which leads to an interesting future whereby we have tarries or VATs based on how much Shannon entropy you're removed from a stream. (Impossible to calculate? Pretty much. But I think it would make a nice little context detail in some sci-fi book.)
Posted by: Jared at May 1, 2008 12:05:03 PM
"I still do not understand how Google makes money. I use their search engine, gmail and blog reader, and I doubt if I click more than one ad a year. I have definitely never even considered buying something after clicking an ad.
Assuming Google doesn't make money from secretly manipulating search results for cash, or from selling info about me personally to others, I really don't see how they make money from me. And they claim not to do those two things."
They're being paid for the advertising space. The rate for that space is based on webhits. The more content Google owns, and the more clicks users generate, the more Google earns (both from volume and rate).
Sort of like how Super Bowl commercial rates are set - advertisers are paying for the eyeballs. And through the eyeballs.
Posted by: meter at May 1, 2008 12:18:51 PM
Since when does foreign revenue = exports? A company can easily have lots of foreign revenue without exporting anything (goods or services).
Posted by: Brad at May 1, 2008 12:44:15 PM
meter, I thought Google was specifically paid for people clicking on those ads, not for eyeballs watching them.
Superbowl ads, and most other TV ads, are not meant to lead directly to buying, they are more for name recognition/ image building. So that next time I am in the super market, I know the brand and have some sort of connection with it.
So I understand how I am paying for TV: even in the case that I am completely immune for commercials, I still pay for them if I buy a product that advertises.
But if I don't click a Google ad, Google gets no cash. And even if I click an ad, but never buy anything from that particular shop, I am still not paying for Google. In fact, I suspect I never bought anything on the internet from a shop that spends money on Google advertising. Most people I know (at least in the real world) have probably never bought anything from a shop after clicking a Google ad.
Still, Google has a revenue of 10 billion or so, meaning that someone pays them several dollars every year for every active internetter around.
Posted by: Great Zamfir at May 1, 2008 1:38:54 PM
http://robtheexplainer.typepad.com/rob_the_explainer/2006/10/how_does_google.html
Posted by: meter at May 1, 2008 1:56:04 PM
Thanks meter. But that's not what I am wondering about.Of course I understand that Google makes money from ads, and apparently companies are willing to pay for those ads. Perhaps a better question is, Is paying Google for ads really worth it?
Total online sales last year were 200 billion, and Google revenue 10 billion. Google's competitors are probably also getting a few billion altogether, and some companies rely on other kinds of advertisement. Amazon for example has its own advertisement system, and probably a significant part of online sales are 'real world based', where people already know what and where to buy before they go on the net.
So Google gets 5% of total online sales revenue, and perhaps as much as 10% of that of companies that rely on it for advertisement.I think that is a lot, especially since many internet trades are very low-cost, low-margin businesses.
Posted by: Great Zamfir at May 1, 2008 2:34:40 PM
It's like this: they're exporting services, not just electrons. I hardly think I have to explain about the advantages of services to this audience.
Their ad market is global, low-enough priced to bring entrepreneurs, and is the place with the most eyeballs. The biggest can always do better. And, not everybody's like you guys - plenty of people are more into the ad links. Their advertising system generates less user mistrust than their competition.
And, plenty of their advertisers sell profitable SERVICES more than toasters or grills (the guy I know who does this does exactly that).
What's not to understand? ;-)
Posted by: Jon Kay at May 1, 2008 3:10:32 PM
Imagine if Superbowl ads were paid for on the same basis as Internet ads. Viewers would see a Doritos commercial and would be asked to pick up the remote and switch to the Home Shopping Network. CBS or Fox would not get paid unless they did. Or perhaps it would be like affiliate programs, and the TV network would collect 5% of the retail price of a bag of chips on a pay-per-sale basis.
In other words: at some time in the future, Google will be making most of its revenue on a pay-per-impression basis just like TV does (that was the whole point of the YouTube purchase), at which point their revenues will be a couple of orders of magnitude larger than today.
Posted by: at May 1, 2008 5:19:11 PM
If you'll forgive the pedantry, Caterpillar export electrons, which are part of the atoms, which constitute the matter which makes up the tangible manufactured goods which caterpillar sell. Particle physics. Makes your hair stand on end doesn't it?
Posted by: Andy at May 1, 2008 6:16:47 PM
sorry, just realised some one has done that gag already. How embarrassing....
Posted by: Andy at May 1, 2008 6:19:18 PM
If Google's ads enhance the sales of $1 trillion worth of products and services by just 4% relative to their competition, then assuming 25% profit margins, the ads are worth the price. There are at least $20 trillion worth of products and services being sold in the world every year. Google's share of the eyeballs of the people who buy those things is very large, probably already much more than the 5% share which justifies its revenues. And this share is growing, which hopefully justifies its stock price.
"Clicks" are just an imperfect proxy measure, a way to estimate how many extra dollars are spent relative to competitive products and services because of those ads. It's a better proxy measure than those available in traditional media.
Posted by: nick at May 1, 2008 8:44:42 PM
I agree with Spencer, something that happens about once a quarter or so. :o
I simply find it very hard to believe that the US is properly getting counted for the exports of its IP on things like Ipods that it imports from China.
Or that the US gets export credit for exports of US based engineering and design on Caterpillar products made in China that are then sold in China.
Posted by: happyjuggler0 at May 1, 2008 8:50:28 PM
Jared: Assuming arbitarily good compression algorithms, we could measure this by bandwidth consumption.
Posted by: albatross at May 2, 2008 12:09:02 AM
I still do not understand how Google makes money. I use their search engine, gmail and blog reader, and I doubt if I click more than one ad a year. I have definitely never even considered buying something after clicking an ad.
However, I have actually bought stuff after clicking an ad. I think the answer here is that the Great Zamfir is not everyone.
Posted by: Tracy W at May 2, 2008 5:13:55 AM
Have you ever used the Google browser home page to look up a vendor from which you wish to buy something? When you get the web search result and click on that, Google gets paid. That is the whole point of the page ranking system and why there are consultants out there that telll you how to set up your web page to end up higher in the search results from Google, Yahoo, MSN and others.
Posted by: techreseller at May 5, 2008 11:54:44 AM
