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Summary:

According to Google, the company’s search and advertising businesses helped generate an estimated $54 billion in economic value for the U.S. last year, an estimate that’s clearly an attempt to promote the company’s value at a time when it’s coming under fire from legislators.

Updated: Google said today that the effects of its search and advertising businesses helped generate an estimated $54 billion in economic value for the United States last year. The assertion is clearly an attempt to promote the company’s value at a time when it’s coming under fire from legislators for its size and market clout in a number of areas — as well as some of its privacy-related behavior — and is fighting the telecom companies on the issue of net neutrality.

Google based its analysis on a number of assumptions, Chief Economist Hal Varian explains in a video (embedded below), including how much revenue businesses generate from search-related advertising via Google AdWords, combined with the amount that Google pays publishers that take part in Google AdSense, as well as an estimate of the value generated for businesses when someone clicks on a regular search result. It then added to this figure the amount that it donates to non-profits through the Google Grant program, which provides up to $10,000 worth of advertising for charities.

For example, Varian said, Google estimates that advertisers make $2 in revenue for every $1 they spend on AdWords (the company recently made public the revenue split for AdWords and AdSense). Google also tried to estimate the value of clicks on search results: Varian said that on average a search result gets about 5.3 clicks for every click on an ad, and the company estimates that advertisers get about 70 percent as much in revenue for each click on a search result as they get for each click on an ad.

Although he didn’t say how much Google pays its AdSense partners, Varian said that the bottom line from all these estimates is that companies get, on average, $8 in profit for every $1 they spend with Google. As a result, it believes that the average economic impact is eight times its AdWords revenue in each state, plus the amount spent by Google in AdSense payments and the value of Google Grants (maybe the company should have to subtract the estimated productivity decline from its recent Pac-Man playable logo).

There’s no way to determine whether the company’s estimates are correct, of course, since the parts of the equation that matter most are based on figures Google doesn’t release publicly. But it’s interesting to see the search giant trying to quantify its value to the economy (a full version of the report with a breakdown by state is available here). Whether it will help Google in its lobbying attempts in Washington is a much bigger question.

Update:

Some critics have taken issue with Google’s version of its economic impact. John Simpson, of the non-profit advocacy group Consumer Watchdog (formerly the Foundation for Taxpayer and Consumer Rights), says the economic estimates are just spin-doctoring, and that the company is “following the classic corporate evil-doer’s playbook as it attempts to quell worldwide outrage” over privacy breaches such as the recent collection of personal data transmitted over wireless networks.

“This is what every big corporation does when they are under fire,” Simpson said. “They divert attention from their wrongdoing and spin a story about their contributions.” The group said that Google’s math ignores other costs associated with the company’s effects on the economy and society in general, such as the competitive aspects of its businesses and the environmental costs of its infrastructure. “What’s the economic cost to the content providers whose material is grabbed without payment or the competitor whose listing is banished to the nether regions of results because of Google’s monopolistic control of search?” asked Simpson. “What’s the cost on society to maintain Google’s extensive network of energy-eating server farms?”

Scott Cleland, a telecom consultant who runs NetCompetition.org and has been a vocal critic of Google in the past, also slammed the Google numbers as “a gimmick,” saying the company “employs selective and misleading accounting in calculating its ‘total’ economic impact, including all the benefits, but not all the costs.”

Related content from GigaOM Pro (sub req’d): Google Takes the Open Battle to Apple on Multiple Fronts

  1. Mathew

    The question that is on top of my mind: have they factored into the costs of businesses they have disrupted and sucked out of the economy. I think most of the time these economic principles don’t account for +ve or -ve factors in order to fit a certain thesis.

    That said, the data Google is sharing is pretty impressive.

    1. That’s a great point — how many businesses that could have created value has Google crushed (or bought and then shut down)? I would love to see that math.

  2. I’d estimate that Google’s contribution is zero-sum. Those sales caused by Google adsense would have been spent somewhere else- in the U.S. Yes, the companies in North Dakota maybe wouldn’t have gotten the sales, but someone somewhere would have. Not only that, Google isn’t the only search engine out there.
    So, it’s pretty self-serving to say the least.
    And I notice that the “Chief Economist” looks like Steve Jobs’ brother.

    1. That’s a good point, Jay — much of the money spent on AdWords would likely have gone elsewhere if it wasn’t available. Maybe to newspapers :-)

    2. Jay, care to share more of the assumptions behind your “estimate”? When you say that AdSense dollars would be spent “somewhere else”, that should be defensible, but your simple assertion that sales would have gone elsewhere seems to ignore the reality of online commerce.

      Google may not be the only search engine out there, but their analysis doesn’t attempt to quantify the impact of all search engines–just Google. Of course it’s self-serving–its marketing, but I like that Google is thinking about its macro-economic impact as a company.

  3. I think Google has done more for society than it has cost them, more than its market cap though? certainly not! Will the value of all it has started rolling eventually outvalue its costs to society by that amount? conceivably. However it is not the dollars spent or received in advertising revenue, nor in grant money. It is instead those areas where Google has adopted struggling ideas, or introduced there own, that changed how the world thinks (and it is ‘group think’ now). Whether we who experienced life before Google existed like it or not, Google has already changed the world. Would another search engine have? I remember many, but Google and its ideas/policies won out. Won becoming a household word, also won the right to broker information for advertising revenue and highly valued equity.

  4. Miriam Boon Tuesday, May 25, 2010

    As the existing comments suggest, establishing the “true” economic contribution of an R&D-focused company like Google is extraordinarily complex. There are hidden costs to society, and hidden benefits.

    Technology has always been a two-edged sword. It generates new jobs while ending others. It (ideally) increases efficiency, which results in greater profit margins but leads to layoffs.

    If we factor in the businesses Google has disrupted, then should we also be factoring in the value generated by free Google tools? For example, a struggling small business might be able to cut costs enough to survive by switching to using free Google tools (Docs, Sites, etc.). If we factor that in, should we also factor in the decrease in expenditure of companies that are now working more efficiently than before?

    And how do we measure the value of the paradigm shifts? Google has innovated in ways that, as Jim Grant suggested above, has changed the way we think about the world. That sort of shift in thinking has doubtless been a factor in the conception of some new and successful technologies.

    I’m not saying that their estimates are right or wrong; just that when we start listing the factors that are not considered, it rapidly becomes clear that accounting for everything accurately and precisely is impossible.

  5. There are a number of major errors in Google’s logic, the main ones are they are (i) counting a lot of ancillary benefits as their own and (ii) are dis-counting any costs.

    My analysis of the 5 main flaws here

    http://broadstuff.com/archives/2213-Twitternomics-and-Googlenomics.html

    1. Thanks for the link, Alan — good post.

  6. Mathew

    I am curious as to hours lost in aimless meandering, thanks to google. It is called “berry picking behavior” when users move their attention rapidly from one link to another, at times aimlessly. This has got upsides and flipsides but here is a recent article
    http://www.fastcompany.com/1651987/google-economic-impact-pacman-game-logo-productivity-firefox-money-workers-distraction that claims nearly 5 million man hours were lost playing Pacman on google last week. It does not take away from google’s glory but does deserve some thought.

    @vasantk

  7. Microsoft has supported similar studies for years, below is a reference to one I found from 2007. The numbers are huge.

    What would be more interesting and relevant in the Google analysis is to understand incremental impact to the economy in terms of GDP and net jobs created in the economy. Their numbers presuppose that the guy who bought a new digital camera from a small business in North Dakota via Google search would not have bought one otherwise. If Google wants credit for the sale of a product, then the electric company, phone company, ISP, inventor of the product, real estate company, shipping company, etc, should all get some credit as well.

    · The Microsoft ecosystem – more than half a million hardware, software, services, and channel firms as well as end user organizations running Microsoft software– employs 42% of the IT workforce. These employees will pay more than $500 billion in taxes in 2007.
    · In 2007, the vendors in the Microsoft ecosystem will, themselves, make more than $400 billion in revenues, and, in 2008, invest close to $100 billion in local economies.
    · For every unit of revenues – dollar, euro, peso, etc. – that Microsoft will make in 2007, other companies will make an average of $7.79.

    http://blogs.technet.com/b/unlimitedpotential/archive/2007/10/18/the-economic-impact-of-it-software-and-the-microsoft-ecosystem-on-the-global-economy-pamela-passman.aspx

  8. Andrew Murgola Thursday, May 27, 2010

    There’s no reason to hate Google, they’ve done nothing more than make the internet broader, more free, and promote free services to compete with ridiculously priced services.

    Yeah they’ve destroyed a few business, but what good business hasn’t? Oddly enough they have helped way more than they have destroyed.

    Search engines arn’t good enough? Google is born. Mail isn’t good enough, Google expands. YouTube is a great idea, Google-get. Texting is too expensive and calling long distance in the US to US exists? Google Voice get (GC). Need help on your site to analyze your traffic? Google acquire! Need solutions for your website but dont have money to pay for email, chat, collaboration or anything else? Google Apps! Cant afford Microsoft office? Google Docs.

  9. 99.9% I’m that 1% Thursday, May 27, 2010

    it says 2009 economics look at License Plate the DOGS I<3 its tag is 2007 FAIL!

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