From its inception, it didn't take long for Google (NASDAQ:GOOGL) to gain ubiquitous use as the search engine of choice on the Internet. In fact, by December of 1998, PC Magazine commented on how Google "has an uncanny knack for returning extremely relevant results", and lauded how "even in its prototype form it's a great search engine." With its rise in popularity, Google had the makings of growing into a giant, and grow it did.
In that first year of use, Google had 3.6-million searches; by 2000, that number skyrocketed to 22 -- billion a year, 6,111 times the initial year's amount, an astronomical increase in such a short amount of time. Notably, in 2005, Merriam-Websters' Collegiate Dictionary, along with "himbo" and "mouse potato" (don't over think these terms), added "google", meaning "to use the Google search engine to obtain information about (as a person) on the World Wide Web". At long last, Google's legacy would forever be intact.
However, the really interesting part involves what Google decided to then do with all of that user-provided data, which one must remember was essentially provided free-of-charge. Well, given Larry and Sergey's original mission revolved around attempting to "organize a seemingly infinite amount of information on the web", naturally, Google organized and packaged all of this user-data up for advertisers to pay to use. It didn't take too long until Google had finally struck gold.
Perfected mining techniques produce a leader
When Google first began monetizing users, it started by introducing AdWords in October of 2000 as a pay-per-view service; this service quickly became a pay-per-click service in 2002. At the turn of the century, with all our concerns surrounding the Y2K bug and the end of the world (remember how we actually expected planes to fall out of the sky at midnight?), few individuals could be absolutely certain that this relatively simple and innocuous idea would turn into the primary driver behind the development of an estimated $48.7 billion in total ad revenues for 2013.
Yet one must note how this obscene amount of ad money generated today makes absolute sense in retrospect, given the above logic regarding how Google built itself. In fact, it all stems from a very particular kind of domination within the Internet scene, one that highlights Google's foresight when closely inspected and interpreted.
Today, Google's AdSense accounts for 74.1% of all advertising network usage by web sites, with the next closest, DoubleClick, clocking in at a paltry (in comparison) 18.2% use-rate. Going one level deeper, the keen observer already recognizes the flaw here: DoubleClick was purchased by Google back in 2005. This means that if an advertiser wishes to link up with a web site, 92.3% of advertisers choose Google, one way or another.
Many people probably chalk this up to Google's brand power and name recognition, the prevailing thinking along the lines of, "Everyone just googles it nowadays anyhow." This certainly has elements of truth to it, however, the absolute truth behind this domination of the advertising-network industry lies in Google's ability to turn its user data into actionable and meaningful results for interested parties, like advertisers. Seemingly, Google had this foresight from the very start.
What does this mean? Well, over the years, Google has become not just an expert at organizing all kinds of information on the web for people in a systematic and usable way, it has also been busily organizing and filing away all of its user-generated data. When we freely provide this data to Google -- so long as we are not using any incognito browsing capabilities -- Google can then create individual "dossiers" on everyone, capturing demographic information, geographic location, search/browsing histories, and the like. Google now has the leverage to use these dossiers to capture revenue from advertisers who need this information to implement more targeted advertising campaigns, ideally boosting sales and profitability simultaneously.
At this time, we should be clear: this only happens because Google has assembled vast swaths of information on our Internet lives, which they store for themselves as a proprietary gold mine of sorts. Also, If you still haven't checked out Google AdWords, or DoubleClick, I suggest you do so now. The sheer amount of power at an advertiser's fingertips is incredible. (Be sure to check out AdWords's "Advanced targeting options" or check out some of DoubleClick's Case Studies.)
Metadata: What it is and the important players who have it
Necessarily, what we've been discussing up until this point has been what many term "metadata," which is more simply "data about data" (i.e., the granular information related to that email you were just sent and then forwarded, including who sent it to you, at what time, who you then sent it to, and at what time, etc.). This idea on metadata best explains why advertisers use DoubleClick nearly every time they need to conduct advertising-network campaigns.
The power of Google's metadata provides companies with clear information with respect to how they wish to market themselves to their customers online. By offering up a glittering repository of user-generated information, Google helps companies maximize their marketing dollars in ways that others just can't. Well, not yet at least.
Late to the game were several players, though each one has started to make inroads that, at least on the surface, look to threaten Google's dominance in advertising. Interestingly, when one considers what each of these companies has done, one concludes that their end games look surprisingly similar to Google. Namely, Facebook (NASDAQ:FB), Amazon.com, Twitter, and even Netflix all have, in their own way, generated swaths of user-provided data that they can then parse out and package up to sell to advertisers who need customer segment information.
In short, they've amassed their own, proprietary gold mine. And now they're slowly creating the technical know-how required to execute on plans that will differentiate them from others in the eyes of potential clients. As some are likely up in arms about, I'm leaving Yahoo! (NASDAQ:YHOO) out of this for now since, ultimately, Yahoo! looks and feels a lot like Google.)
To explain this marketable difference, we can use Facebook as our example. Facebook has tons of demographic information that it can marry to location history, as well as friend history, which, when combined with your "Like" history, creates some fairly powerful insights into trends and customer segments. Though still in its relative infancy, Facebook's Graph Search tool, released this past summer, is taking the necessary steps to make analyzing Facebook's metadata meaningful to Facebook's bottom line.
In fact, in its most-recent quarter, Facebook monetized its 1.19 billion users to the tune of $2.02 billion in revenue, likely by using customer-segment analyses to drive utilization of Facebook as an advertising platform. Soon enough, Facebook will have the mining tools required to reach depths and levels of insight that only it can provide.
Importantly, as I've noted elsewhere, Facebook appears poised to not just encroach upon Google's and Yahoo!'s advertising revenue streams. With all of its demographic information, Facebook looks ready to move in on the market-research industry en masse. Essentially, Facebook isn't just after Google's and Yahoo's slice of the pie; it likely wants others' revenue, too. And not just that, but it appears like Facebook has a sustainable social network model that will provide new metadata, seemingly, ad infinitum.
An increasingly crowded advertising world
This same analysis, though with some company-specific twists, can then be applied to Amazon, Twitter, and Netflix, though Netflix uses its metadata in a much more selfish manner. Each one has a proprietary metadata set that serves as a gold mine of actionable insights companies can, and likely will, pay for in the near future. Considering companies only have a certain amount of dollars to dedicate to marketing and advertisement, whomever develops their tools the best, to then mine the most actionable insights, will likely find themselves in greatest demand.
(For a funny Graph Search done during the Beta launch back in January of 2013, please see here, and don't forget your sense of irony.)
Fool contributor Hugo St. John III has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.