Google Touts Its Role, State by State, in U.S. Economic Growth

5/25/10Follow @wroush

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all businesses,’” Bialecki said at the Google event. “We completely disagree. We feel innovation is our competitive advantage in Massachusetts…This [Google study] is a data point that proves our strategy is heading in the right direction, and demonstrates that here and around the country the use of advertising online is helping all businesses.”

Google also included a few other measures in its economic impact calculations, such as the amount it paid to website publishers for placing ads next to their content through its AdSense program, and the amount spent by recipients of Google Grants. These are free Google ads doled out to non-profit organizations at a rate of up to $10,000 per organization per month. Google Grants advertising totaled $27 million in California in 2009, $6.1 million in Massachusetts, $2.7 million in Michigan, and $3.1 million in Washington.

There are, of course, a few things Google didn’t count.

For one thing, the company hasn’t attempted to tally up the economic losses sustained by traditional media companies whose advertising businesses have been severely disrupted by online players like Google. In any overall picture of the company’s economic impact in Massachusetts, for example, it would be necessary to calculate how much advertising spending Google has siphoned away from the Boston Globe, the Boston Herald, the Yellow Pages, and other regional newspapers and magazines.

After the press event I asked Mark Saidnawey, a third-generation owner-operator of Pemberton Farms, whether he’s scaled back on print advertising at the same time as he’s scaled up his spending on AdWords and other search-based advertising. “That’s probably a fair assessment, yes,” Saidnawey answered. “When people are shopping on the Internet for stuff, that is where I need to spend my advertising dollars. If the homeowner is not flipping through the Yellow Pages in looking for gift baskets, I’m not going to spend my money there.”

When I put the issue to Brian Schmidt, he acknowledged that there may be economic costs to the growth of online advertising, but he argued that Google is helping to enlarge the overall economic pie for advertisers and publishers.

“I don’t have the data off the top of my head on the advertising revenues lost to magazines and newspapers,” Schmidt said. “But I’m definitely conscious that the business models are evolving quite a bit, in terms of how people are consuming media. We believe that search will continue to grow, and grow dramatically for a long time, and that display [advertising] will grow for a long time, and that mobile will grow for a long time, so that in aggregate the pie is growing. With regard to newspapers and magazines, whether their piece is shrinking or is sustainable over time, that will continue to evolve.”

But while Google didn’t attempt to balance out its economic-value data with estimates of the losses to its competitors, there are other ways in which the search giant’s report may actually underestimate the company’s true impact.

For example, Google didn’t count what it spends on payroll for its 20,000 employees or rent for its offices–money that trickles down into the economies of all the local regions where the company has major operations.

Nor did Google attempt to account for its role in stimulating innovation and new-company growth. By periodically buying up smaller companies such as Android in Cambridge or Picnik in Seattle, Google provides an exit path for numerous startups and their investors. Indeed, Google has acquired 16 startups since early 2009, with its $750 million acquisition of San Mateo, CA-based AdMob, finally approved last week by the FTC, being the largest.

Ed Roberts, a professor at MIT’s Sloan School of Management who co-wrote a major study of MIT’s contribution to the global economy in 2009, says economic impact studies like Google’s usually end up with estimates much larger than the company’s revenues, since the sponsoring company usually counts things like spending on local vendors and the multiplier effect from salaries, which translate into consumer spending on housing, taxes, and the like. Google evidently didn’t have to stretch things that far to find $54 billion in economic value from its services.

“Many corporations and institutions, like Harvard and MIT in the past decade, carry out such economic impact analyses to show their critics—local and state governments for example—how valuable they are to the economy,” Roberts says “Google is merely doing the same thing.”

Here’s a video Google published today about the methodology behind the study:

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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