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

5/25/10Follow @wroush

Google unveiled the results of its first state-by-state analysis of the company’s impact on regional economies at press events in 10 cities on Tuesday, including Cambridge, MA, Detroit, and Seattle. For the most part, Google measured the value it generates when local advertisers and Web publishers use its AdWords and AdSense platforms for Web advertising.

Overall, Google claimed that transactions enabled by its search and advertising tools added up to $54 billion across the United States in 2009. About one-fourth of that that activity, $14.13 billion, took place in California. New York felt the second-biggest Google impact, with $6.27 billion in advertising-driven activity, followed by Illinois at $3.24 billion and Texas at $3.18 billion. Xconomy’s other home states of Massachusetts, Michigan, and Washington saw total economic value of $2.2 billion, $906 million, and $2.8 billion, respectively.

“‘What is the value of Google to local businesses?’ is a question we’ve often heard from the press, from advertisers, and from partners,” said Brian Schmidt, director of sales for Google Boston, at a press conference Tuesday at the Pemberton Farms market and garden center in Cambridge. “We take it seriously and we wanted to put some serious thought behind it.”

Advertising on Google is a “growth engine” for local businesses, Schmidt argued. He said that 43,000 of the 175,000 businesses in Massachusetts have advertised on Google. That includes Pemberton Farms, which allocates about 60 percent of its overall advertising budget to buying online ads matched to search keywords such as “gift basket” and “fruit basket,” according to co-owner Mark Saidnawey.

“The actual economic return to the state [of Massachusetts] via our advertising programs totals over $2 billion for 2009 alone. That is a really big number,” Schmidt said. “What’s important to note here is that we are not a California company. We are headquartered in Silicon Valley and that’s our focus, but we’ve built a focus in Massachusetts that we’re proud of. We’ve hired over 200 people, but more importantly we are empowering businesses in Massachusetts.”

Brian SchmidtGoogle calculated its economic-impact numbers by assuming that the dollars advertisers spend buying keyword-based advertising on its search pages through the AdWords program have a multiplier effect on their businesses. (After all, the whole point of advertising on Google is to entice Web surfers to click on your ad, arrive at your website, and become customers.) Hal Varian, Google’s chief economist, says businesses earn an average of $2 for every $1 that they spend on AdWords ads.

But when Google factors in not just revenue from AdWords advertising but revenue from clicks on natural search results—which outnumber AdWords clicks by about 5 to 1, acccording to third-party researchers—the multiplier effect grows even larger. Overall, the company calculates that for every dollar AdWords advertisers spend, they get back about eight dollars. (The exact formula that Google used can be seen here in more detail.)

A number of state and local officials attended the Cambridge press event, including Greg Bialecki, Secretary of the Executive Office of Housing and Economic Development under Massachusetts Governor Deval Patrick. In interviews with Xconomy and elsewhere, Bialecki has often promoted high-tech innovation as a path to economic recovery and growth for the state. “When we talk about the ‘innovation economy,’ sometimes people say ‘It sounds like you’re helping high-tech businesses but not 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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