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The sexiest word in business is ‘scale’

Scale means that as you grow market share, you are able to command higher margins in your business, amortize fixed costs across and ever growing base of topline revenue, and yes "own" your competition.  The steeper the residual demand curve the great the degree of market power.  Man, this is sexy.  Really sexy. 

I’ve worked for a couple of companies that tried to compete with Microsoft (WRQ and RealNetworks).  Now, these companies are still going (and profitable).  But, competing with a company like Microsoft where they can throw a feature (that might have been your startups main product line) into an operating system for free.  Boy, that’s scale advantage. Yes, I don’t want to open up old Seattle wounds here (with the "M" word). 

A great case in point is Google.  Henry Blodget just published a very interesting article on how Google continues to kick butt against online and offline media. Some interesting stats from the article:

    * Online ad revenue at Google grew 44%, or $2.7 billion.

    * Online ad revenue at Yahoo, Microsoft, and AOL grew only 15%, or $1.3 billion.

    * Google captured 2X as much revenue as its closest three competitors combined.

Very wild to think that the online ad category grew by 28%  and that Google captured the majority of that share.  Very interesting to see offline media growing only at 3%.

When you have this kind of share growth you’ll just continue to take costs out of the supply chain.  Since Google owns Performics and DoubleClick, why wouldn’t they just start offering ad management and serving for free?  Oh, wait they already announced this last week.  Google can shrink markets (web analytics, ad serving, offline media, etc) while keeping margins healthy.

We have seen the reports about Google’s QoQ click decreases (net effect is lower eCPMs).  Sure, but, when you are playing the scale game, you can afford to play with your operating dials.


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