Google+ is Part of Something Bigger — Much Bigger

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The much-ballyhooed launch this week of Google+, a social network that was created to go up against Facebook, has drawn tons of media attention. Some reviewers panned the effort, saying Google should stick to its search roots. Others praised the eye-catching design and UI as more lively than past Google efforts (that’s largely thanks to Andy Hertzfeld, the former Apple UI guru who is now working at the Googleplex). What most pundits seemed to miss in the all the noise is that Google is smartly positioning itself as a one-stop-shop for multiple facets of local advertising, all sold through its automated self-service sales machine. What’s more, they should all feed off each other. Here’s the deal.

The first leg of Google’s strategy is paid search. In the Google main well it is not as powerful for small companies, but Google’s sales force has managed to convince Mom and Pop outfits around the country to pony up for pay-per-click advertising (particularly for services) in locally oriented search results for places and maps.  Google has smartly augmented paid search with sophisticated display ads, which can now be geo-targetted relatively well (although not down to the zip code, which is the Holy Grail). The market is fairly mature–but still growing at a healthy double-digit clip. It will probably continue to grow as more small businesses go online (more than half still don’t have a Web site) and seek novel ways to advertise.

The second leg of the stool is Google Offers. The daily deal concept cemented by Groupon has quickly embedded itself in the minds of consumers. That said, the market for daily deals is beyond saturation and Groupon and LivingSocial are mightily attempting to defend their hefty margins while maintaining a growing sales force. (Groupon apparently has suffered from declining revenues per customer in mature markets, a truly bad sign). This is a huge opportunity for Google to undercut the two big guns–as well as many other daily deal sites–by leveraging its powerful technology infrastructure to reduce costs and maximize distribution and self-service. How could that work? For example, Google has massive server farms and already has a built-in Content Delivery Network. Both are items that Groupon and LivingSocial probably pay for (although perhaps less so LivingSocial due to its relationship with Amazon, an investor).

True, its not a Google thing to play the low-margin game but the gross margins on daily deal offers are so compelling– well north of 50% on paper if cost per customer acquisition is backed out–that I think Google would gladly take a margin haircut in order to thump the competition and win in the long run. Early indications are this is exactly the approach they are taking. BusinessInsider reported that Google Offers is offering significantly better payment terms than Groupon (critical because the longer it takes Groupon to pay out, the more money they make on the float–a favorite business model of Warren Buffet).

Which brings us to Google+. It’s a long way from being successful. But it looks like a very serious play and its hardly a surprise. Facebook’s advertising revenues are soaring as the social network crowd acclimatizes to advertising and Facebook gets smarter about running ads. Even better, Facebook ads can be so finely targeted for hyper-local efforts. Google may not ever put ads in the Circles. But if it drives more people towards using Google ID in the same ways they have taken to Facebook Connect, that would allow Google to power a vast network of advertising targeted to profiles provided by users themselves on sites outside of Google +. So if Google +takes off, then Google has a trifecta play in all three of the major online zones for hyper-local ads. Add in mobile and Google is clearly looking to hit all the bases in hyper-local and hit them hard.

Alex Salkever’s Personal Fight column appears every Friday on Street Fight.