Google & perceived values

I was a research & development engineer for more than a decade before switching to the dark side of the business (investment). Majority of my engineer friends scorned at the idea of value creation derived from marketing. Many focused on solving the most complicated engineering issues and making better products.

I was once one of them, seeing the world through my own tiny filter of engineering excellency. For those of you who have read enough of what I wrote, you know fairly well that I'm a convert now, toward the extreme other end.

Today I believe that consumers are happier with a great consumer electronics product that is properly marketed to them. The value created out of genuine and heart-warming marketing is otherwise known as the perceived value. It brings more satisfaction to consumers and more added value to the company. It elevates human beings from a functional/utilitarian world and into the sphere of art for the mass population.

As I argued in an old post, perceived value will be playing a more and more important role in this world that's moving inevitably toward zero marginal cost.

Nevertheless, this argument remains as elusive to many engineers as ever.

It's all the more puzzling that such engineers usually worship Google as the leader of technology, while completely disregarding the fact that Google's entire empire is built exactly on the business of perceived values – advertisement.

At Google, our innovations in search and advertising have made our website widely used and our brand one of the most recognized in the world. We generate revenues primarily by delivering online advertising that consumers find relevant and that advertisers find cost-effective.
— Alphabet Inc. 10-K filing 2015

Alphabet Inc. Consolidated Income Statements

As we see in the consolidated income statements of Alphabet Inc., in 2015 the company as a whole generated almost $75B worth of revenue, out of which (see blow) direct advertising revenues is about $67.4B, or about 90% of all its revenue.

Alphabet Inc. revenue breakdown

In other words, as brilliant as the company is in terms of technology, it created almost its entire revenue out of a very old industry whose holy grail is to create strong perceived values in the eyes of consumers and ultimately to build strong brands.

If, as many engineers would put it, perceived values and brands aren't important, then Google today will not be a $75B company but will be a $7.5B one. That's a whopping 10X difference.

Note that the global advertisement spending is about $600B in 2015. This suggests that as dominant as Google is, it has only seized 12.5% of the value chain as of today. There's a lot more ground to gain just in advertisement alone, which is why the company has not been particularly in a hurry to monetize its other bets.

Not trying to slight anyone, somehow I feel that there might be some brilliant engineers inside Google that never buy in the idea of perceived values, while making their fat salaries and bonuses out of it.

Maybe this is worth a Shakespearean theatric work?

#NetworkEffects : Fitbit Q1 2016 Earnings Call

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