Passive Online Income vs Sustainable Online Income

Aug 31st

Is there such a thing as "passive" income? Generally no. A person can cash out existing brand equity and exposure, but if they cash out too aggressively and/or do not reinvest enough then they are ultimately cashing out their market position and will eventually fade.

Does Google Make "Passive" Income?

Online there are some network effects that are hard to beat. MySpace had them over Facebook & only lost due to years of systematic incompetence & mismanagement. But if you are boastful about your business model competition will come and eat your lunch. Look at all the Groupon clones. And even Google has to claw and fight for every percent of search marketshare.

A person could say "well Google makes passive income" and I would counter that with "not really."

So far this month Google has made about a dozen search interface changes or tests & the underlying relevancy algorithms have likely had at least 3x or 4x as much change.

Keeping Google's Marketshare Costs Big Money

The propaganda Google spreads include statements like: "users keep coming back to Google even though they have a choice of a search engine every time they open a browser"

While Google maintains that their monopolist marketshare is due to user appreciation of superior technology, a ton of their exposure is paid for. I was helping a friend set up a new laptop and the amount of Google added to the machine made me feel like Google is the new Norton or Symantec.

If you use the Internet Explorer browser to access the web it comes with a Google Toolbar.

That toolbar defaults to enhanced features enabled.

Google not only pays to be the default search provider, but as part of that they also pay to have competition removed from the default options list!

Google also pays for Chrome to be installed in the laptop.

If you are curious enough to click on the pinned Chrome logo then when it opens they try to set it as your default browser.

If you do use Chrome regularly you see Chrome store ads bundled right into the browser.

Ads are also included within the interface of their online tools. For example, if you use Google Analytics they may recommend you try AdSense, AdWords, or their affiliate network.

The act of logging out of 1 Google service may trigger ads for another.

Google bundled chat into Google+ & they were fined by the FTC for bundling Google Buzz into Gmail, a violation of user's privacy.

Google's doodle drawings on their homepage may also promote their other offerings

Even if you don't use Chrome or the Google Toolbar in Internet Explorer then whenever you use Google they suggest setting it to your home page.

And even if you don't change your homepage, Google paid to be the default search box on Toshiba's default start page!

If you manage to somehow avoid all the above Google payola then they also pay other browsers (like Firefox) to be the default search service. Further, they then wait for those 3rd party browser plugins to have security issues & then do a bundled cross-promotion there, thus turning competing browsers into ads for more Google crap.

And when you go to update Flash, look where they tell you to search from

If your default search provider isn't Google when you install Chrome they use an option screen to help you change it, with Google being the first choice

Either Google is fibbing when they state how much of their existing marketshare is due to superior quality service, or they are hedging a risk of losing marketshare to Bing by buying placement everywhere they can. And to me this really highlights one of the big issues with truly "passive" online income. In spite of Google's success (& the great network effects they enjoy), even Google feels the need to spend hundreds of millions of Dollars a year buying exposure for their own browser, buying default search provider exposure in 3rd party browsers, and ensuring new computers are filled with promotional Google crapware.

Google also uses their browser's start screen to push beyond software into hardware...a cautionary tale for Android manufacturers after seeing Google acquire Motorola Mobility.

This sort of cross promotion is everywhere, from ads on Youtube promoting Chrome

to Gmail ads highlighting featured Youtube videos

and Google+ games having Chrome ads integrated as special items in the game

right on through to Google buying display ads promoting display ads.

Facebook realizes how powerful this cross-integration is & thus buys ads on Youtube as well.

But if you want to leave Google's ecosystem it takes a lot of effort, as Google is willing to advertise the Google alternative aggressively wherever they can.

Google recently extended their ecosystem of cross-referencing further by automatically adding Google Related to Google Chrome & the Google Toolbar, which recommends Google content within the browser no matter where you are on the web.

Google's bundling not only follows users around the web & personalizes ads, but it also bakes right into the core of their relevancy algorithms. Eric Schmidt stated "the internet would be better if we knew you were a real person rather than a dog or a fake person. Some people are just evil and we should be able to ID them and rank them downward."

Either you sign up for a Google Profile or you suffer the consequences! Forbes published (then quickly pulled) an alarming article titled “Stick Google Plus Buttons On Your Pages, Or Your Search Traffic Dies.” Wired followed up spreading a similar message & a new Google trusted stores rating system for merchants was also spotted.

With so many attempts at lock-in there is no surprise that some other browsers which have partnered with Google are considering moving on.

This is not to say that Bing doesn't do marketing as well. They just are not as slick about it.

Policing Advertisers Costs Billions

In addition to evolving their core relevancy algorithm, Google has to police advertisers who are willing to be deceptive, market counterfeit goods & use the lowest common denominator. When Google is too loose that can cost them a pretty penny: they just paid a $500 million fine to the US government for ads from Canadian pharmacies. The DOJ claimed Mr. Page knew what was going on:

Mr. Neronha said those efforts amounted to "window-dressing," allowing Google to continue earning revenues from the allegedly illicit ad sales even as it professed to be taking action against them. Google employees helped undercover Justice Department agents in the sting operation evade controls designed to stop companies from advertising illegally, he said.

"Suffice it to say that this is not two or three rogue employees at the customer service level doing this on their own," Mr. Neronha said in an interview. "This was a corporate decision to engage in this conduct."

Likewise, it costs Google a lot of money to deal with lawsuits that arise due to their business practices & lack of respect for copyright with photos, books & videos. They eventually had to develop an expensive video footprinting technology to adopt DRM features on Youtube.

And building the partnerships Google has to run Youtube isn't easy. They pay something like a half-cent per video view & if you create a site with a "no soup for you" message (like the above Google page) for markets where the finances do not work out then you are violating their search guidelines by cloaking, whereas Google overly-promotes YouTube in the search results and is free to count ad views as video views (once again, against Google's guidelines).

New Niche? New Lawsuits

Eric Schmidt highlighted how the lobbyists write the laws & then Google went out and hired over a dozen lobbyist firms. Anything that disintermediates search costs Google a cut of revenues.

While Groupon is still unproven as a business model, Google was willing to spend $6 billion to buy it in order to avoid the risk of missing out on a new form of local ads.

Mobile search now represents 12% of the search market. To look in their dominant search position onto the new devices Google:

  • build a new operating system to give away for free
  • paid carriers a revenue share (in addition to giving it away)
  • likely violated Oracle patents (that will likely cost them in the B's)
  • had other patent issues which required Google to spend $12.5 billion buying Motorola (that is nearly 1/3 of the cash Google has built up through their IPO & saved profits in the 10-year history of the company)

Sneaky ISPs Redirecting Search Traffic

What is worse for Google, is in spite their default status, their huge ad budget, and being large enough to be sued regularly, even all that isn't enough to keep all the traffic they pay for, as there is widespread hijacking of search traffic by ISP providers.

Google Isn't Passive, but ___ Is

Google may have bit off more than they could chew & are certainly doing anything but being passive. But maybe some other companies that make great money are doing so passively. Offline that is certainly true in many instances, but online passive companies tend to disappear.

Look at all the work Yahoo! has done with their news box & their sports vertical, yet when you back out the cash on the books & the foreign investments the company isn't valued at much above $0. AOL has also cratered. In spite of their huge traffic streams they are not growing with the market due to search bypassing them & niche players picking them apart one vertical at a time. Running a portal profitably & sustainably is anything but passive.

Even deep into the long tail at the other end of the equation the profits may be every bit as scarce. Demand Media's accounting techniques show that they were far better at growing revenues than growing profits & the company may never be profitable.

The Limits of "Search"

Google & Bing keep eating more of the value chain through content scraping & a more interactive search experience that include new ad formats, like coupons & product ads with pictures.

In addition, search companies are challenging the boundaries of search by creating vertical media & ad networks that compete against a wide array of publisher websites.

The Huffington Post

Autonomy / Fast Search

Groupon

BankRate

MapQuest + TomTom

The Yellow Pages

Dell / HP

That "Shady" Competitor

When Google talks about "protecting users" one of the case studies / angles they push is the health angle:

The paid post at the top happens to be about brain tumors, which is a really serious subject. If you are searching for information about brain cancer or radiosurgery, you probably don’t want a company buying links in an attempt to show up higher in search engines. Other paid posts might not be as starkly life-or-death, but they can still pollute the ecology of the web.

While Google was using the life-or-death approach to policing link buying outside of their AdWords ad network, Google was knowingly selling search ads to Canadian "pharmacies" providing illicit drugs in the US. The official settlement document lists how Google insiders knew work-arounds to the automated systems & were working directly on managing the ad accounts associated with the illegal activities. Google had done so for over a half-decade & only changed their approach *after* they knew a sting operation was underway.

For those scoring at home, this has been Google's approach to the health vertical:

  • 3rd parties buying links that *could* influence search results for important health topics = morally reprehensible
  • Google selling links *within* the search results for important health topics to criminal organizations = totally reasonable

Given the above investigation, it is not surprising that they shut down their health records initiative. They had already spent all their credibility.

Google may protect you from some third parties, but Google can not protect you from Google. :D

Not only can Google hardcode the algorithms toward promoting certain websites (while editorially discriminating against other webmasters for doing the exact same thing), but Google also actively invests in the publishing ecosystem, which pits them directly against anyone who doesn't receive their largesse.

Webmasters are told that having networks of similar websites is spammy. And yet, Google invests is a company that owns about 7 copies of the exact same business model in the exact same niche as a roll up.

As we saw with BeatThatQuote, Google owned-and-operated websites get penalized for a shorter duration of time for the same offense that other websites get penalized for longer periods of time for. It was only through *repeated* exposure of the absurdity on SEO blogs that Google decided to treat their own property like they treat a typical webmaster.

You can also do nothing wrong, but have your model undermined by looking too similar to a company that is exploiting Google's relevancy weaknesses & forces Google to apply retribution. A lot of small ecommerce sites were purged in the content farm update. What is so sad about that is that if not for accounting games & selling stock as a business model a lot of the biggest "success" stories in the content farm might not even exist.

While the above section focuses on Google, it could be about any competing business that touches the web...a bank which uses bogus accounting driving smaller banks out of business, a company that receives no bid government contracts associated with bribes & uses those "profits" to price dump in related fields, an ISP redirecting your traffic, etc. No matter how clean a business model looks at a glace, there is some gray area where businesses meet & exceed the numbers quarter after quarter.

Look, for example, at the sorts of links NetZero puts in some of their customer emails

And those links point at the illegal "fake news" styled $1 trials (with endless unstoppable recurring billing).

Look closely at any mainstream media site & you will run into those ads.

Are Passive Revenues Impossible?

It really comes down to how you define passive.

If your site doesn't evolve & isn't aggressively marketed then eventually a search engine or another competitor will pick away at your advantages until you are soon found ranking #2 then #3 then #7 then #20 then invisible. Or you might get clipped by an algorithm all at once in a sudden stop torch job that makes your site essentially invisible, or it may be a slow & painful debt by a thousand cuts.

This is one of the reasons I generally prefer to have a site with a 30% or 50% profit margin over one with a 90% or 95% profit margin. Sure high margins are great while they last, but if you don't reinvest enough over time an algorithm or a competitor will eventually torch some of those high margin projects.

When it comes to online income, passive and reliable are not synonyms.

If you saved the margins you made while they were there then you are lucky, whereas if you adjust your lifestyle to that level of income & don't save anything then dark times have appeared.

It turns out having passive frugal spending habits & active savings habits are crucial if your lifestyle relies on "passive" income. ;)

Published: August 31, 2011

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Comments

May 25, 2013 - 4:22pm

true but what is your take on adsense? can it really give a webmaster a passive reliable income? last time I checked it said that relying in it is putting your site's income in thin ice

May 27, 2013 - 8:05pm

Just about anything can work & just about anything can fail.

What's every bit as important as the revenue stream & source is spending less than you make on living expenses such that if you ever have a rough patch you have the ability to survive through it.

The primary value of AdSense isn't strong longterm stability across all markets, but rather the ease with which you can plug-n-play without having to manage ad sales directly (with setting rates, hiring salespeople, managing ad technology, etc.).

The instability of AdSense may be overstated by some market participants in order to try to get sign ups for other services. It certainly would suck to have one's account arbitrarily nuked. But even if you are not in AdSense, if your site is heavily reliant on search traffic & Google whacks your site there then of course it is still hit no matter what revenue strategy you were using. This ability to warp/distort/influence markets in such a profound way is why Google having monopoly marketshare is bad for other players in the ecosystem ... too much risk is concentrated, and that risk is concentrated there even if you are not using Google's ad programs.

Even membership sites require constant effort to keep going. They can be sold as "easy recurring revenues" but you have to have some amount of exposure and new subscribers each month to offset any membership cancelations.

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