Why Google Really Is Recession-Proof

Chief Economist Hal Varian: Marketers May Cut Back on Brand Advertising, but Search Is a 'Staple'

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NEW YORK (AdAge.com) -- Google has long been posited as recession-resistant because its biggest business, search, is highly targeted and trackable. Search is, as an accountant would say, cost of goods sold -- not just an administrative expense. Hal Varian, a Berkeley economist turned full-time Googler and co-author of "Information Rules," explains why he's not worried.
Hal Varian, author and former Berkeley economist, says belt-tightening consumers can save money by shopping online.
Hal Varian, author and former Berkeley economist, says belt-tightening consumers can save money by shopping online.

Advertising Age: How do you see an economic downturn affecting online advertising and, in particular, Google?

Hal Varian: It's very apparent brand advertising tends to be pro-cyclical. When the economy goes up, it goes up. When the economy goes down, it goes down. On the other hand, direct marketing is definitely not procyclical. ... And we feel that Google is more like direct marketing than brand advertising.

[In a recession] a consumer may switch from sirloin to ground round, and they may postpone getting a new washing machine or new car, but these are delayable forces. The consumption of consumer staples really doesn't change much at all. It's the same way with a business. You may cut back a little in capacity expansion, investing in your brand, other sorts of investments that have a payoff in the future. But you're not going to cut back on something that is your staple. We think direct marketing is a staple.

Ad Age: True, but Google's a supply-and-demand marketplace, the demand being the advertisers and the supply being clicks and conversions. And if people are converting less, doesn't that hurt?

Mr. Varian: That's a fair point. From the consumer side, you'll see people tend to be consuming less. But there are two points there. One, when you look at a recession in aggregate, it's basically a 2% or 3% reduction in GDP -- instead of growing at 3%, you grow at zero. So it's a relatively small amount. Some industries may be particularly hit hard by that ... but overall, people's spending isn't changing a huge amount unless times really get rough. Second, an online purchase is perceived as a bargain. If you type "trip to Hawaii" into Google, you'll get ads that say "bargain airfares to Hawaii," "cheap weekend getaways," "great deals on tickets." Those ads are appealing to a price-sensitive audience. You can save money by shopping on the internet. ... This is like the Wal-Mart effect. Wal-Mart's sales go up during a recession.

Now, I grant you, if we go into full-fledged depression, all bets are off. But that's unlikely. We haven't seen a depression in 70 years.

Ad Age: Real estate has been particularly hard hit.

Mr. Varian: It's true that overall real-estate queries have gone down as a fraction of total queries. But there are interesting anomalies. Type in "California foreclosures" or "Arizona foreclosures" or "Florida foreclosures," and you'll see 11 ads for companies that are providing lists of foreclosures, advice for bidding on housing auctions or getting a great deal in the housing market. Remember, every time a house is sold, another is bought. You've got to advertise to make that happen, and the internet's the place to go for a deal on Hawaii or a house.

Ad Age: Google has been expanding into other offline media. How do you see an economic downturn affecting that?

Mr. Varian: My view is, if you look at this pattern where brand advertising is more sensitive than direct marketing, you would expect to see a decrease in the cost of brand advertising. Well, that's a good time for a new entrant to come in. We think we have a cost-effective model, a way to do good matching, and we think we can do it more inexpensively than some of the existing technology. We're in this game for the long run, and if people are looking for ways to economize in that area, that's good for us.

Ad Age: Google really grew up during the last recession, didn't it?

Mr. Varian: Google had a huge benefit from the last recession, the dot-com bust -- not so much on the sales side but because we were able to hire a lot of great, talented people who became available. Managing a big website at scale is hard to teach in school, and people who were doing a lot of this during 1999 to 2000 became available to us in late 2000, and it was a great boon for Google.
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