Worth Reading: The Myth of the Algorithm

If you want to get a tech company’s leader in a lather, say that it seems like his company is more services than tech. No way, no how. We’re living in the Age of the Algorithm. Much of this is thanks to Google, of course, which owns the most valuable of algorithms: the search algorithm. Thanks to that, Google gets to make money while it sleeps. Not so much for services businesses like, say, agencies. They’re in the grubby business of hiring people to create value. Nowadays that’s out of fashion. Rick Webb, a co-founder of The Barbarian Group, sees a certain mythology taking hold in this cult of the algorithm. The dirty secret of many “tech” businesses is they’re very reliant on services. Google’s sold plenty through self-service, but it has armies of sales people. And besides, search is an anomaly. As one digital media veteran once put it to me, “Search is bought, not sold. All other advertising is sold, not bought.” Webb echoes this sentiment in an article on BetaBeat:

Now, it would seem to me that a good measure of a company having some sort of algorithm that just churns out money—and can infinitely scale—would be revenue per employee per month. If they’re just printing money, it ought to be like 15 employees sitting in a room making something like half-a-billion a year each, no? They should at least be, you know, making more revenue per employee than, say, McKinsey. And anyway, there’s really no other metric to use. We could use profitability, of course, but Groupon isn’t even profitable yet. The thing about this that irks me, though, is that many of these companies make their money off of advertising. Advertising doesn’t sell itself. Originally, Google AdWords was primarily a self-serve product. But over time, a sales staff became necessary. And indeed, almost every major web company failed to make any real money until they built up a massive sales staff. We’re hearing this all the time now, for companies like Groupon.

Read Webb’s full post at BetaBeat. Follow him on Twitter at @rickwebb.