I think you missed the point, it's not that doing two profitable things is better than one, which you're right is always the case.

It's the more specific case of running businesses X and Y where X is dependent upon buying services that Y provides.

If you have a monopoly on Y (advertising), then it's easier to complete in X, because everyone else in X has to buy their Y services from you.

So you end up paying your competitor in order to compete with them.

I'm not sure that I did. If you are trying to compete in business X, you have a side income Z, and everyone competing in X has to buy service Y, what tangible benefit do you get from Y and Z being the same thing? Unless you can rig the bidding process I don't see any advantage.

It means that any expense you spend on Y isn't really an expense, since the money goes right back into your pocket.

So not only do you get the extra income from other people buying Y, buy you can operate at higher margins than everyone else in X because Y is available to you at cost.

EDIT: On further thought it seems no different than being vertically integrated.

> It means that any expense you spend on Y isn't really an expense, since the money goes right back into your pocket.

If you do the accounting in this way, then you make that much less profit on your service, so it winds up being the same as if you are making a greater profit, but count the cost of Y at market value.

> So not only do you get the extra income from other people buying Y, buy you can operate at higher margins than everyone else in X because Y is available to you at cost.

This isn't any different than if Y and Z are different, but you use the excess profits from Z to subsidize your business in X.

That's not how auctions work. Let's say A owns advertising business X and shopping business Y. Now, if B who only owns shopping business Z will be paying their competitors. If A bids higher, money still flows black to them regardless of the profit/loss. But Z is forced to bid much higher to get any traffic! This can be used to inflate the price to any level. Sure, others can also inflate the prices but if you try that then the money goes to A and you lose that money but it's not true for A. In this Google operates like A.

Edit: Google has lot more data about a visitor and which enables them to predict more. So, they can sell their competitors (in shopping business) the impressions which never convert while selling the impressions which are highly likely to convert to their own shopping business.

> So, they can sell their competitors (in shopping business) the impressions which never convert while selling the impressions which are highly likely to convert to their own shopping business.

If they do that, then their competitors should notice and then pay them less for giving them bad impressions, so they're just taking money out of one pocket and putting it in another.

This scenario only works out if their competitors are less competent -- but in that case, seems like Google would do well?

Does it need to be profitable? It seems to me that if it siphons money off from competitors, that's already enough to hurt the competitors relative to itself. In fact not only does the advertising not need to be profitable, even the sales of X do not need to be profitable, for the competitors to be harmed... dumping would be the extreme example of that.

You are talking about a different aspect of the scenario, where the company is reaping profits from advertising. Sure, that's kind of beside the point though. Which is why it's important to recognize that the harm happens even without the advertising being profitable.

If the service isn't profitable, then you are subsidizing the cost of a service that your competitors need. You aren't benefiting from the fact that your competitors are spending money. They would have had to spent money anyway.

Interesting... I started out pretty sure you were wrong about this but you and others are bringing me around. Good discussion.

Its not really siphoning money off, tho. It is an exchange of money for services rendered.

From what I saw in comments and the (paywalled) article, the problem is that Google isn't siphoning money. They're keeping the ad-space for themselves.