Market Size in Revenue vs Profit

In our last post, we referenced an eMarketer report that forecasts the market size of various online advertising market segments.  Like just about every market size report we have ever seen, the eMarketer report focuses on revenue size to define the market.  We think it's more interesting to look at market size by profit. 

That's why the software market is so attractive in general.  While the global software market is less than 1/10 the size of the US retail market (300b vs 4t) it is dramatically more profitable.  So it commands a lot more attention and gets much more investment than other markets of greater revenue size.

South of the border in Mexico, this dynamic is tragically illustrated in the Mexican drug market.  It's estimated to be a 40b export market, which isn't that large compared to Mexico's overall 223b export market.  But it's estimated to be 80% profit.  So its economic impact is far, far greater than its revenue footprint would suggest.

We think this reality about market size underscores the point we made in our previous post on growth in search versus video.  Most of the search growth will come from searches at Google.com, which is an incredibly profitable business for Google.  Video, on the other hand, has a much higher production cost and often has many intermediaries that each take a revenue cut.  So even if video and search have comparable revenue growth, the market growth measured in profitability will skew heavily to search.  Good news for Google shareholders.