When a company like Google discontinues a product like Tags there is almost always more than one reason.

Google’s publicly stated reason that they need to focus their efforts on which technologies they expect will yield the most benefit to users and businesses is very plausible.

I think that the statement is accurate as far as it goes.

At best Tags offered little benefit to businesses that were using them. While it allowed for a listing to be visually highlighted and its difficult to value the benefit of that in terms of additional clicks or calls, the product itself generated a very low click volume. There was little accountability nor possibility for accountability of those actions either.

In accounts that I examined, Tags generated between 1.5% and 4% of the total actions reported in the dashboard compared to all of Google’s reported actions. Once Google stopped allowing a Tag to be directed to a website and those Tag actions were directed inward on Google towards a photo or the Place page, a Tag became even less valuable (and less trackable) for a merchant. The change to blended results further decreased the value of Tags in the Places world. At least the other, free actions like driving directions or clicks to your website in Places offer mostly direct and quantifiable value.

The logic of whether to keep a given product in the mix needs to address not only individual merchant needs but Google’s corporate needs as well. You also have to remember, Google is an large stock held company that trades on the public capital markets.

To keep capital flowing, companies like Google need to show regular and steady increases in their income. Google has generated average revenue gains of over $4.5 billion a year for the past 4 years. If you discount 2008 as a recession year then they increased revenues by an average of $5.3 billion a year.

Google needs that sort of growth and more every year to be a contender in the capital markets. Growth of their traditional ad products has slowed as a % of sales. Everyone, including Google, is looking to Local for the next ad growth market. Some companies, like LivingSocial seem to have found a way to access local ad revenue and are already on track to reach a $1 billion of revenue for 2011.

A fixed price product like Tags puts a very real cap on total potential revenue and growth that can ever approach those sorts of numbers.

There are 16 million or so businesses in the US. Even if everyone one of those ponied up for Tags it would generate only $5 billion or so a year. With a self serve product it is estimated that the maximum uptake is about 25% of the potential market. In Google’s case, because of the steep drop in benefit once a Tag no longer shows on the main SERPS, the actual market is likely to be significantly less than that. Thus, even over time, it is unlikely to be able to contribute significant annual growth to Google’s revenue stream. At least not at the level they need.

Income though is only part of the equation. Costs are the other side. And the Local market requires hand holding. Unlike the early adopters of Adwords that could survive with little human contact, the new markets Google is going after minimally need a voice on the other end of the phone. As Groupon, Yelp and LivingSocial have demonstrated, sales into local markets do best with a high touch. Google, at least initially, is going for a light touch with phone support. But even one call from a Tags account into the support line a month would likely eat up the total monthly income. Given the current number of problems with Places, Tags was destined to be a loser.

Google, while still struggling in the local space, has developed two products in Boost and Adwords with local extensions, that have higher upsides and because they function independently of Places fewer problems. Google is obviously searching for a growth market like daily deals but has yet to succeed. You noticed that in the current corporate realignment, they put someone at the head of Local, Jeff Huber, with lots of Adwords and commerce background not lots of local background.

Whether Google is done “clearing the decks” is not yet clear. What their next income move in local will be is unclear. In abandoing Tags,  Google is essentially abandoning the hundred million dollar a year market in search of the multi billion dollar a year market. When Jeff Huber says to provide him with “any suggestions you have on new or different (preferably innovative) things we should be doing” you can be sure that the subtext to that statement is income generating innovative things.