The Google Economy

I had not planned on writing this post had it not been conceived while taking a walk in Prospect Park this morning with my friend and business partner in, Sebastian, who writes (He will be speaking at Emetrics DC next week in a panel titled Mobile Analytics is Calling You – Sebastian Wenzel).

Yesterday, Jeff Jarvis wrote a post on Google‘s Third Quarter Results that were, again, as always, beyond Wall Street’s Expectations – defying all odds, and confirming that Google is a company that appears to defy normal physics (see my Google Recession post- when everyone else is suffering – they glide into a 3rd Quater Profit – but how? According to SeekingAlpha:

Market reaction: Wall Street was pleasantly surprised by the earnings release, rewarding the shares with almost a 12% markup in after hours trading. The shares saw nearly a $100 swing from their lows to their highs providing a nice selling opportunity for prudent traders. I think if you dig deeper into the report, you may detect some fool’s gold from within.

And now, according to Jeff Jarvis in a post on The Google economy, indeed

Google does indeed have its own economy. It’s latest results:

The Web search leader reported third-quarter earnings that far exceeded the expectations of analysts, especially those who thought the company might finally fall victim to the slumping economy. Thanks largely to having contained costs better than in previous quarters, Google reported on Oct. 16 that profit rose 26%, to $1.35 billion, significantly higher than analysts had predicted. Sales jumped 31%, to $5.54 billion.

The analysts are stumped because they are not judging Google as a new kind of company in a new kind of economy. It’s different.

Indeed – strange – until Sebastian woke me up to something about Google that no one talks about.

Ha, ha, ha, Google has “rigged” their system so it always pays out profitable …

Google is the will, the way and the word, Google controls almost 75% of Search in the United States according to a post in Web Analytics World Google Up 12 Percent Year Over Year and 80% of all the Paid Search Advertising Share according to the Rimm-Kaufman Group – look at this chart from Alan Rimm Kaufman’s blog:

paid search market share feb 2008 google yahoo microsoft ask

Well, want to know the secret of why Google is profitable and always will be, even when the rest of the economy crashes?

Simple, with AdSence and AdWords – Publishers don’t know the actual money that Google is making on each ad .. no one does – except Google.

If Google were a European company, it would have been much more regulated, Europeans would not have allowed Google to create such a financial system.

And as we sit here and think about the implications – look what happened on Wall Street – all the “sub-prime” mortgages, and “credit swaps”. from Lehman Brothers amounted to almost $607 Billion dollars – I think that’s why the FED didn’t bail them out – they had simply too much unregulated Debt (I’m trying to find the article in the New York Times where I read about the over 600 Billion that Lehman lost .. and could not find it, but I’m sure I read it today)

All Google needs to do at any point, is manipulate the dials to pay out to publishers more or less, as they need to, to make whatever Quarterly Goal they want.

In other words, Google has total control over it’s own Economy
- Google is it’s own Economy - and it can alter the payout on advertising to publishers in any way it feels like – without anyone ever knowing how much they actually made, and it can alter its PPC Ads to be easier or harder to click on, as it wants - all which end up controlling how much money it makes and how much money it reports.

Google is the ultimate “rigged” system - as much as I love wearing Google T-Shirts and Swag – as great as their products are – their 3Q08 results each quarter are as “unnatural” as George W. Bush‘s winning the Presidential Elections of 2000 and 2004 - especially 2004 (Neocons are trying to do it again in 2008, but having a much harder time of it).

In fact, Google can almost, almost make as much money as it wants to make…. as long as people use Google to publish PPC Ads of any variety, and people click on them ….. Google will be profitable. How profitable?

As profitable as their CFO decides they need to be in any quarter. That’s Google’s Secret – they are their own Internet Economy. Microsoft and Yahoo simply can’t compete, they don’t have enough of a market share in Search to drive any real policies.

So the question may come up ….. should Google be regulated? And the answer is ….. Yes. Their quarterly results are …. well … whatever they want them to be …, and that’s unnatural.

But think of it this way – while Google is not a monopoly in name, it might as well be …. because they can set prices with no regulation – no one sees what Google really makes vs what they pay out.

But … I bet, with some sluthwork, large publishers could determine sublte changes in payouts earch month – I’m sure Google doesn’t make it easy but it seems like there’s enough data in publisher’s hands where they could notice the average payout per click in a specific position might vary slighly – and all Google needs is to make very subtle alterations to what they pay publishers OR how they position their ads, and presto … all the money the need.

The CFO of Google might as well have a dart board in his office and just sit there with and throw darts on the numbers they want to make and then just manipulate the dials of Google to pay out whatever they want.

Yep, Google must regulated at some point soon - they’re too powerful, too dangerous to be allowed to continue to operate this way, much longer – because they’re acting much as Government would, as a Federal Reserve would – except, they’re not accountable to anyone but their stakeholders – and that’s not right, especially as they’re a de-facto monopoly in search, both Paid and Organic, and that’s not right.

However, to be fair, SeekingAlpha has a more probing look at Google’s 3Q Results and sees signs of weakness – results that Google is probably trying to spin it’s own way – Google: 3Q Results Reveal Chinks in the Armor

“….On the surface, Google (GOOG) appeared to soundly beat analyst expectations of $4.76, by reporting diluted earnings per share of $4.92, on a top line of $ 4.04 billion (see conference call transcript). GOOG’s revenues were $20 million short of analyst expectations of $4.06 billion. This was the first time in GOOG’s trading history that they actually missed revenue estimates, and their sales gain amounted to a mere 4% sequential rise against second quarter results. The company’s growth rate is indeed in a declining phase, as the law of larger numbers, a dismal economy and a stronger US dollar are factors beginning to take their toll.

But not that much of a toll – in fact, I bet Google could have easily “erased” that $20 million decline by just “turning the dial” up a little.

Yes, it’s a rigged system – the problem is there’s no real competition to Google – nothing to keep them in line – they can, essentially, do whatever they want, and their profit will be, well … whatever they want or need it to be.

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9 thoughts on “The Google Economy”

  1. I mostly agree with you. Don’t get me wrong, I love it when Google sends me traffic and pays me nice Adsense checks, but every so often Google turns off the juice, if the dial is down on me: game over.

    Now I think they have systems in place to “regularize” various things for publishers day-to-day: payments, traffic, etc. Of course I can only speculate, but let’s say they earn $10 CPM on my pages for September, and then October they get more advertisers in there and it climbs to $20 CPM, they can pay me $3 CPM both months and I won’t know the difference. I’m willing to play along because hey, they are sending me traffic, right?

    Let’s say I find a network that pays $5 CPM, will I switch? No, because if my Google traffic dries up I’ll wonder if it’s because they did a ROI/SERP calculation on me, you know? So I’m held hostage but it’s a comfy captivity ;-) Also, I prefer that Adsense negotiate a higher CPM for me over an affiliate program that is more likely to rip me off. And Adsense rotates and targets the ads a number of ways, selling direct you’re just spinning your wheels. They have so much data at their disposal, even if I had 1000s of advertisers coming to me directly, bidding through my own scripts, it would take me a long time to optimize the rotations, arrangements, to get the highest CTR, CPM, whatever. However, if an interesting, relevant advertiser approached me wanting to buy an ad, I wouldn’t immediately say no, a little variety is good. However, I wouldn’t draw too much traffic off my Adsense ads ;-)

    No doubt, Google can make or break you. I don’t care if you have 10,000 friends on Twitter, Facebook, whatever, that doesn’t help much if you’re not well positioned in Google. Should they be regulated? No. Nobody is forcing all these people to use Google.

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