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Thursday, January 19, 2006

Google, I Know What You Did Last Fall

Some wonder if Google's quarterly results (coming Jan. 31) will disappoint -- if Yahoo's recent slightly-below-expectations numbers are a bellwether for the sector. Probably not, think most analysts, including, it seems, top Yahoo brass.

Seems it's come to the attention of top Yahoo execs that Google's ad platform kicks Overture's tail. No, not just a little bit. I mean this Overture thing is really holding Yahoo back. Terry Semel's being polite about it in public, but I imagine he's becoming more and more impatient the longer it takes that unit to overhaul the Overture (Y!SM) beast.

Back to Google. As my subscribers read in December's special update, Google's new quality scoring formula will have had a measurable impact on Google's financials, since it clearly affected a wide range of advertiser accounts. We won't know until we know, but my strong suspicion is that Google intends (or expects) to wow Wall Street with a higher average cost per click. They've knocked out the lower-priced clicks, taking on lowball bids from a number of angles (albeit indirectly, through a new ad ranking system that is intended to solve numerous problems at once). What this will appear to do, I think, is raise the average CPC, and thus Google's reported profit margins.

Yet it leaves quite a bit of inventory unmonetized, leaving further room for growth, and keeping users happy. Wall Street seems to like companies that have the power to "raise prices." In fact, I remember the delight exhibited by the CNBC dude when Ted Meisel of Overture came on boasting about their ability to raise minimum CPC's from .05 to .10 (those were the days -- when that actually seemed to matter). "So you've got pricing power." The market marveled and Overture kept rolling.

Imagine if Google, at $400+ per share, gets the same red carpet treatment.

This is also a temporary way of dampening revenue growth (so it doesn't look ridiculous and set unrealistic expectations). So much for GOOG not being concerned about "earnings management."

Advertisers are hoping this is just a bout of temporary insanity so Google can snap up a few companies with their $600+ stock. Because a lot of them (not just evil ones) get a real kick out of being able to bid on that lower-cost inventory. Without it, the Long Tail is one of those nice little Web 2.0 fairy stories that doesn't actually apply to your situation.

Anyway, when Google's earnings report is on track again, don't be too surprised. They're raking it in, and for the sake of optics -- for now, at least -- they'll have put together a quarter that shows a higher average CPC across the board, making it look like a stagnant average CPC trend has reversed itself. Only time will tell if CPC's are actually rising.

Posted by Andrew Goodman




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