Google's "Do No Evil" Earnings?


Yesterday, Google released an awesome set of earnings for Q3 2005 (typically a seasonally weak quarter for advertising). For Q3 2005 we are talking about 96% higher revenues vs. Q3 2004 and 14% higher revenues vs. Q2 2005. All in all an awesome job by the Google team.

I was curious about how Google managed to do all of this, and as a result I set forth to dig into the earnings to figure out where all this growth is coming from. In my research I started listening to part of the Google earnings call yesterday, where Eric Schmidt, CEO of Google, attributed much of the earnings blowout due to "Product Improvements".

Hold on here... What does "Product Improvements" really mean?

I would have to guess a lot of it has to do with the release, this past quarter, of their new Google AdWords quality and relevancy ranking algorithms. This new algorithm monitors the quality of your keyword/advertising copy combinations and if it doesn't meet a certain "quality ranking" Google will disable your advertisement unless you either pay more or inprove your ad. In short, the new algorithm has made, for advertisers, the Google AdWords blackbox a lot less transparent.

Day to day, I speak with a lot of Google AdWords advertisers in my line of work and there is a lot of confusion by advertisers about the new "quality ranking" algorithms. The confusion is so pervasive that most advertiser find a quick fix for an advertisement disabled by the "quality ranking" algorithm is to raise their bid amount. Raising the bid amount means a higher cost per click for Google which means higher margins for the company! Essentially the result is the new Google AdWords is tuned to maximize their revenues since most people don't bother or have the tools to do proper testing of their online advertising copy.

Wow... Has Google built a fabulous mechanism that they can adjust at any time to blow out future earnings expectations? It really brings into question about the premise of "Do No Evil"...


No it does not

A company in business to make money wants to make more money and thats evil? Have you compared ad costs between a New York Times ad run and google's CPM when you really load up adwords?

Can you be more direct and not just make insuations tell us why its evil to make money . Also let us in on why you think these advertisers couldn't go to yahoo and drop their accounts with the evil google?

The issue is really the lack of transparency

It is not evil to make money. I'm a red blooded capitalist as they come. But the issue is really Google's lack of transparency on how their algorithm works. The "evil" part is not informing the participants properly of how they are setting prices in pretty much an open exchange. Is price setting an arbitrary thing that can be manipulated due to earning expectations? The bottom line is, We don't know... nor Google wants us to know.

Another possible reason

It looks like the percentage of revenue that Google shares with its partners has been going down as well. Here's a table outlining what I "think" found out:

I say "think" because I may have misinterpreted the meanings of some of the numbers.

No lack of transparency

Measuring conversions is ridiculously easy, and in fact Google provides more data points (5, I think) than ANY competitor in this space. WHAT keywords deliver HOW MANY people to WHICH pages on my clients' sites... super-easy to figure out!

For some of my clients in the past, the AdWords cost-per-sale -- despite my smart tweaking -- has vastly exceeded that of YSM's cost-per-sale. One time I had the AdWords team do a maximization, and things got better. Another time, it didn't help. Solutions? EASY! When the cost-per-sale minus revenue-per-sale has gotten too out-of-whack, I've either dropped AdWords with that client in favor of YSM, or had others work with that client to improve their natural search results.

This whole talk of lack of transparency is bullocks, IMHO. AdSense advertisers, too, know EXACTLY how much they're getting. If [$x] on average per month sucks, then it's a 2 minute dealie to quit AdSense and sign up with Y! or AdBrite or Chikita, etc., and I have no doubt there'll be even more competition down the line. There are no commitments, no contracts... as soon as a Goog solution no longer is optimal, *poof* the wise publisher or advertiser says sayonara. And doesn't whine about how AdWords is complicated or AdSense doesn't disclose revshare, blah blah blah...

I don't think AdWords is right for every client, for every campaign. I've presided over enough failed AdWords campaigns myself, frankly, to know this firsthand ;). But complaining that poor helpless advertisers are being mislead or forced to increase their bids, hypnotized by the evil Goog... that's just pathetic.

Degrees of transparency

There are degrees of transparency. Transparency in bidding - and transparency in who made the clicks you paid for. i.e. identifying the 'prospect' you bought.

Why don't Google provide a list of IP addresses that generated the clicks you paid for last month?

At the most basic level, I still think that there should be a list of IPs provided to each advertiser - now that's transparency. How much easier would that make click fraud detection/ double billing arguements/ competitor clicks etc?

Interesting development

I'm not an AdSense customer, but it's been mentioned on SearchBlog that Google recently "rolled out an machine learning/AI system to select ads to display based on keywords". This goes on to say that the system lead to a big increase in revs, and that the development team were rewarded handsomely for their efforts.

Is this the same as the "quality ranking" algorithm? I'm guessing yes.

How did the system boost revenues by 20%? Swong's argument sounds reasonable. I'm sure economists would have a field day with this development.

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