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"...