Google Bear Case: Readers Weigh In

Lots of thoughtful reactions to the Google bear case, both pro and con:

Patrick, a significant Google advertiser, reports that, despite recent increases in cost-per-conversion, Google is still the "most cost effective form of advertising out there."  If this is true for most Google advertisers, the  company is in great shape.  Patrick also explains that, although cost-per-conversion has increased 2x-3x, Google's lowering of the minimum bid from 5 cents to 1 cent has reduced his spending by more than two-thirds.  Instead of spending $150 a day, Patrick now spends $50 a day--for more conversions.

Patrick K. Rutherford pointed out (in a note) that the click fraud issue should be irrelevant, because increases in fraud would mean increases in clicks, and even if the price-per-click dropped, this would mean more revenue to Google.  This is a good point.  The reason I still worry about it is that, at least in the case of email back in 2000, advertisers were only willing to tolerate a certain amount of uncertainty and fraud before they just threw in the towel and steered their dollars elsewhere.  The concern about click fraud, therefore, is as much about advertiser attitudes as click/price math.

Several readers suggested that click fraud was easily detectable (on both the advertiser and search engine side) and is therefore under control.  This may be so.  My concern is that, if click fraud keeps growing, so much money and effort will have to go into the detection and refund process that the spending will reduce ROIs.  If click fraud really is "easily detectible" and both sides can agree on what the appropriate refund (or discount) is, fine.  But much anecdotal evidence--including another insight from Patrick above, who says that getting refunds is easier said than done--suggests that this isn't the case.

A professional investor pointed out (again in a note) that Google's reported cash flow from operations will soon be much less than it is now, when cash flow benefits from stock options are reclassified within the cash flow statement per new accounting regulations.  This is another good point--one I'll devote an upcoming post to).

Some readers likened odds of a revenue slowdown plus click-fraud scenario to that of a giant asteroid or comet hitting the earth.  Note to such optimists: Please stay tuned for upcoming sale of Brooklyn Bridge.

One reader complained that, because I didn't use AdSense, I had no business analyzing the company.  I'm not sure I agree, but now I use it.  Sign-up easy, and only took an hour to install--even for this HTML moron.  I don't understand why I'm not getting paid something just for showing massive billboards on the site--Geico is clearly getting some branding value from them, even with no clicks--but Google only credits me when the ads are clicked.  Still, I'd rather have the display ads than the link ads, which make the site look like a newspaper classified section.

A couple of readers ranted about how Street analysts are falling prey to Google revenue recognition scam (recognizing revenue from partner sites and then paying out almost all of it as expenses) and are just blowing hot air because they're afraid of offending the company or their bankers.  I don't think there's anything wrong withGoogle's revenue recognition, and I haven't seen any analyst except Mark "Google $2000" Stahlman value the stock with a revenue multiple.  On the hot air question, I can say from experience that the biggest fear for most analysts is not bankers or companies but looking like idiots.  Every analyst who has been negative on Google since the IPO (and there have been several) has missed the biggest stock in the sector in the last five years.  For the analysts, this is beyond embarrassing.  It's downright painful.  Your salesforce loses faith in you, your clients lose faith in you, and you wake up every day feeling like an imbecile.  Eventually, when you just can't take it anymore, you climb on the bandwagon.  And when everyone finally does that (we're getting there), there's no one left to get positive, and we're primed for a fall.  By the way, this isn't just truie for analysts: The same psychology drives the actions of many investors, as well. 

Several folks noted that one organization has been negative on Google for a while: www.fuckedgoogle.com.  The site is worth checking out (the main message is that pride/arrogance are reliable leading indicators of a fall).  For what it's worth, I don't think Google is "fucked" (or, for that matter, a "scam").  Even if the company gets overwhelmed by click fraud or some other calamity and the stock tanks, it should thrive in the long run.  Yahoo!'s stock went from $110 to $4--and look at the company now.

Comments

[francks]

Another reason why click fraud might not be as bad as some people fear is that even though it cannot be suppressed it can be measured and contained. It is in Google's interest to prevent advertisers to leave therefore as soon as the medium becomes less attractive than the competition they will surely move to tackle the problem.

They already do to some extent but with little conviction because the problem is not business threatening right now. A good example of the step they took to segregate click fraud is to allow advertisers to target only the search engine (where obviously there will not be any fraud) or just the sites they want to.

Going further Google could segregate sites with a fraud rank for example and allow advertisers to bid separately on each class of sites. Obviously the market for keywords would be much lower for those sites that rank low in fraud rank. Another side benefit would be to move the onus of fraud fight back to the site owners...

[Steve D]

What do you think of Google buying Ebay? Yahoo, at the height of Internet boom, wanted to buy Ebay, but backed out and terribly regretted afterwards. Google need to diversify its revenue base and there are other factors in favor of such a combination. I cannot post my every thought here, but if interested, refer to:
http://dzemid.blogspot.com/2005_10_01_dzemid_archive.html

[joe blow]

Why do you think there will be no click fraud on search results?

If I know my competitor runs a law firm for mesothelioma, I'll just fire up my automated script to do a search for mesolthelioma, knowing his ads will appear and then the script will click them.

this will deplete his ad budget quickly.

[Xoip]

"Half the money I spend on advertising is wasted; the trouble is I don't know which half."
John Wanamaker

At least with Google, you can have a better idea of the effectiveness of your budget.

[Josh]

Click fraud - Why does Google's business model track clicks and not sales? I understand that text based advertising creates some brand recognization but for most e-commerce (Amazon) its about sales.

Growth - Are the companies that are purchasing text based advertising growing? In my experience I have never purchased a single product from a text-based ad. I research a product (possibly using Google), get the product id # and then enter it in pricegrabber (Froogle is not a good offering).

Yahoo - For the first time this week I used Yahoo's search engine because I wasn't getting good results with Google.