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March 08, 2006



Henry, From Google's point of view this is a major victory. 90 million out of 11 billion in revenue over the last 4 years (~0.9%) would constitue as immaterial for Google. This also is in keeping with the company's claim that click fraud is less than 1% of total revenue. Also since this is a class action lawsuit, it's a very big win for Google since it would cover all advertisers within the US.


One more thing I forgot was that the compensation after excluding legal charges is in terms of Adwords credit. So I think the revenue impact would be minimal.

Neal Lachman

Anon, The settlement is substantial (material) when it reaches $90M today. It has ot much to do with reality, because who is going to judge what? Henry is right when he asks these questions (one by one very valid issues). He also wonders -and so do I- how this news can be announced just 6 days after the CEO mentioning (or discarding) it as non-material.

I wished I could call $90M non-material.

Henry also observed the tone-of-speech (writing in this case)... "finance folks"... these people at Google have lost complete touch with thise who have made the founders multiple-billionaires: their investors. The finance folks remarks shows that Google is trying to spin or damage control and their prime focus now is to keep the finance folks off their bodies. The small investors do not matter, until they swarm together and sting Google's butt like a class-action bee typically does. I don't like class-actions but Google seems to be inviting trouble.


Neal, Do note that Google doesn't necessarily have to pay all of the 90 million. It depends on how many people are able to come forward and show that they deserve to be paid for the 4 year period. The term 'non-material' is relativistic: comparing to 11 billion, a max of 90 million is not much especially if it can take away the spectre of click fraud.


John Battelle, who's fairly clueful on these things says --

On the one hand, this validates Google's claim that clickfraud is not that big a deal.... My first take: This settlement is a major victory for Google. Was it good for advertisers? Not sure. But I think the folks at Google are pleased as punch with the deal.

Neal Lachman

It does NOT take away the spectre of click fraud I suppose. The $90M will be taken as a charge NOW, regardless whatever term it refers to/covers. Thus, investors will see a loss of at least that amount, most likely Q1-06. That is very substantial.

While you mention that they do not necessarily have to pay all of the 90M, there may also be another side to that story too, which is that Google will be forced someway or the other to pay even more, like Henry said... what about future click frauds? Should we believe Ms. Associate General Councel that the geeks have taken care of that?

I am glad I don't own GOOG shares, but I know very close people who own lots of it. They are going to burn.

BTW, although I didn't follow this story and thus don't know how it is unfolding, it seems very interesting: Gmail Horror Story -

Neal Lachman

Anon2, John Battelle is a nice guy, be it very partisan - pro-Google.

Still Inside

GOOG net income was $399 million last quarter. The $90 million sounds to me like 23% of the last quarter's earnings.

This number effects the part of GOOGs business that drives almost all of their earnings. There is also no promise that this is the end of the lawsuits.

I'm personally not that alarmed by click-fraud--it's part of the business. It should be baked into the company's earnings expectations.

However, the GOOG handling this event is almost criminal. If their stock takes another giant hit, it might be ACTUALLY criminal too.

You see, to compare this quarter's earnings hit to the total revenue ever made by the company is dishonest and misleading. A stock's price is based on its forward earnings. Total revenue is just some number. If XOM announced an unexpected $5B loss next quarter they certainly wouldn't say, "yes, but that's only .0001 of our total revenues since we were founded in 1898".

The only defense GOOG might have here is that only a complete idiot would actually buy this argument. Maybe in the future they will try to argue to a judge and jury that this was just a joke.


Neal Lachman

SI, I thought it was a joke!


Neal, Regarding the "Gmail Horror Story", Phillip thinks it might be false. Read his blog at :

'A Gmail horror story: imagine your complete Gmail account is getting deleted, and you lose all your mails. That’s just what happened to Bob.

Update: A source I’ll keep anonymous here told me Bob’s report sounds very suspicious and may not be true. If I have further information that helps to verify or falsify this, I’ll post an update.'

Neal Lachman

Anon, I don't really have the time to read the whole forum there but let's keep to the click fraud topic... I am sorry for digressing.

Back to the $90M and Battelle. He says it seems like a victory for Google. That's shortsighted or at the least wishful thinking. He thinks Google is glad is pleased, but I think it will come home to roost.


I would not comment upon this - except to note a few points in Google's blog entry that strike me as somewhat incongruent:

"Until the settlement is approved by the judge, it is not final" and "We’re very near a resolution in that case" - so which is it? Resolved - or do you only wish it were so?

"...the details are confidential, but will become public when it is formally filed for the judge’s consideration" - ok, then shut the fuck-up until you have it finalized.

"we believe we manage the problem of invalid clicks very well" - ok, based on what metrics?


Professional management is needed now. I have been a great fan of Google,
however, the gaffes, mistakes, untruths and scorning their own investors
must stop for me to ever buy another share of goog.
In America we have a tradition, a way of doing business. The troika now in power
will learn the hard way I am afraid, that no one can tinker with honest and
open communication with investors and analysts, It is the way we do
things in America.
Cut out the high and mighty nonsense in the mission statement----
do no evil---and be responsible businessmen and citizens.

Yoav Shapira

Finances aside, I'm curious why you think acknowledging the issue on their blog is a problem?


I have no involvement with this matter nor am I admitted or have any knowledge about the workings of class actions in Arkansas. But as a general matter, with respect to the blog's observations about the "finality" etc. of the deal, typically after the parties reach an agreement they present it to the judge for "preliminary approval" and permission to send a notice to class members advising them of the terms of the settlement and their rights with respect to objecting to it. Plus it will indicate a date for a "fairness hearing." This step is generally a formality.

At the fairness hearing, the judge will decide whether the settlement is fair and reasonable, under the circumstances, to the members of the class and will also consider the attorney's fee application. In both of these, the judge will consider any objections filed, and give objectors the opportunity to be heard. This is not necessarily a formality.

It is a process that can take some time, and objectors have the right to appeal the judge's decision.

Neal Lachman

It is funny that the arrogance of Google is hitting their self-built wall. I guess their slogan "Don't be evil" was a sneer to MS, but MS could maybe sneer back with "Don't be Stupid".

Henry Blodget

Why is addressing the issue on the blog a problem? First because blogs, however important and mainstream they are becoming, are still informal. Google obviously believes that this issue is so irrelevant that it can be treated informally, but its investors and advertisers don't. And by using an informal communications tool, they are saying that their take on this issue (irrelevant) is more important than the reader's take on it (concern). In short, it's like wearing a t-shirt to a job interview. One in twenty interviewers might find that quirky and cool. Nineteen out of twenty would conclude "He doesn't even care enough about what I think to put on a real shirt."

It might have been different if Eric Schmidt had written the blog post, or if the company had issued a press release saying, "We've just addressed this important matter in our corporate blog." As it was, when I went to the "company news" section of the site last night, the post didn't even appear (it does now, which is a step in the right direction). This casual treatment does not say to me, "Google cares about this important issue, and, just as important, Google cares that I know that they care." If the settlement of the first big click fraud lawsuit doesn't merit the formality of a press release, what does?

Neal Lachman

I wished I could let my investors know everything important by a simple blogpost. It would be up to them to visit my blog and be informed!


just to keep focused on the q " Does this include advertisers who ever thought about filing a claim--"

Yes, it does. $90M is all encompassing and will fall into Revenue expenditure for Q2/06 baseline. Will this imapct EPS, no.

Henry, secondly-- I dont see any reasons, why legal counsel should not Blog the offical response vs MSM. Not sure where your Beef is with blog vs MSM press release.

Neal Lachman

There is a major difference between a blog and a press release. The latter reaches all media, while a blog post's reach is limited to those who frequent or happen to land on it.

Also, can somebody here (or Henry) please explain to me why Yahoo P/E is 24 and Google around 70? Is it because everybody thinks Yahoo is done and over with?

The Analyst

Henry of all people should know that we've seen this movie before and we know how it ends. The earlier version was called Yahoo! The Early Years.

Management is simply inexperienced. The company is controlled by a couple of CS grad students who appear to be quite smart, but are inexperienced in business. The professional managment (Schmidt & Reyes) have no favorable track record of managing a business through transition. The second tier of management is full of people who got on for the ride up, but have already made $$$ and will bail for the next great thing, hike the Sierras, or make wine in Napa the minute times get tough.

When the initial business explosion slows down, these guys will not have a clue what to do and their subordinates will retire. The concentrated ownership structure will insulate management and the usual Silicon Valley board people from shareholder demands. The chef, the laundry service, and the masseur will stick around way too long. Eventually a grown up will the actual experience to run a large organization successfully throuhg thick and thin will be brought in.

These gaffes are a sure sign that when things start to go wrong, the inexperience will bite them.

Tim Case

I hate to say it while staring at my struggling bank account, but while $90 million dollars sounds to me like an astronomical amount of money, it really is "non material", to Google. $90 million is nothing, and this story will soon die, exactly what Google paid pennies for.


Imagine Google had acted this way during the 1st quarter or year they IPO'd! I highly doubt we would be inflating their share price into outer space. Investors need to take all actions into context when investing. Much like when on a job interview EVERYTHING you SAY, DO, Appear to BE, is evaluated. In the last month we have witnessed an earnings disappointment, two retracted/"non-issues" based communications and a very material settlement. CLICK fraud is apparently a very serious issue and threat to GOOGLE and the industry. The important ? now much so (goog please quantify) and what can be/or is being done to diminish it's impact/threat!?

Neal Lachman

Yes Tim, always look at the bright side of life. I think the judge will ask Google to hold a large sume in escrow or something like that for future payments. This $90M is not the end of it. It is bad to see Google going sliding down. I hope not many people joined the Google train recently and that they have kept the stock since long, and thus make a substantial profit (while they still can) in the selling times ahead.

This is maybe an inflation-correction of the Google stock, someone ever thought of that?


Neal, Your posting looks like something one sees on a finance message board with constant harping on the stock price in different posts and encouraging people to sell. It would seem like you have either shorted the stock or bought some put options.

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