In the history of the world, there has never been a business model quite like Google Adsense. I say this without exaggeration, and remain fully convinced that Google will not miss more than 1 earnings prediction in a row for at least the next decade. Here is why.

  1. Ultimate Price Control:
    One of the biggest assets of being a monopoly is the ability to set prices at will. A company that controls an industry lacks the competitive checks that prevent them from price gouging, however most monopolies end up setting their prices right below what a potential competitor would need to start up successfully. Google’s Power is Greater.

    • Price Ambiguity: As a publisher, you do not know how much each click is worth. You do not know what percentage of the bid that your commission represents. Because of this price ambiguity, it is impossible for webmasters to determine whether fluxuations in their earnings represent a shift in Google pricing policies, or simply poorer website performance.
    • Micro-Payments: Not only are payouts ambiguous, they are deceptively small. It is much like the famous “taking fractions of a penny” schemes from Superman and Office Space, except that it is really happening, legally, and on a much larger scale. A slight percentage increase in Google’s can bring in millions in profits.
    • Real-Time Control: AdSense also offers Google the unique ability to change payouts at will.
    • Price Discrimination: While I cannot say with any accuracy that Google tampers with pay-out rates dependent upon a publisher’s performance, we do know that it is possible to get direct advertisement feeds and exclusive ad deals.

    With these near perfect price controls in place, Google has unparalleled power to change their earnings without greatly impacting future sales.

  2. No Unions, No Problem:
    It has been proposed before that webmasters/publishers in the AdSense program could band together to demand a bigger slice of the pie, thereby limiting Google’s ability to price at-will. However, because individual Adsense users behave as subcontractors, and not employees, their collective action is quite restricted. So, unlike trade unions which have protections and collective bargaining rights, a trade association of publishers would be largely powerless.
  3. Not a Monopoly, But Damn Hard to Take Down:
    Because AdSense relies upon the AdWords program, which is any marketer’s direct gateway to the world’s largest search engine, you would be hard pressed to find a program worth participating in other than AdSense. While there are several alternatives to Google Adsense, the only viable competitor seems to be rival search engine Yahoo’s “Publisher Network”. Yahoo’s much smaller advertiser pool, however, makes it less likely that the Publisher Network can deliver truly relevant advertisements on all pages of your site. Google doesn’t use any monopolistic tactics to control this market, they just do.

So, here is the scenario. Like any growing business, you expect there to be ups and downs, especially in the tech industry. However, Google has the unique ability to use AdSense as a buffer for any and all potential losses. As long as Google does not leverage risk against the ability to use AdSense, they should always be able to tap that resource for a quarter or two in order to ensure that they meet earnings estimates.

Let’s say the GPhone flops - entirely flops. Millions of dollars of investment go to the wayside and Google is on the verge of missing earnings. Sergei picks up the phone and calls down to his financial guys to crunch out the numbers and they decide that it will take an additional 2.75% for the next 3 weeks to meet earnings. Sergei, feeling lucky, says “make it a cool 3″, and sure enough at the end of 3 weeks they have beat the earnings estimation once again. Not only that, but the press picks up that despite the GPhone flop, Google is rocking and rolling, so earnings and investment rise even more, and Google feels comfortable to drop back to maybe only a +.75% take from Adsense - just to be careful.

I’d put my money on Google any day.

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Google: The Perfect Stock

By iloans | November 20, 2007

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Topics: Loan News, Loan Resources |

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