July 1, 2007

The Threat to Google . . .

By James Altucher
RealMoney.com Contributor
6/29/2007 7:52 AM EDT
URL: http://www.thestreet.com/newsanalysis/technet/10365544.html

To be honest, I'm scared and I think you should be also. It all started with something we're all accustomed to and dabble in from time to time: revenge.

eBay (EBAY) was upset about something Google (GOOG) did -- the details are not important, but it's related to the heightening competition between Google Checkout and PayPal.

Basically, Google was throwing a party in Boston for users of Google Checkout while eBay was having a conference, eBay Live, for its users. It's like two squabbling teenagers. Consequently, eBay, which is Google's largest customer, decided to have some fun. The online auction company pulled all of its ads for a week from Google.

What were those ads, and why is this important?

Well, if you search right now for "Beanie Baby," you'll see an ad on the right that takes you to eBay. eBay served up 188 million ads for Google in 2006. That was almost double the No. 2 advertiser Target (TGT) .

eBay then claimed that its traffic actually went up on the week that it had no ads. In other words, eBay implied that the ads were meaningless to their business. eBay then stated it would reinstate "limited" ads on Google. A spokesperson for eBay told USA Today, "I will tell you it will be in a much more limited way than it was before."

So what does this mean? Something like 99% of Google's revenue and earnings come from search. Google dominates search advertising, with somewhere between 56% and 65% (depending on which data service you believe) of all searches done using Google's search engine. All of Google's other fine products -- Gmail, Google Maps, Google Finance, even YouTube -- are like a drop in the bucket compared with search.

Try searching your name in Ask.com and Google.com. Which results are better?
Answer Here

I believe there are three other factors that could be affecting Google's core business and analyst estimates.

1. Keyword inflation is coming to an end. Across the board, the prices of keywords have been steadily rising since Google's inception. I think as more companies start putting money toward natural search marketing (figuring out how to get higher on search engines rather than paying for ranking), the keyword prices will go down.

According to Scott Buresh of seach-marketing company Medium Blue:
Search users are up to six times more likely to click on the first few organic results than they are to choose any of the paid results, while an eye-tracking study showed that 50 percent of users begin their search by scanning the top organic results. Other studies have shown that only 30 percent of search engine users click on paid listings, leaving an overwhelming 70 percent who are clicking the organic listings. And a 2003 study found that 85 percent of searchers report clicking on paid links in less than 40 percent of all of their searches, and 78 percent of all respondents claim that they found the information they we searching for through sponsored links just 40 percent of the time.

Cohen goes on to say: "Between October 2004 and December 2005, average keyword prices rose from around $25 to just under $55. And the cost of keywords can increase by as much as 100 percent during the holiday season. These costs aren't going unnoticed either; one study of problems experienced by U.S. companies found that 57 percent of respondents felt that their desired keywords were 'too expensive,' while 51 percent expressed concern that they are overpaying for certain keywords."

2. Anecdotally, a lot of keyword advertising was being done by mortgage brokers. It remains to be seen how the housing bust has affected this end of the business.

3. There's a huge arbitrage game that has been played for years with keyword pricing, and it's done right now by hundreds of thousands of domains. Maybe millions of domains. Basically, you get a domain, you slap a bunch of links on the domain where all the links are related to a very expensive keyword category (for instance, mortgage brokers) and you buy cheaper keywords to drive the traffic to your domain. This is called "parking" a domain. Marchex (MCHX) , a public company, is the master of this.

Like any arbitrage, this is going to run out as the spread between the expensive keyword prices and the cheaper ones goes away.

I do think that the so-called holistic approach to online advertising is the direction to follow in the next five years. Search defined the last five, but now with Google buying DoubleClick, Yahoo! (YHOO) buying Right Media (and this past weekend consolidating its banner and search-ad sales forces), Microsoft (MSFT) buying aQuantive (AQNT) , and AOL having successfully integrated Advertising.com, we're going to see a lot more interaction between the banner side of things and the search side.

Additionally, we haven't even begun to see tighter integration of high cpm premium online content and online advertising (a simple example being a sweepstakes in which you have content, you get names and numbers, etc.) that I expect we'll begin to see.

Will GOOG go to $0? Certainly not; it has a continually growing business and the smartest people in the world working for it, and Google's other products, while not generating a lot in revenue, are generating a lot of mind-share and are being taken seriously by the competition (hence the lawsuit with Viacom (VIA) on YouTube).

Despite all the attempts by InterActiveCorp (IACI) (with Ask.com's recent "Ask3D" initiatives), Yahoo! and Microsoft to get share in search, Google keeps dominating this area, without any real moat other than brand value. (Arguably, Ask's results are better right now, thanks to the integration of Teoma.)

But is 100% of Google's revenue in question? Do people really need to pay so much for search ads? About nine out of 10 Web sites I visit can easily improve their natural search results with very simple techniques.

Many of these same companies are ignoring this and just spending money on keywords. This is like using diet pills instead of exercising. First see what you can do naturally -- then take the medicine.

This is why I belive that over the next 12 months, Yahoo! is the better bet than Google.

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