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Google money machine defies common sense

Advertisers shrink, ads expand

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As the economy continues to shrink, Google continues to crank the dial on its top-secret money machine.

According to the latest stats from AdGooroo - a search marketing consultant that tracks search ads from a network of servers across the globe - Google expanded its ad coverage (yet again) during the first three months of the year, despite a decrease in the overall number of advertisers using its AdWords platform.

"An increase in the number of ads coinciding with a decrease in the number of advertisers suggests an artificial change in ad coverage, perhaps in response to sluggish activity, quite different from than the organic growth which fueled revenues in previous quarters," reads a preliminary draft of AdGooRoo's quarterly report, due for release on Monday.

Google's official line is that by expanding coverage, it's somehow improving the "quality" of the text ads that turn up when you type certain keywords into its search engine. But the Mountain View Chocolate Factory said the same thing last year when it was actively shrinking coverage.

During the first quarter - a traditionally slow quarter for online advertising - the average number of ads per Google keyword reached a high of 5.25 in February, up from 4.39 in the shopping-happy month of December. Meanwhile, the number of first-results-page advertisers dropped 1.3 per cent during the quarter.

Typically, AdGooRoo says, an increase in ad coverage results in more revenue: More ads means more clicks, and more clicks means more dollars. But considering the decrease in the number of advertisers, the outfit questions whether this will still hold true.

Potentially, there could be cases where expanded ad coverage does not grow revenue. If Google posts more ads with lower per-click prices, for instance, this could shrink the bottom line by reducing the numbers of clicks on ads with higher prices. But in the end, Google controls AdWords prices - though it says otherwise. Advertisers do set the maximum price they wish to pay, but Google's top-secret algorithms, in tandem with what others are advertisers are bidding, determine how much it actually charges for a particular ad. Thanks to Google's "quality score," ads at the bottom of the page may have higher prices than those at the top.

Google's ad coverage is limited by the keywords advertisers are bidding and their daily ad budgets. But because Google controls such a large swath of the search market - more than 60 per cent in the US, according to comScore - advertisers are generally willing to pay for as much traffic as they can get.

"Our experience is advertisers are willing to take all the clicks we can give them at the current CPC [cost per click] - even in tough times," Google senior vice president Jonathan "Perfect Ad" Rosenberg said during the company's fall earnings call. "We think that will continue to be true because nobody wants to turn away a customer."

AdGooroo founder Rich Stokes argues that click-for-click, Yahoo! and Microsoft are generating better leads than Google. But advertisers are still more likely to opt for Mountain View.

"There's some pretty good ROI to be found on Yahoo!, much better than Google. But the volume is so much higher on Google," he tells us. "It takes just as much effort to manage a Yahoo! or Microsoft campaign as a Google campaign, so advertisers - many of whom are shorthanded - are going to choose Google."

Anytime Google wants to expand coverage, it can do so. Certainly, the company is concerned with so-called ad quality. But when it wants the extra cash, it can always hedge that commitment in the short term.

The question is whether this latest coverage-leap will boost the bottom line.

Earlier this year, CEO Eric Schmidt admitted that even Google is "not immune" to recession. "The situation is pretty dire," he said last month at a San Francisco analysts' conference, referring to the global economy. "During this time, what's happening is that people are using the internet more. But it obviously will affect the online-advertising markets as well - simply because our systems are so tightly tuned that if customers are buying less it will eventually be reflected in [cost per advertising click]...

"We are not immune - 'we' Google and 'we' the online-advertising industry. But we may be better positioned than other advertisers."

Pay no attention to the "finely tuned" bit. AdWords isn't anywhere near as finely tuned as Google would lead you to believe. And in all likelihood, you can ignore the "not immune" bit too. Schmidt likes to downplay the power of the money machine.

Google announces its first-quarter earnings next week. ®

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