There were three proverbial "elephants in the room" that the media and analysts largely missed in discussing Google's stock slide and recent concern over a slow-down in paid clicks.
Elephant #1 -- Click Fraud:
I was stunned that no one connected-the-dots with the slow down in paid clicks with Google and Yahoo's "dirty little secret" of addressing raging click fraud.
- Click Forensics, the industry leader in tracking click fraud, stated:
- "The average click fraud rate of PPC [pay per click]advertisements appearing on search engine content networks, including Google AdSense and the Yahoo Publisher Network, was 28.3 percent in Q4 2007. That’s up from the 19.2 percent average click fraud rate for the same quarter in 2006 and 28.1 percent for Q3 2007."
- Apparently Google's euphemism for click fraud is "accidental clicks."
- Why didn't anybody investigate if Google and Yahoo's abrupt change in paid click growth did not have anything to do with new anti-click fraud measures?
- It appears as if everyone jumped to the same conclusion that the economic slowdown was to blame for slowing clicks, when that explanation is probably the least likely cause given the tidal advertising shift from offline to online.
- Most of us who study how numbers and growth rates "behave" strongly suspect that the abrupt change in this paid click metric was a result of changes the company has made -- NOT coincidnetal external factors.
- If the companies took action to substantively root out or stop click fraud in any way, wouldn't it be logical for some of the 28% of all clicks that are reported fraudulent to no longer be in the system or be counted by Comscore and others?
- The most logical explanation for these Google numbers is that they are finally and quietly addressing their click fraud problem.
- If that is the case, as I strongly suspect, the slowdown in the number of paid clicks will likely not result in a consequent reduction in revenues from paid clicks because Google reportedly has worked out rebates for advertisers that adjust for fraudulent clicks.
- If I am right, the market has over-reacted and for the wrong reason.
Elephant #2 -- Imminent closing of DoubleClick acqusition.
The market seems to have totally forgotten that the extremely important acquisition of DoubleClick is about to gain approval by the EU and close and the market is also is ignoring the substantial forward looking boost it will provide Google in 2Q08 and beyond.
- Approval of a "close call" merger like this is extremely investor friendly. Google is quietly giggling that they have an extremely powerful competitive weapon in DoubleClick that the market does not yet appreciate because it is distacted by the Microsoft-Yahoo soap opera.
- DoubleClick provides Google with the tools to reinvigorate its growth:
- DoubleClick expands Google's client reach to most all of the top 1500 global advertisers and web publishers that Google does not serve, providing an additional catayst and accelerator for taking market share and increasing pricing power as it will have vastly more advertiser and publisher reach than even a combined Yahoo-Microsoft potentially in the future.
- Google will also be able to put DoubleClick's market leading ad-display serving technology model through Google's vastly superior targetting and monetization engine further enhancing gross profitability.
- While only one of the five FTC commissioners ultimately determined that my www.googleopoly.net analysis was legally sufficient to block the deal, my competitive analysis of the merger remains sound and is the core reason I believe that the market is totally missing how positive the closing of DoubleClick is for Google's future.
Elephant #3 -- Who is Google being run for?
Momentum investors, which dominate Google's investor base, are understandably upset and negative that Google broke its own earnings momentum by spending even faster than Google's awe-inspring 51% revenue growth rate of last quarter.
This rude awakening, where Google has fallen ~33% from its November 2008 high, has investors looking at Google more objectively now.
- Any objective analysis of the company shows that the company does not have a revenue growth problem it has an out-of-control spending problem, where investors never share in the awesome 90% gross profit margins in Google's core business because it is chronically spent as fast or faster than the revenue comes in.
- Bottomline on this point is that investors are legitimately questioning whether Google is a traditional company being run for the benefit of shareholders or is it really just a "sandbox" where Google's founders can play out their apparently limitless ambitions to organize all the world's information?
