Google: The Next Ponzi Scheme to Fail?

Here is a provocative take on an internet juggernaut: Google (GOOG) is nothing but a giant Ponzi scheme that is coming undone as I write.

This is not an accusation, but more a hypothesis. What gives this hypothesis legs is a recent discovery that Google is aggressively cracking down on so-called “violators” of the terms and conditions of its "Adsense" program. My own website recently fell victim to this. We have been gradually building our readership and hence our traffic through the combined effort of good, original content of the financial kind, and a parallel effort to monetize our traffic so we can continue offering this commentary at no cost to the reader.

As measured by various metrics tools for the internet, we were succeeding and were just beginning to gain some traction with readers. Our writings are picked up now by Seeking Alpha and our insights and observations are available to many. Our well-timed pieces on General Growth Properties (GGP) and more recently on the prospects for natural gas ETF, UNG, caused our views to spike. It was not through any illicit effort to create fictional traffic that our page views increased, but through hard and time consuming work combined with good luck and timing. Naturally, as our traffic increased, so did the balance in our Google Adsense account.

Then, without warning, two weeks ago our account was not suspended, but was permanently canceled by Google, apparently for all time. And our Adsense revenues were absconded by Google. Not just this website, but any other website we should ever develop is also barred from any relationship with the Adsense program. Again, there was no warning, no real chance to appeal (only a token automated email appeal form that returned a computer generated rejection). I was floored. How can a company who claims it wants to “do no harm” justify this?

We could not believe that we were somehow singled out from the millions of similar websites that have been created and that utilize Adsense to help pay for the effort in some small way. We had done nothing wrong that we knew that violated Google’s rules. The relationship between small website or blog developer and Google is supposed to be symbiotic. Small websites like ours put Google on the map.

Google attracts advertisers because it has such great reach and exposure through millions of small websites. It needs the billions of webpages to provide the internet real estate and associated “eyeballs” to sell to its advertisers. Google depends on small businesses and entrepreneurs more than any other internet or computer based software company. Microsoft (MSFT), SAP (SAP) and Oracle (ORCL) all rely on large business customers for the bulk of their revenues. But Google is almost entirely dependent on its ad-based business model that is dispensed through a myriad of startup websites. Our own site and all other similar small, entrepreneurial webpages on the “net” allow Google to exist.

So, how does Google figure to go forward by biting the hand that feeds it? This is a question that must be asked by any investor. My only answer is that Google is in big financial trouble that is not yet revealed by their published financial statements. This trouble comes from the same place that has exposed many other Ponzi schemes recently, most notably, Bernie Madoff’s. As the economy falters and advertising revenues dry up, Google is losing its primary source of income. It is no longer able to take money from one source, advertisers, and give it to another, ad posters, to keep the pyramid upright.

A good Ponzi requires a very convincing story which generates substantial public interest. The Ponzi sponsor then monetizes this public interest by collecting funds with a promise of great returns. The returns are generated by money brought in from other participants, not from any specific benefit created by the Ponzi artist. The Google Ponzi speculation is a little more subtle, which also makes it a little harder to uncover. Its scheme is supposedly made legitimate by a multi-paged, “fine print” contract that gives it the ability to shut down any website for just about any reason imaginable, or no reason at all except by the whim of Google. But is this contract really legal and enforceable?

As we started researching the crackdown on small businesses, we uncovered that there are thousands of others in the same situation. Many of our fellow small website developers have written about their own experience and loss of Adsense revenues. Many describe that it happened to them just as it happened to us: with no warning, no real chance of appeal, no one at Google to talk to, and unilateral confiscation of all their earned Adsense revenue.

One such participant, Aaron Greenspan's "Think Computer", was officed in the same county in California as Google, Santa Clara. Greenspan took Google to small claims court…and won! (and then lost on appeal to a bevy of Google lawyers). I am sure Google knows that most web owners are not in a position to sue and wanted to drive the fruitlessness of litigation home by the appeal. Once again, Google demonstrated its utter contempt of the small customers and business partners who have made it what it is.

As Google continues to cut off its advertising partners reducing the number of ad page views what will the advertisers think? Google’s viewership will be greatly reduced and so will their ad traffic. The advertisers will respond by cutting back even further on their advertising. Google revenue will subsequently fall as will its profits, which may turn to losses given the enormous overhead created by the recent reckless moves by the management of Google.

Google stock has a lofty price and multiple to earnings. It is valued as though it will continue to grow at 20% a year well into the future. But, if ad revenues and profits drop as we think they might, Google stock should be sold or shorted. Google's latest attempt to remake itself into a full-featured business software company will cost it a king's ransom. Taking on Microsoft, Oracle and SAP on their own turf could be the demise of Google. Hubris has its costs. Shorting Google stock is how we plan to recoup our losses of Google Adsense revenue.

Disclosure: No positions

Comments

[logicalthought:]

Something in this story appears to be missing, and that "something" is Google's side of it. Did they specify to you (or any of the other "thousands" of site operators to which you say they've done this) the policies you are accused of violating? How about copying-and-pasting the emails they sent you? Also, can you please provide some of the links to your research discovering the thousands of cases similar to yours? This is such a striking accusation that to make it without providing these things presents a bit of a credibility gap for you.

Jul 12 08:42 AM

[JaySanz:]

I'm guessing Google took you back? There IS a Google ad on your header.

Jul 12 08:44 AM

[fed_alchemy:]

Develope a program to delete ads or go in stealth mode upon startup. I would pay to go ad free, maybe that is what google sees in the near future.

Jul 12 08:49 AM

[archangelms:]

I find it amazing that google which trades at a lower PE than Amazon, Yahoo and many other internet companies would be mentioned in this article. It is growing faster than most of them and has more cash on the books combined. It has no debt and close to 80 percent of worldwide searches. I am amazed at why so many have such contempt for a company that has done so much. I guess jealously is the only answer. Or maybe they bought google to high. If google was to split it's stock the amount of times Ebay, Yahoo, Amazon has it would trade for 30-40 dollars. Thats Cheap!

Jul 12 08:55 AM

[Gnothead:]

This article and the reference to Aaron Greenspan's tangle in small claims court are also interesting matters for further consideration.
Thanks

Jul 12 10:55 AM

[JVan:]

Whatever your personal feelings about Google, as a market analyst you ought to know better than shorting a stock for the reasons mentioned in "Next Ponzi Scheme." People might be teed off at the price of oil moving all over the map (anyone who can't read the manipulative tea leaves is not paying attention), but to go short of oil based on being teed off would be stupid. Stocks moves up and they move down. There are far more reasons for those moves than how people feel about paying their gasoline bill!

Jul 12 11:50 AM

[Up Yours SP500:]

"Shorting Google stock is how we plan to recoup our losses of Google Adsense revenue."

Disclosure: No positions - way to stick it to them!

Jul 12 02:30 PM

[Wil:]

This article is pathetic.

Jul 12 05:56 PM

[bonae:]

"Rats gather in the bow of a sinking ship"
-wisdom of jimi

I don't know about whether seeing an apparent injustice by an internet trust is a strong enough reason to short their stock, though I have not checked the chart to see what the institutions are doing.

It is interesting to see that Dr. Eric Schmidt was attending Aspen meeting with major media executives who know full well he is under Anti-Trust Investigation. It would be nice to see those executives who spoke with Schmidt Subpoenaed to appear in an FTC Court on the issue of anti-trust and internet media search trust. Though it is quite clear to see that in the world of fantastic poor judgment Google is King and the last effort to 'Crush' all the 'little guys' is beginning in earnest. Forget that there is a recession and US Small Business is the next to require a Trillion Dollar Federal Bailout and the news industry in general has already been largely destroyed by Google but apparently when Google needs a few more pennies, damn the world, they shall have a few more pennies.

Personally, I think Seeking Alpha is the new Wall Street Journal and a little attack by petty Google to try to destroy an up-in-comer who allows 'not-pro-google' views on its comment board is going to damage Google Management and draw more into the investigative fray of Google's embattled Board of Directors than any harm Google will do to Seeking Alpha.

I advise you to call on Microsoft and ask for more money and a three year contract. When you get it, and you will, then advise all others that are with Google ad sense to do the same.

Don't let their dominant Network Effects Monopoly intimidate you into a cowards corner - fight them by leaving.

Microsoft I understand is rolling out a professional welcome mat to those who are tired of dealing with all the 'we're smarter than you so go eff yourself' juvenile delinquents over at the googleplex.

Rat's gather in the bow of a sinking ship.

In the case of google, they fight over the last piece of cheese.

Google is the worst bunch of A-Holes to ever have a share sold in the US Public markets and a disgrace upon Every American. Kissing them goodbye is pulling up the anchor that has been holding you down.

so...

eff 'em, move on and make even more money with Microsoft.

We've all had enough of Google's BS and even if the US Senate has all been greased with shares, we're sure as hell not going to stand for this sh&t anymore.

Jul 12 08:35 PM

[bonae:]

The evolved species (the small survive, Darwin) doesn't fight over the last piece of cheese on the sinking ship, they find the open porthole and a piece of wood for a raft.

Watch the ship sink from the shore, drinking corona's and a cheese platter, with all the other small mice that ignored the drowning rats for a safe shore where small business is welcome

Jul 12 08:57 PM

[Brian McM:]

Insightful comment, Wil

Jul 12 11:59 PM

[Market Crank:]

Bla bla bla.....All this is,a typical big fish eat small fish,google pays taxes to the government much more than any of you do,so its misconduct will always be overlooked.Its employees who get paid are usually the ones who mess things up for the founders of the company,as long as they get paid,they don't care whether google losses customers or not.If google responds,it's usually when things go public like this and they feel it'll harm their reputation,they respond,otherwise heads will turn elsewhere.
If they do look into this,they'll follow the trail which will probably lead to one of there departments.The person whose responsible(who caused all the stir..),some one in charge of one of there departments will blame an employee who had nothing to do with it,and have him fired.
We the users make google what it is,if they carry on turning a blind eye to its consumer complaints,they'll be just another patient on the operating table.
Brian McMorris's opinions are highly important,and it's only a matter of time b4 others follow suit.

Jul 13 05:58 AM

[Brian McMorris:]

No, we are now adsense free as they would not reinstate our account. I don't know where you are seeing a Google ad. The original e-mail they sent us had no reasoning whatsoever. Basically it said "your adsense account has been suspended because you have been deemed to be a risk to advertisers." At the bottom of the e-mail it said "click here to send us an e-mail to appeal this decision." I sent them an e-mail asking for further clarification as to why we were banned since the reason "deemed a risk to advertisers" is pretty vague. About 4 days later we recieved another computer automated message stating "Thank you for appealing the decision, after further review we have concluded that you are still a risk to advertisers." No specific reasoning for the suspension was ever given. Within hours of posting this article I had already recieved numerous e-mails from people in the same boat.

Jul 13 02:32 PM