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Venkata Subbu's  Instablog

Venkata Subbu
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Investor and commentator
My blog:
Politics and Economy
  • The Future For Google 0 comments
    Jun 6, 2012 10:59 AM | about stocks: GOOG

    One always has to marvel about human nature - and here specifically the instinctive defensive crouch an aging person or organization adopts to protect against competition. Unable to take on a fight directly and win, such a person or organization will attempt to use their experience and political clout to organize the world in such a manner as to disable competition before the fight even begins. This results in a poorer world for everybody, and preventing this behaviour (e.g. see here) is often even beneficial to one who would indulge in it.

    Currently we have Google (NASDAQ:GOOG) planning to adopt a shareholder scheme whereby a majority of shareholders will be disenfranchised, in order to preserve the control of its founders Sergei Brin and Larry Page over the organization. This is being justified by an appeal to the long term interests of its shareholders, saying in effect that the founders can address them better if they were not distracted by the short term interests of Wall Street. A Forbes article addresses this in detail, so I will not talk about it further.

    There is another defensive stance being adopted that could be much more detrimental to Google. We are already seeing the effects and they are due to get much worse. Unless this is part of a plan to diversify Google's business, this could get ugly in a hurry.

    As everybody knows, the primary business of Google is pay-per-click advertising. Search is what brings eyes to the advertising, but is not Google's primary business. It does provide part of the sell - advertisers only pay for "interested" viewers - not for all viewers - many of whom have ad blindness and don't even see ads that are on the page they are viewing. Unlike Yahoo or AOL that actually provide content or use email to attract viewers, Google relies on "publishers" to provide content - offering them an easy way to be found and monetize the content they are publishing by sharing the pay-per-click revenues.

    The pay-per-click sell has its downside. Advertisers complain about publishers who click on ads alongside their own content, and Google is forced to install mechanisms to detect "click-fraud" and punish publishers who do it. Publishers who put up content often see a lot of activity on their site, but very few clicks. Large publishers who can generate their own advertising can maximize their revenues by eliminating pay-per-click and/or bypassing Google as the middleman. This leaves the middle and lower tier publisher as Google's main content provider.

    Punishment of an errant publisher is draconian - a complete cut-off of Google advertising to that account. After the fall-off in advertising earlier this year, Google instituted across the board information sharing about accounts; after the spring results it used that to cut off even more accounts - under the belief that this would bring back the advertisers. But what it is really doing is eliminating and/or annoying it's eligible content base. Already one can see a major reduction in the number of sites carrying Google ads.

    What is worse, under the current policies it is now even possible for a random website to cut off the advertising flow to a perfectly well behaved and respectable website, allowing Google's competitors, annoyed publishers, or competing publishers to mount a denial of service attack. I believe this is already happening, and Google's next few rounds of results are liable to bring a nightmare to Google investors.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: short-ideas Stocks: GOOG
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