Defying a melting economy, Google racked up $5.54bn in revenues during Q3, a 31 per cent leap from a year ago. But that's hardly a surprise. This summer, during a conference call announcing ho-hum Q2 earnings, co-founder Sergey Brin left little doubt that the online ad broker would soon crank the dial on its top secret money machine.
Of course, when delivering earnings to reporters and analysts on today's Q3 call, Google preferred to label recent changes to its ad platform as "quality improvements." But the bottom line is that in Q3, these changes unleashed more ads onto its search pages. "The quality-based bidding launch...increased our coverage significantly," Sergey said today.
More ad coverage means more revenue - whether the ads match what the surfer is looking for or not. Google gets paid when surfers click on ads, not when "high quality" ads actually generate useful leads. And if you serve up more links - even misleading links - you get more clicks.
In the quarter ending September 30, Google hit $1.35bn in profits, a 26 per cent increase from the same quarter last year. That's $4.24 per share, and if you exclude costs for employee stock compensation, earnings per share hit $4.92, a good 17 cents higher than the estimates of Wall Street guessmen.
Three months ago, when an analyst asked Google senior vice president Jonathan Rosenberg why ad coverage was shrinking, he said it was down to the company's "focus on quality," indicating the shrinkage would continue. "[Google co-founder] Larry [Page] says we'd be better off showing just one ad [per page] - the perfect ad," he said.
But he was quickly contradicted by the other co-founder. "There is some evidence that we've been a little bit more aggressive in decreasing coverage than we ought to have been," Sergey Brin said. "We've been re-examining some of that."
Then, in early September, Google rolled out significant changes to its Adwords setup. Among other things, the company did away with the infamous minimum bid that often prevented advertisers from joining "auctions" for certain search keywords.
AdWords now calculates each ad's "quality score" in realtime. Brin and crew say this leads to better ad placements. But even the experts have no way of judging how well or how poorly this works. And we all know that Google search pages are littered with irrelevant ads. Even if AdWords is indeed serving up more high quality ads, odds are it's serving up more low-quality ads too.
Online ad matching is not an exact science.
What's clear is that the changes had an immediate impact on Google's revenues. "As far as the quality announcements [rolled out in early September], it was one of the bigger things we did in the quarter, and these things tend to manifest themselves in terms of their impact reasonably expeditiously after they're launched," Jonathan "Perfect Ad" Rosenberg said today. "Most of the benefits of the typical quality enhancements occur very, very quickly."
You heard it here first. Commanding close to 70 per cent of the search market, Google has a ridiculous amount of control over how much money spills in from advertisers. With a few tweaks to the platform, it can serve up more ads whenever it likes. And even if those tweaks hurt advertisers in the short term, they have little choice but to stick it out. Google's competitors just don't have the reach.
And that means Mountain View is all but recession proof. Of course, chief executive Eric Schmidt prefers to spin things a little differently. "We believe that [Google's Q3 results] reflect the fact as marketing budgets are squeezed, targeted ads are becoming more valuable to advertisers," he said today. "And as consumer budgets are squeezed, people use the web for comparison shopping to hunt for bargains online and in stores." ®