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Google: Waiting for the DOJ Hatchet to Fall

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Google is the new FCC. Except it’s not regulated. That can’t last. I predict Google to become dismantled and highly regulated early in Obama’s second term.

Historically, radio and television broadcasting have been great businesses, often cash flowing 40-50%. Why? A critical reason is that FCC regulations created huge barriers to entry in every market. With some content, a station could attract an audience and lucrative advertising dollars. An FCC license was in effect a license to print cash.

Today, sitting atop (or just making the first page) of Google’s organic search rankings creates a similar position. Businesses like Bankrate in finance, All Star Directories in education, and About.com in ‘how-to’ are achieving similarly high operating profitability. These businesses invest a relatively small amount in content, then attract an ad-friendly audience through their steady stream of organic search traffic. They businesses are entirely dependent on the favor of Google’s SEO algorithm for their audience.  Just like the broadcasters depend on the FCC.

Not only do Google’s black box algorithms create winners and losers in organic (or unpaid) search listings, but they create winners and losers in the paid search listings. I’ll save a discussion on the intricacies of natural search (SEO) and paid search (PPC) optimization for further posts, but suffice it to say that both SEO and PPC have separate algorithms designed to optimize user experience (and ultimately revenue). A tweak in either can literally crush a business, instantly wiping out hundreds of millions in value (for ex, Geosign).

This represents tremendous economic power for one company. If Google knocks you down, you’re toast. With Google owning 70%+ of search, there is no other game in town when it comes to search traffic.

While Google gives some insight into the inner workings of its algorithms, it is fundamentally opaque. Google keeps a black box for two legitimate reasons: it doesn’t want competitors to replicate it and it doesn’t want web publishers to cater to its algorithm over the general principles of good user experience.

This makes Google an easy target for conspiracy theorists who posit ulterior motives for every algorithmic tweak. While I think most of that is bunk, there is a fundamental conflict of interest. What if Google’s natural search algorithm gives a boost to a site that uses AdSense to monetize its traffic over another site that uses a different ad network?  What if a heavy spender on PPC suddenly improves its SEO?  Conspiracy theorists could also suggest that Google could reward sites that use Google Payments or other Google products. As it continue to introduce new products, these potential conflicts of interest will multiply.

The regulatory scrutiny of Google’s proposed search deal with Yahoo was a harbinger of more regulation to come. Microsoft and other competitors will recognize the ROI of using legal warfare to combat Google, especially given open market competition is futile against a natural monopolist. With the current financial bailout and an activist Obama administration, there is a tidal shift of growing governmental intervention in the economy. As Google’s hammerlock on the commanding heights of the Internet ecosystem continues to grow, it’s inevitable that the DOJ’s hatchet will come down. Expect to see Google’s consumer-facing search business separated from its advertiser-facing monetization business.  Obama & co. will have other priorities in the first term, but by the second they should be ready to unleash the DOJ on Google.

Written by sandykory

January 8, 2009 at 1:36 pm

Posted in Uncategorized

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