Is Google Scared?

Why this charade, if not? In a “Pot calling the kettle black” statement, Eric Schmidt whimpered that Microsoft’s Yahoo bid is anti-competitive. My poor little Google, let me rock you and soothe you …

Here’s an excerpt from last week’s analysis on Google’s earnings:

“Revenue on Google’s site stood at $3.12 billion, up 58% y-o-y. Google Network sites generated $1.64 billion, or 37% y-o-y (via AdSense). During the quarter, free cash flow was $1.02 billion. Total paid clicks in the quarter rose 30%, compared to the 45% growth rate a year ago.”

See that $1.64 billion revenue number due to AdSense? I think, if Microsoft-Yahoo play their cards right, that’s the first piece they can take away!

AdSense, in fact, has been the source of Google’s problems already in Q407, not delivering much from the social network sites it pushes ads to. Most notably, MySpace. We have already seen a good example last week of “how to crash Google’s stock”. Microsoft is watching.

When we first started investigating this AdSense problem, we had pegged AdSense to be 37% of Google’s revenues. This was an estimate, Google wasn’t reporting it separately. Now, reportedly, it is dramatically smaller.

Remember what I have said about AdSense earlier? – I had lunch with the co-founders of an ad network startup on Thursday. I will keep their identities anonymous, but I cannot help quoting one of them, as he put his finger on one of the biggest problems plaguing Google AdSense: It is great at monetizing crap, but offers absolutely no premium for high quality traffic.

And what is on our Trend Radar this year? – I talked about Audience Fragmentation and the Rise of Ad Networks recently. At the moment, the Ad Networks are in the business of amassing large volumes of fragmented traffic, and offering a channel to advertisers to access the publishers who own this traffic. Expect, in 2008, a trend towards these “mass” Ad Networks gradually becoming of higher quality via segmentation and “verticalization”.

Now, if Microsoft does realize that Yahoo’s greatest asset is their vertical opportunity, then they would also align the ad network accordingly, into a vertical ad network for the top categories that Yahoo plays in.

And then, publishers will be exiting Google in droves.

This, my friends, is the low-hanging fruit!