This article continues immediately on from the first 4 parts that may be viewed via the following links.

Part 1 - Google and the domain industry

Part 2 - Google and the quality myth

Part 3 - Smartpricing traffic

Part 4 - Google, TV and Analytics

My theory is that as Google has shifted gears to increase their revenue line through expanding the volume of traffic. It's unlikely that they will be able to increase advertising spend per click for market verticals due to the trend advertisers will have towards a profitable asymptote for keyword bid prices.

If you look at the rate of growth in Google's revenue line acrossthe last three years it's been in steady decline. Google's rate of revenue grow in 2006 was 73% over 2005, 56% in 2007 and projected to be 34% in 2008. This decline is in spite of the fact that Google's share of the global online marketing spend has expanded from 32% in 2005, 41% in 2006, 49% in 2007 and projected to be 54% in 2008.

I believe that in the earlier years Google achieved remarkable growth due to many market verticals becoming aware of the Google Adwords platform and started pouring in advertising dollars. Naturally as market verticals became filled with advertisers they began to "cap out" Google's payment per click, hence the slow down in year-on-year earnings growth.



Now the challenge is to find a "Google super-sized" volume of traffic. If it's not paying particularly well now then that's OK as "smart pricing" will scale the profits upwards. What needs to be accomplished is to pick up a huge volume of bad non-converting traffic as well as a proportionally large enough volume of high converting traffic.

For the past few years Google has been buying up large volumes of traffic either through acquisitions or via network publishing partners. Consider that the Internet has been growing at about 10% per year while Google has been growing its revenue line on the back of all of this traffic by an average of 55% per year for the past 3 years. Assuming that there is a direct correlation between revenue and traffic this means that Google has been sucking in traffic to fund its growth from other entities at the rate of 45% per year! After establishing a commanding position in the U.S. domestic market how is this growth going to be sustainable?

This is where the international market fits in perfectly. When you look at Google's revenue line back in Q4 '05 only 38% of the revenue was generated in international markets. For the first time ever Q1 '08 has the international revenues at greater than the U.S. domestic with 51% international and the 49% U.S. I anticipate that the discrepancy between the international and U.S. will continue to expand into the future.

During the last couple of years domain name owners have been purchasing international traffic in vast quantities as they have aggressively entered the ccTLD markets. Although the traffic is not paid an enormous amount per click at the moment it will only be a matter of time before the Google advertising auction system begins to bite.

The challenge for advertisers in many of these countries is that due to the lack of credit card penetration there currently is not a direct link between advertising dollars spent online and sales. I am personally keeping a close eye on the level adoption of credit cards as I believe it will be the precursor to a surge in advertising spending.

Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- May 16, 2008