Partner Pay Intrudes on Google Fantasy

Both appear to be beneficent employers with hints of paternalism: Wonka rescues the Oompa-Loompa tribesmen from their bleak existence so they can work in his factory; Brin and Page tell us they provide their employees meals free of charge, doctors and washing machines. "Expect us to add benefits rather than pare them down over time."

Finally -- and most relevant to investors -- neither Wonka, nor Google's Brin and Page, seem all that interested in making money. Google's mission is "to organize the world's information and make it universally accessible and useful," and they're guided by the motto "Don't be evil."

Not that there's anything wrong with treating your employees well, or not being evil. But the idyllic picture painted by Google's IPO document looks very much like life inside a late-1990s dot-com start-up. You've got unlimited free soda in the refrigerator, free massages on Friday and a sliding board from the second floor to the first. If you follow your joy, the money will follow you.

In other words, it's a business based on an unlimited supply of free money. Sure, Google will get that money from an IPO. But it won't last forever.

For the first glimmers of the new reality, consider the economics of Google's relationship with other companies upon whose sites Google runs ads, and through which Google collects advertising revenue.

Those partner sites -- referred to as members of the Google Network -- accounted for a significant amount of Google's gross advertising revenue, one learns from Google's IPO document. In 2003, those partner sites generated $648 million in gross revenue, or 46% of Google's $1.4 billion in gross advertising revenue.

Yet Google's net revenue from its partner sites -- the amount it receives after it pays commissions to these partners for the privilege of running ads on their sites -- is a fraction of that. According to TheStreet.com's calculation, in 2003 Google paid to its partners 81% of the advertising revenue it received from these partners. In comparison, Google rival Overture Services, before it was acquired by Yahoo! (YHOO Quote) last year, was paying out around 63% of partner-generated ad revenue to its partners.