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The Threat to All of Google's Revenue

06/29/07 - 07:52 AM EDT

James Altucher

I believe there are three other factors that could be affecting Google's core business and analyst estimates.

1. Keyword inflation is coming to an end. Across the board, the prices of keywords have been steadily rising since Google's inception. I think as more companies start putting money toward natural search marketing (figuring out how to get higher on search engines rather than paying for ranking), the keyword prices will go down.

According to Scott Buresh of seach-marketing company Medium Blue:

Search users are up to six times more likely to click on the first few organic results than they are to choose any of the paid results, while an eye-tracking study showed that 50 percent of users begin their search by scanning the top organic results. Other studies have shown that only 30 percent of search engine users click on paid listings, leaving an overwhelming 70 percent who are clicking the organic listings. And a 2003 study found that 85 percent of searchers report clicking on paid links in less than 40 percent of all of their searches, and 78 percent of all respondents claim that they found the information they we searching for through sponsored links just 40 percent of the time.

Cohen goes on to say: "Between October 2004 and December 2005, average keyword prices rose from around $25 to just under $55. And the cost of keywords can increase by as much as 100 percent during the holiday season. These costs aren't going unnoticed either; one study of problems experienced by U.S. companies found that 57 percent of respondents felt that their desired keywords were 'too expensive,' while 51 percent expressed concern that they are overpaying for certain keywords."

2. Anecdotally, a lot of keyword advertising was being done by mortgage brokers. It remains to be seen how the housing bust has affected this end of the business.

3. There's a huge arbitrage game that has been played for years with keyword pricing, and it's done right now by hundreds of thousands of domains. Maybe millions of domains. Basically, you get a domain, you slap a bunch of links on the domain where all the links are related to a very expensive keyword category (for instance, mortgage brokers) and you buy cheaper keywords to drive the traffic to your domain. Here's a great example.

This is called "parking" a domain. MarchexMCHX, a public company, is the master of this.

Realistically, will Google ever hit below $400 again?
Answer Here

Like any arbitrage, this is going to run out as the spread between the expensive keyword prices and the cheaper ones goes away.

I do think that the so-called holistic approach to online advertising is the direction to follow in the next five years. Search defined the last five, but now with Google buying DoubleClick, Yahoo!YHOO buying Right Media (and this past weekend consolidating its banner and search-ad sales forces), MicrosoftMSFT buying aQuantiveAQNT, and AOL having successfully integrated Advertising.com, we're going to see a lot more interaction between the banner side of things and the search side.

At the time of publication, James Altucher had no positions in stocks mentioned.

Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs a fund of hedge funds. He is also a weekly columnist for The Financial Times and the author of Trade Like a Hedge Fund, Trade Like Warren Buffett and SuperCa$h. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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