Bronte Media

There are two worrying trends from Google’s most recent quarter:

1) Social Network inventory deals are bursting. Like other morons who say ‘I told you so’, last year I said that if any area of online advertising was experiencing bubble like conditions, it was ad network representation. I call them Madonna deals because like the contract Madonna signed with Live Nation, they do a lot for Madonna and little for Live Nation. Just like Microsoft is marrying every page view sweetheart in sight at the press release alter. Ironically, Microsoft’s original deal with Facebook would have been roughly break even because of the stunning growth in inventory, but now the waters are murkier because the deal was re-negotiated with Microsoft’s investment. MySpace’s stunning growth has played out and left the monetization naked for all to see and the ‘plex is having trouble lifting the $0.10 eCPMs.

Yet this at the end of the day doesn’t make a shit of difference to Google and why its stock has plummeted. The news is bad for News Corp and Facebook whose fortunes are tied to the $0.10 eCPM becoming $0.50 over the next few years. They didn’t for Tripod, Geocities, Hotmail and all the other self-expression/communications sites before them.

The real news from Google’s fourth quarter was this:

2) Click growth: “Slowing growth in the number of times consumers clicked on Google’s ads, which appear alongside its Web-search results and on partner sites, could heighten such concerns. Such paid clicks increased 30% in the fourth quarter from a year earlier, compared with a roughly 50% average increase during the previous four quarters.”

Over the past year, each quarter Google’s growth has been nearly entirely driven by the number of clicks rather than a rising CPC price. This trend is now muddied and is worrisome. Google’s advertising marketplace is less and less an open auction and more and more at the arbitrary mercy of Google. They have rewarded relevance and kept prices lower than they could have been in the past. Now it looks like growth is increasingly driven by charging advertisers more.

The real negative surprise could be in the first quarter rather than the fourth quarter. Price increases in the fourth quarter are fine because so much of the ad spend is transaction oriented and retailers are fine to absorb a spike because a lot more conversions happen but it will be interesting to see what happens in the first quarter when that is not the case.