The Unjustified Google Panic

Remember the panic which ensued when comScore announced that Google’s paid-click rate was declining? Henry Blodget went so far as to call it a "Google Disaster", and the shares plunged.

But it turns out that the comScore data aren’t nearly as disastrous as they might look at first blush. The company has a long blog entry ont the subject which explains that it very much looks as though Google is doing this on purpose. In a nutshell, Google is running fewer ads, with higher minimum bids, which are more relevant for web searchers.

Google has been targeting what it deems to be low quality ads… In addition, the real estate available for ads is being reduced, squeezing the supply of available spots to bid on. The reduced supply, as well as the higher minimum bids, contributes to an increase in the price per paid click, which is what helps counteract the slowdown in the absolute number of paid clicks. Therefore, Google’s revenue will not necessarily suffer…

But wait! If this improved quality is real, should we not expect an increase in the paid click rates? Not necessarily. If the ads are more relevant, consumers would need fewer clicks to get what they are looking for. Perversely, a high number of clicks means that the ads are not delivering what the user is looking for on the first try, which induces additional clicks on the second or third try…

Naturally, the changes will not benefit everyone. Rightly or wrongly, some marketers win and some lose, venting their frustration in the blogosphere. The users, on the other hand, will mostly win with improved relevancy and user experience, which helps explain Google’s continued overall query growth and share dominance.

Google stock is down today, although it’s above the level it fell to when the comScore news came out. But never mind the share price: the important thing here is to remember, once again, that intraday noise is rarely of much long-term consequence, and that investors are just as capable as anybody else of jumping to an erroneous conclusion.

(Via Wilson)

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