Friday, January 20, 2006

Google's Business Model

Mark Cuban appeared on CNBC the other day and succinctly described how Google makes money. He also pointed out a gaping technical hole in their business model that may jeopardize Google's earnings going forward.

According to Cuban, the vast majority of Google's revenue comes from Google AdWords. Google describes AdWords as follows:
"With Google AdWords you create your own ads, choose keywords to help us match your ads to your audience and pay only when someone clicks on them."
Owners and administrators of web sites can allocate space on their pages for Google to place the ads that advertisers create. They receive a portion of the revenue generated when someone clicks the advertising links. Google receives the rest of the "click revenue".

Cuban drew attention to the fact that competitors can game this system. I.e., a competitor to an advertiser can write an automated script that repeatedly "clicks" the link, thereby causing the advertiser to pay huge sums of money to Google for worthless clicks (clicks by a machine that will never purchase anything). If this problem becomes pervasive, companies will no longer want to advertise with Google, and Google's primary source of revenue will dry up.

1 comment :

Doojie said...

This really isn't a new idea by Cuban as Google as known about this for years. I'm not a big Google supporter, but I've read about how they are continually modifying their software to detect and prevent ghost clicks, so I doubt this will have a dramatic effect on them. Also, anything Cuban says on SqawkBox is most likely stated for a gain of his own.