Will Google's new algorithm coin more money?

Summary:Bear Stearns analyst Robert Peck says Google's new AdWords algorithm that changes quality scores could boost the company's first quarter revenue. Why?

Bear Stearns analyst Robert Peck says Google's new AdWords algorithm that changes quality scores could boost the company's first quarter revenue.

Why? The biggest change with the quality scores, a topic covered for a while by Donna Bogatin, is that lower volume ads without historical data will be given more leniency on minimum bid requirements.

In other words, ads that would have been tossed will now be monetized. Now you can argue that these low volume campaigns will diminish the overall quality of Google's ads, but the dollars could be substantial.

Just how substantial remains to be seen. Google's latest algorithm will also give advertisers estimates of their ad quality.

Overall, Peck reckons that:

  • "Google will be able to monetize advertisements that were previously deactivated, driving more revenues for Google."
  • "Advertisers should see a better ROI, as they will have more information to guide their campaigns."

Add it up and Peck says that Google's revenue growth from the fourth quarter to first quarter could top the current 11.6 percent growth estimate.

Peck's note comes as the Wall Street analysts are increasingly talking up Google as shares have fallen. In a research note Thursday, Citigroup analyst Mark Mahaney argued that Google's search monetization has plenty of room to grow.

A big crux of Mahaney's argument came from a survey by the Search Engine Marketing Professional Organization released Feb. 8. In the survey, SEMPO found that 96 percent of respondents used Google AdWords. More importantly, these folks can tolerate price increases.

Bottom line: If Google's growth ever does stall it could raise prices. Speaking about the SEMPO survey Mahaney writes:

"Three-fourths of search buyers could tolerate further price rises -- 25% of respondents said they could not afford to pay more for leads, while 17% said they could pay 10% more, 21% said they could pay 20% more, and 12% said they could pay 30% more. Google's search revenue growth -- because it is only marginally driven by price increases -- is more sustainable than the market recognizes."

Now all of this Google love may be a bit much for some. If so we've got quite a contrarian post for you. Mitch Ratcliffe outlines how Google could unravel by 2009

Topics: Google


Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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