Did GOOG beat estimates by shortchanging publishing partners?

Last week Google beat financial analyst forecasts and its shares rose. I looked at the third quarter 2007 results, in particular, its traffic acquisition costs (TAC), and noticed something very interesting and something which no one else had written about.

TAC was 29 per cent of total revenues. Almost all of TAC represents money paid to Google's publishing partners. These are web sites enrolled in its AdSense advertising network. In the third quarter they received $1.116 billion.

Google does not tell each AdSense site how much of the advertising revenue it keeps. With large sites such as the New York Times, there is a set agreement on revenue sharing. Google will even pay 100 per cent of the AdSense revenue to some large sites--usually done for strategic business reasons.

Smaller AdSense publishers get a lot less, in some cases, it could be as little as 40 per cent. But it is difficult to determine the revenue split on a site by site basis and Google keeps that data secret.

The total aggregate payment to AdSense publishers is revealed each quarter and from that you can work out the overall split--which has generally been around 80 per cent with Google keeping 20 per cent.

I keep an eye on the TAC number because many media companies rely on Google AdSense to help their online business. And there are many "Web 2.0" Silicon Valley startups whose business models are based on revenues from Google AdSense.

GOOG sharing less $$$

Looking at the third quarter 2007 numbers I noticed that payments to AdSense publishers had dropped by $24m compared with second quarter 2007.

Take a look:

In the second quarter Google paid out 78.62% of AdSense revenues to publishing partners or $1.063 billion.

In the third quarter Google paid out 76.70% of AdSense revenues to publishing partners or $1.116 billion.

The difference is about $24m which helped Google beat its earnings estimates. Did GOOG change the ratio of payouts to AdSense publishers to help boost its earnings?

You can check my math here.

Harming startups?

Lower AdSense earnings are significant issues to startups. They are under pressure to show revenue growth as a proof of their business model and that their strategy is correct--even though those revenues aren't yet expected to cover their costs of business.

Risky business

AdSense revenues represent more than one-third of all Google revenue. If Google can change the payouts at any time, then it has the ability to improve its financial performance at any time. If this indeed is what Google has done, to change the ratio of payouts to AdSense publishers, does this become an ethical issue?

If this is its practice, then it risks losing its AdSense publishers to other advertising networks. It is risking one-third of its business. Is this a shareholder issue?