Google's highly profitable secret war against small businesses and jobs

Google has managed to boost its revenues by billions of dollars this year by attacking thousands of smaller businesses who make money from affiliate programs. It does this by deliberately favoring large brands in its search results.

This war is largely secret because very few people understand this shift. Google manages to deflect attention through publicity about projects such as Google+, or its self-driven cars -- none of which are revenue generating businesses.

Yet in its core business, under the renewed leadership of CEO Larry Page, Google has launched an incredibly aggressive strategy targeting mostly small firms. You can see how effective this has been in the following numbers culled from its financial reports.

For example, for the whole of last year, 2010 Google's revenues from its own sites could barely keep pace with growth in revenues from its AdSense partner network -- mostly small firms.

2010:

- In Q1 Google sites grew 20% and partner sites grew 24%

- In Q2 Google sites grew 23% and partner sites grew 23%

- In Q3 Google sites grew 22% and partner sites grew 22%

- In Q4 Google sites grew 22% and partner sites grew 24%

Yet in 2011 this trend miraculously reversed itself within just 1 quarter and Google sites' growth jumped suddenly and for no outward reason.

2011:

- In Q1 Google sites grew 32% and partner sites grew 19%

- In Q2 Google sites grew 39% and partner sites grew 20%

- In Q3 Google sites grew 39% and partner sites grew 18%

What did Google do that suddenly, its sites nearly doubled their growth rate while partner sites suffered a massive drop?

The answer is that it controls the traffic and that controls revenues. Google managed to shift traffic and revenues from its partner network to its own. That means it keeps

all

the revenues -- it doesn't have to give away 80% of AdSense revenues to partners.

There's other things that Google has done that hurt small businesses trying to make money online such as banning tens of thousands of affiliates from its Adwords network.

It has gotten away with this strategy by shifting the attention of analysts and media to projects such as G+ and self-driving cars. These aren't businesses and have no effect on its revenues but that's the subject of the questions asked by Wall Street analysts on its earnings calls.

I haven't come across any analysts or journalists looking into this major shift in Google's business strategy. I haven't seen any financial analysts explaining how Google has been able to grow revenues so quickly -- yet some of the answers are hiding in plain sight -- in Google's financial reports (as above).

Google's strategy is to set itself up as the largest affiliate and displace the hundreds of thousands of small businesses that make money from affiliate marketing. It wants to be the main affiliate for online sales of branded products and that's why its organic search results heavily favor large companies -- the brand owners.

But this strategy comes at a significant cost -- lost jobs as it displaces the smaller firms. It's not a cost to Google but it is to society.

That's not a good scenario in today's hard economic times, it's a PR nightmare for Google to be seen as anti-small business and causing job losses.

Small companies don't have a much of a voice in Washington DC and Google knows this. It has been careful not to antagonize the large brand owners, reports one of my contacts, the CEO of a large company that relies on AdSense revenues, because they have lobbyists and they could add their voices to complaints about Google's business practices.

Google, however, is working hard to keep the US government out of its business. This year it dramatically stepped up its lobbying efforts, hiring more firms and spending a record amount on political influence.

Jessica Guyen reported in the The Los Angeles Times:

Google spent $5.9 million from Jan. 1 through Sept. 30, a 51% jump from a year ago. To put that in perspective, Google spent $5.2 million total on lobbying last year.

Google has doubled its spending on lobbying in the last two years. It has also formed a political action committee to give donations to candidates and it has hired influential lobbyists such as Richard Gephardt, a former House Democratic leader.

So who will come to the aid of small businesses? By the time the government figures out what's going on, and politicians extract themselves out of the pocket of lobbyists, it'll be too late.

Maybe Facebook will be a savior of sorts, it has been far more small business friendly than Google lately. But, this might be just a short term strategy because Facebook will face pressure to grab an ever larger share of the revenues flowing through its network, as Google is doing today. That pressure will mount when it becomes a public company next year.

What's happening to small businesses in the Google ecosystem is precisely why Facebook, Apple, etc, prefer to build a walled garden online and control as much of their ecosystem as they can so they aren't vulnerable to a change in business strategy by a large partner providing traffic and web services. Google's decision to start charging third-parties for using its formerly free maps service is a good example.

One of the very few people I've found that understand Google's anti-small business strategy is Aaron Wall over at SEOBook. Here's an excellent post by Mr Wall on Google trying to stamp out affiliates.

Google Hates Affiliates

At Affiliate Summit last year Google's Frederick Vallaeys basically stated that they appreciated the work of affiliates, but as the brands have moved in the independent affiliates have largely become unneeded duplication in the AdWords ad system. To quote him verbatim, "just an unnecessary step in the sales funnel."

It is worth noting that Google doesn't consider itself "just an unnecessary step in the sales funnel" when they insert themselves as an affiliate.

He recently produced an excellent infographic to explain Google's focus on large brands.