How does the newly launched Google Checkout help fend off threats to Google's profitability? When I wrote about those threats last month, I highlighted the opening up of "a new 'long tail' market of advertisers" as "a hugely under-estimated source of profitability" for the search engine and contextual advertising giant. Checkout boosts the profit potential of that market in two separate ways:
Obviously, it increases the profitability of AdWords by adding transaction margin on top of the margin it creams from the ads themselves (although not in the short term, as Donna Bogatin has calculated).
More importantly, it entices new merchants to join in by saving them the trouble of having to set up a separate payment processing account, whether with PayPal or one of the conventional card processors. This is an enormous barrier to selling online and Google Checkout demolishes it at a stroke, vastly increasing the extent of the 'long tail' market Google can now reach with its combined Checkout and Adwords proposition.
No wonder Google is offering those incentives to merchants to sign up. The quicker it builds a merchant base, the more momentum it will build to establish its brand as a means of buying and selling on the Web. I am doubtful, though, whether it will succeed in its broader aim of persuading consumers to use it as their 'wallet' on the Web. Eric Norlin has explained why the proposition is flawed. And as Garrett Rogers points out, the fact that at launch it's restricted to US-only merchants and consumers is somewhat underwhelming compared to the reach of PayPal and other online payment processors. Considering how proud Google is of a track record that in the past four years has "billed advertisers in 65 countries more than $11.2 billion in 48 currencies, and made payments to advertising partners of more than $3.9 billion," the restriction seems a little surprising but is no doubt a product of its deal with Citi rather than of its own choosing.
A far better use of Google's identity account infrastructure, if you ask me, would be to use it as the basis for offering user authentication as a service to Google Checkout merchants. That would allow them to offer their customers paid downloads or private website access without having to build their own authentication system. I've long suspected that there's a huge untapped demand for 'identity as a service' out there in the long tail. It may not become as big a money-spinner for Google as 'advertising as a service', but it could still be very lucrative move.