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Google's sweetheart deals Commentary: A little negative news for Net stocks
CBS.MarketWatch.com ^ | Apr 29, 2004 | By Bambi Francisco

Posted on 04/30/2004 8:10:18 AM PDT by fight_truth_decay

SAN FRANCISCO (CBS.MW) -- There was speculation for months that Google might be giving away more revenue to some of its distribution partners than it took in.

Now we know.

It does.

In its S-1 filing Thursday, Google revealed that 80 percent of the $961 million in sales it generated last year came from its site alone. The other 20 percent came from other Web sites that use Google's ads and send traffic Google's way.

Google also said: "Typically, in situations where we pay a Google Network member more than the revenue we receive from our advertisers in connection with paid clicks on that Google Network member's web site, we recognize the difference as cost of revenues."

Google didn't disclose which of its distribution partners are getting that "more than the revenue we receive" payment. But many analysts speculated that some distribution partners were receiving 80 to 90 percent of the revenue generated from the traffic they sent to Google's advertisers. Now we know it's more than 100 percent in some cases.

Ask Jeeves shares had been soaring on speculation that the company's latest acquisition would help it sweeten its terms with Google. One analyst speculated that Ask Jeeves would be able to improve its economics above an estimated 80 percent of the revenue it shares with Google.

We don't know the terms between Ask Jeeves and Google. Google did not disclose its terms with individual partners.

The fact that Google admitted to giving more revenue than it took in, however, is not good news for Net companies.

"It's a negative surprise," said Mark Mahaney, an analyst at American Technology Research.

For a little background, over the last several years, Google and Yahoo have competed for the same distribution partners.

Distribution partners have been key players in driving the growth of both Google and Yahoo as both companies sought and continue to seek advertising placement for their large ad networks.

Ask Jeeves dropped Overture, the paid-search specialist owned by Yahoo (YHOO), in favor of Google in July 2002. Some people close to the deals made accusations that money-losing deals were being structured. But nothing was for certain.

Now that Google admits to giving away some revenue and says it generates 80 percent of the sales on its own site, it doesn't seem Google needs to improve the economics between itself and its partners.

One has to wonder why some search engines, therefore, trade at a premium when they rely so heavily on a company like Google, which clearly has a lot of leverage.

Ask Jeeves (ASKJ) saw nearly 70 percent of its sales from Google in the first quarter. InfoSpace (INSP) said more than 10 percent of its sales come from Google. Google accounted for 12 percent of CNet's (CNET) sales. Time Warner's (TWX) AOL also relies on Google. Shopping.com, which has filed for an IPO, said it generated $67 million in revenue last year. Nearly 40 percent of those sales came from Google.

As I said in my Net Sense column earlier this week, Google's IPO may just end up being that big giant sucking sound siphoning away money from other publicly traded Internet shares.

Sound off: Would you buy Google if it was worth $35 billion, or would you short it?

E-mail: Bfrancisco@marketwatch.com. Bambi Francisco is Internet editor of CBS.MarketWatch.com, based in San Francisco.

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TOPICS: Business/Economy; Culture/Society; Editorial; Extended News; News/Current Events
KEYWORDS: adsense; adwords; google; ipo
Google,the popular Internet search engine, filed for a $2.7 billion initial public offering Thursday in what looks set to become the largest dot-com stock offering ever.
1 posted on 04/30/2004 8:10:19 AM PDT by fight_truth_decay
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This morning: ASKJ Last: 36.05 Change: -2.70
2 posted on 04/30/2004 8:19:29 AM PDT by fight_truth_decay
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