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

November 30, 2011


By Tom Foremski 

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.

China Herd Follows the Shorts

NOVEMBER 22, 2011   THE WALL STREET JOURNAL

By DUNCAN MAVIN And TOM ORLIK

Short sellers are apparently running the market for China stocks. But it ain't what they say so much as the fact they say it that has investors hitting the 'sell' button. With a market this vulnerable, investors must question the rationale for holding any but the bluest-chip overseas-listed Chinese companies.

The latest stock to fall under the short sellers' sword belongs to Nasdaq-listed advertising display firm Focus Media Holding Ltd. After short seller Muddy Waters alleged accounting shenanigans, the Shanghai-based company's shares fell 60% in an hour—barely enough time for most investors to digest the short's dense, 80-page report—before eventually closing down 39% on the day.

Carson Block, the man behind Muddy Waters, is no Meredith Whitney—the U.S. bank analyst whose word was enough to send financial stocks spiraling downward during the dark days of 2007 and 2008. But his reports seem to have the same kiss of death impact on valuations for the companies he targets.

There is now a mini-industry trying to find out which Chinese company will be the next focus of short-seller attacks. Hedge funds that discover what shorts are researching can get their positions in place, knowing that once the report is published, the stock is almost bound to fall. In the days before Muddy Waters published on Focus Media, a rapid build-up of short positions was an indication that word of the report's existence had leaked out.

There's an argument that the shorting trend is injecting a welcome dose of skepticism and analytic rigor into the market's view on the China story. In time, that should improve governance at Chinese companies and encourage investors to spend time distinguishing true value from fraud. For now though, with the herd mentality as strong on the way down as it was on the way up, value investors will have little luck. Against that backdrop, the only safe option may be to stay out of the market altogether.

Write to Tom Orlik at Thomas.orlik@wsj.com

China's Developers Breathe Easier, For Now

DECEMBER 1, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

The wild card in China's real-estate sector—unpredictable government policy—just got wilder.

Wednesday's cut to the reserve requirement ratio for China's banks, which frees up more funds for them to lend, might have arrived in the nick of time for cash-strapped property developers. Squeezed between falling sales, tight financing and mounting debts, some had been forced to lower prices.

More in Property

• Residential Property Prices Slipped in November

Data from property consultancy SouFun published Thursday show average prices were down 0.28% month-to-month in November, the third monthly drop in a row. Many expect bigger price cuts to come. Two-thirds of developers surveyed recently by Standard Charted expected around a 10% drop in prices in the next six months.

A shift toward pro-growth monetary policy could change that outlook. Till now, the government has been cutting off funds for developers at both ends. Restrictions on house purchases cut revenue from sales. Controls on bank lending meant borrowing was tough. A looser monetary policy means one of those conditions will be eased.

Vice Premier Li Keqiang said last week that controls on the real-estate sector will remain in place, suggesting the government will make an effort to prevent extra funds from flowing into property. But there is little that can be done to prevent cash flowing to wherever the returns are highest—right now, that means hard-up developers.

The markets certainly see the reserve requirement cut as a positive for the sector. Shares in China's developers surged Thursday. Guangzhou-based Evergrande Real Estate Group rose 16%, one of many developers that outpaced a 5.6% gain in Hong Kong's Hang Seng Index.

A burst of liquidity won't address the fundamental problem of excess supply or bubble-high prices in China's property sector. Indeed, it will probably make them worse. But for now, investors are betting that a shift back toward easy money will postpone the day when those chickens come home to roost.

Backlash from Netflix Buybacks

NOVEMBER 23, 2011   THE WALL STREET JOURNAL

By JOHN JANNARONE

It is not Netflix's fault that investors priced its shares for perfection. But the Internet video company is to blame for managing its own balance sheet for the same flawless performance.

The former high-flier announced Monday night it had sold $200 million in new shares at $70 each and another $200 million in bonds convertible to stock at $85.80. Just months ago, the stock traded above $300. It is now at $72.

Enlarge Image

Reuters

Netflix CEO Reed Hastings

Netflix is selling off stocks and bonds in an attempt to raise $400 million, illustrating how acquiring the video content is expensive, Deal Journal's Shira Ovide reports on Markets Hub. Photo: Getty Images.

Related Reading

• Netflix Shares Hit a Low
• Netflix Looks to Raise $400 Million in Cash

Netflix could easily have avoided this. The company has spent over $1 billion on share repurchases since 2007, leaving it with just $366 million in cash and $200 million in debt at the end of the third quarter. During that time, executives including chief executive Reed Hastings have been selling shares.

In buying back shares, Netflix failed to build a cash cushion against any slowdown in its heady growth rate. With expectations for healthy subscriber additions stretching into the future, the company locked into big contracts for streaming content. Since the start of 2011, the company has more than tripled such commitments to a whopping $3.5 billion, of which $2.9 billion is due in the next three years.

But everything changed this summer after the company raised prices and began bleeding subscribers. The company has not indicated subscriber losses have stopped and said it expects to lose money next year. Netflix has also said it expects free cash flow to lag net income over the next several quarters. In the year through September, the company's free cash flow was a modest $204 million, while buybacks totaled $200 million.

Netflix Inc. fell $2.50 a share Tuesday, or more than 3%, to $71.90, after the video-streaming and rental company said it's selling $400 million in stock and debt in order to raise funds. Rex Crum has details on Digits.

Unfortunately, dilutive stock and convertible issues have become Netflix's best option for raising cash to cover the potential outflows. The company sold $200 million in eight-year bonds in 2009, but those have a yield of about 7.3%, according to MarketAxess. So issuing more debt would mean large coupon payments. The newly-issued convertible doesn't include regular interest payments and won't mature until 2018.

What Netflix desperately needs is for streaming subscriber growth to resume. That should boost margins and cash flow, even though a portion of the content costs rise with viewership, because much of it was purchased for a fixed price. And if subscriptions improve, content owners could yet ask for higher fees in future deals, making a cash cushion crucial.

The lesson for growth companies is that buybacks can be risky—not just in large amounts, but at high prices. Netflix paid an average price of $45 a share for stock repurchased since 2007, below the current level of $72. But many of the recent purchases were at multiples of that price. If Netflix had refrained from aggressive buybacks until the business model was relatively steady, inevitable bumps in the road would have been much easier to ride out.

Write to John Jannarone at john.jannarone@wsj.com

重回三星供應鏈 璨圓傳搶走晶電大單

2011.11.28   【經濟日報╱記者詹惠珠／台北報導】

全球最大的LED TV廠三星出現轉單，韓國LED供應鏈廠商透露，璨圓光電（3061）重新接獲三星LED TV的背光源訂單，11月份璨圓LED TV出貨優於預期，未來三星LED TV訂單可望從晶電（2448）逐步轉回璨圓。

據透露，供應給三星LED TV的韓國封裝廠從10月起轉向璨圓採購，外傳是璨圓搶走晶電的訂單，未來這家韓國封裝廠將會逐步從向晶電採購，轉向璨圓採購。但晶電和璨圓都不願證實這項消息，晶電主管表示，同業的確有採取價格攻勢。

璨圓主管則表示，韓系客戶的訂單11月比10月還多，超過公司的預期。

據了解，早期璨圓曾是三星大部份藍光LED的供應商，但隨著璨圓與三星的競爭對手LG結盟，三星將訂單移轉到晶電，不過第四季開始，韓國的封裝廠又開始將三星LED TV使用的LED晶粒，轉向璨圓採購，且有逐月增加的現象，未來一旦LED TV的需求回溫，在擁有韓系二大LED TV的訂單加持下，璨圓可望成為受惠較大的LED磊晶廠。

LED廠的10月營收多數下滑，只有璨圓和新世紀光電的10月營收逆勢上揚，主要就是受到LED TV的訂單挹注，新世紀有來自日本Sharp的訂單，璨圓則來自韓廠的訂單。

璨圓光電發言人傅珍珍表示，璨圓11月在LED TV的需求量的確有比較多，也超過公司的預期，至於最後的營收數字還是要等結算的數字。

傅珍珍表示，近期璨圓公告解散清算山東璨圓光電，外界誤解晶電的大陸布局有變，事實上並非如此，主要是因為璨圓與LG、東貝、瑞軒等合作的江蘇璨揚廠技術能力不錯，且量產提升快，加上璨圓山東從頭到尾都沒有營運，且與當初預期不同，因此璨圓董事會才作出結束的決策，將中國大陸生產重心放在江蘇揚州，山東廠對璨圓的影響微乎其微。

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Heavy Is the Crown for China's Land Kings

NOVEMBER 25, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

In the boom years, it seemed the only constraint on growth for China's property developers was how much land they could acquire. Rapacious hoarding earned some the title of land kings. With the correction in China's property market now pushing land prices down, the crown is starting to feel heavy.

Nicole Wong, property analyst at CLSA, says developers China Overseas Land & Investment Ltd. and Longfor Group have already cut the prices of homes by 20% to 25% at projects in Shanghai. A fall in the real-estate market reduces the incentive for developers to invest in new projects, denting demand for land.

In October and November, land auctions at several major cities failed, with no bidders at some and only low prices offered at others. Prices nationwide for residential land were down 8% year-to-year in October while transaction volumes were down 37%, according to data from property agency Soufun.

That is bad news for developers, many of whom are sitting on large inventories of land purchased near the peak in September 2009. Land prices are volatile, but average prices for October are down 40% since then. Anyone who bought at the top could be looking at significant write-downs.

Something similar happened in 2008, when CC Land wrote down the value of its land bank by 12%, and China Vanke by 3.9%, according to calculations by Jinsong Du, a property analyst at Credit Suisse. It was only the boost from the government's stimulus policy—kick-starting the real-estate engine—that saved developers from recognizing bigger losses.

Those sitting on large land reserves are in the toughest spot. Zhejiang-based Greentown China Holdings, for instance, says only a tiny fraction of its stock of land gives cause for concern. But a land inventory nine times as big as sales for 2010, according to Credit Suisse data, still looks vulnerable if prices continue to fall. Reserves for China Overseas Land are smaller, though the company made substantial purchases in the second half of 2009 and first half of 2010 when prices were high.

Policy remains a wild card. If investment falls sharply and growth slows, the government could relax controls on the sector, buoying sales, encouraging developers to break ground on new projects, and pushing land prices back up. Barring such a shift, falling sales and land values mean some of China's former land kings could be in a royal mess.

Write to Tom Orlik at Thomas.orlik@wsj.com

China Herd Follows the Shorts

NOVEMBER 22, 2011   THE WALL STREET JOURNAL

By DUNCAN MAVIN And TOM ORLIK

Short sellers are apparently running the market for China stocks. But it ain't what they say so much as the fact they say it that has investors hitting the 'sell' button. With a market this vulnerable, investors must question the rationale for holding any but the bluest-chip overseas-listed Chinese companies.

The latest stock to fall under the short sellers' sword belongs to Nasdaq-listed advertising display firm Focus Media Holding Ltd. After short seller Muddy Waters alleged accounting shenanigans, the Shanghai-based company's shares fell 60% in an hour—barely enough time for most investors to digest the short's dense, 80-page report—before eventually closing down 39% on the day.

Carson Block, the man behind Muddy Waters, is no Meredith Whitney—the U.S. bank analyst whose word was enough to send financial stocks spiraling downward during the dark days of 2007 and 2008. But his reports seem to have the same kiss of death impact on valuations for the companies he targets.

There is now a mini-industry trying to find out which Chinese company will be the next focus of short-seller attacks. Hedge funds that discover what shorts are researching can get their positions in place, knowing that once the report is published, the stock is almost bound to fall. In the days before Muddy Waters published on Focus Media, a rapid build-up of short positions was an indication that word of the report's existence had leaked out.

There's an argument that the shorting trend is injecting a welcome dose of skepticism and analytic rigor into the market's view on the China story. In time, that should improve governance at Chinese companies and encourage investors to spend time distinguishing true value from fraud. For now though, with the herd mentality as strong on the way down as it was on the way up, value investors will have little luck. Against that backdrop, the only safe option may be to stay out of the market altogether.

Write to Tom Orlik at Thomas.orlik@wsj.com