Google gets greedy – increases share of advertising pie

There’s been plenty of doom & gloom written about the forecasted fall in online ad revenue in 2009. Business models that are dependent on revenue via Google Adsense are already feeling the pain.

Everyone has been assuming that it’s just a result of the current economy but a closer look at Google’s Q4 results announced yesterday reveal that there is more than one culprit to blame.

Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $1.69 billion, or 30% of total revenues, in the fourth quarter of 2008.

TAC – Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, decreased to $1.48 billion in the fourth quarter of 2008.

The majority of TAC expense is related to amounts ultimately paid to our AdSense partners, which totaled $1.29 billion in the fourth quarter of 2008.

Those numbers alone don’t tell you much until you compare them to the previous quarter’s results:

Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $1.68 billion, or 30% of total revenues, in the third quarter of 2008.

TAC – Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, increased to $1.50 billion in the third quarter of 2008.

The majority of TAC expense is related to amounts ultimately paid to our AdSense partners, which totaled $1.33 billion in the third quarter of 2008.

To summarize, in Q3 Google Adsense generated $1.68 Billion in revenue with $1.33 Billion in traffic acquisition costs resulting in a 20.8% gross margin on that business. In Q4, Google Adsense generated $1.69 Billlion with $1.29 Billion in traffic acquisition costs resulting in a 23.6% gross margin.

That’s 14% margin growth in one quarter out the pockets of website publishers on the Adsense network. It seems Google has found a way to increase the size of their slice of the advertising pie while everyone else has had their eye on the ecomony.