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Feb 2, 2005

Google generates dramatic profit growth, but eats into partners' income

Google's stock rose by almost 10% to $210 in late trading after the companyreported Q4 results that beat analysts' estimates. Here are the key numbers from Google's results and some brief comments about the sources of Google's income...

Google cut the proportion of revenue it pays to its AdSense partners to 77% from 85% a year earlier. On its conference call, the company ascribed this to (a) strong performance from partners that Google makes fixed minimum payments to, and (b) strong performance from smaller partners that receive a lower share of revenue. That's fine, but at the end of the day it still means that Google increased the percentage of profits it takes from its partners. Will this generate the same hostility from partners as eBay's recent price rise? Or to put it another way: is that a sustainable source of growth?

Google's AdSense program performed spectacularly, generating almost as much revenue as its search business ($490 million versus $530 million) and growing at almost an identical rate sequentially (28% versus 29%). Google's AdSense program is actually two distinct businesses: partnerships where Google provides PPC ads for other companies' search, such as AOL Europe, Ask Jeeves, and Shopping.com; and Google's contextual advertising business for content  owners.  Comments on the conference call suggest that both of these businesses performed strongly.

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