Jan. 29, 2006

Dear Mr. Donlan,

While I agree that there are many reasons to be bearish on Google,
I don't believe the ones you cite are to be taken seriously.  In
fact, I am surprised to see you cite them, since they reflect a
shocking lack of faith in markets.  If I advertise on Google, 
I will pay them in total no more than the customers brought to
me by Google are worth.  If I used to pay $5 per click, and fraud 
leads to 50% of the clicks being spurious, so that now instead of
1 click in 10 leading to a sale, it takes 20 clicks to accomplish
the same, I will now pay $2.50 per click.

Similarly, Click Truth is not a threat, just the opposite, and
in fact, Google's selling proposition is based largely on being
better able to match sellers with interested buyers.  The better
they can do that, the more money they can make.  As an analogy,
suppose I am the publisher of a magazine entitled Babson's, in
the entertainment area, which for some reason appeals to teenagers
and corporate tycoons.  Barron's might be interested in advertising
in it, but cares only about the tycoon readers.  If I somehow manage
to publish two separate editions that differ just in advertising,
one going to teenagers, and the other to tycoons, would't you be
willing to pay me just as much if your ad were placed just in the
tycoon edition, even though only half as many eyeballs would have
a chance to see it?  In fact, wouldn't you be willing to pay a bit
more, since there would be only half as many ads in each copy, so
your ad would stand out more?

Best regards,
Andrew Odlyzko

P.S.  Actually, click fraud is a bit of a threat to Google, but not
in the way you present it.  Interestingly enough, though, the market
provides incentives for Google to control it by itself.  To see the
problem, suppose that you publish Barron's, and I publish a competing
magazine entitled Babson's.  Suppose our serials are comparable in
every way, so in a no-fraud situation we are both willing to pay
$2 per click associated with some words that indicate interest in
our products.  But now suppose I create fraudulent clicks on your
ads, so instead of a 1 in 10 success rate in selling subscriptions,
you find yourself with a 1 in 20 success rate.  Well, being a 
rational business person, you will surely lower your willingness
to pay to $1 per click.  But then (assuming we are the only two
advertisers competing for those queries) I can lower my bid to
$1 per click, even though I am still getting a 1 in 10 success rate.
In other words, I now pay half as much for a new subscriber as I used
to, you pay as much as you used to, and Google loses.  (Google loses
25% of its revenues in this model, if you do the arithmetic.)  Hence
Google has an incentive to root out such fraud, even in the absence
of laws and regulations.

P.P.S.  Another, this time trivial issue:  The number consisting of
1 followed by 100 zeros is called "googol," and the one with googol
zeros is called googolplex.  The name Google is a corruption.