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Google closed at $545 and change and is the number one holding of Fidelity’s massive Contrafund. Google earnings have been exceeding analyst estimates quarter after quarter. Since I own Contrafund I set my mind to thinking about why Google is so successful and possibly what the future holds for them. Their success stems from the great lead they have in search engine users but it is far subtler than that. Everyone knows Google’s business model is built on advertising. Of course that only works if you have the most people looking at your ads. They introduced “Adwords” as a way to jump the queue so to speak and for an advertiser to buy his way onto the first page of search results. Those ads appear on the right hand side of the screen when search results are presented. The actual search results appearing on the left have to earn their position by gaining page rank. That is awarded to the most popular sites on a scale of 0-10. 0 being the least popular and 10 the most. This page rank is earned over time but by paying Adwords a fee an advertiser can appear in the top position on the right. That position on the most popular search engine is worth money to advertisers. So where does Web 2.0 come in? This is the explosion of personal sites, many of which are blog sites like this one. When Google introduced “Adsense” there was an intersection of Web 2.0 and the leading Search Engine. People started putting Adsense ads on there own sites and all Google had to do was provide a mechanism for writers to do that. Adsense is a system whereby ads are placed on a site page in the same context as the subject on that page. The affect of this was that Bloggers for example started applying Google’s Adsense to their own pages. This is the very definition of viral advertising since the writers are applying the ads for Google. The explosion of sites I mentioned have driven this virus to levels where I can’t even imagine how they can figure out what their earnings will be. It’s like a runaway train that can’t be stopped. Good investment!
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Speaking of Google, perhaps it’s time to admit that the emperor is buck naked? Google is no longer an asset to small business. It’s digressed into a black box designed to extract as much money as possible from small business while giving back as little value as possible. This piece explains why Adwords is something to be skeptical about: “Why Google Adwords is Not Helpful to Small Business” http://smartstartup.typepad.com/my_weblog/2007/07/a-fable-doing-b.html