Lions share of revenue and 99% of profitability is made through two programs:

What motivates Google?
Google is beholden to its share holders and wants to make money. Sergey Brin & Larry Page (the two founders), Eric Schmidt, Nikesh Arora, Patrick Pichette, Ben Fried and others want to see their own shares grow and keep their jobs, though their actual salary package is modest. Google Inc net income was $6.5 billion as opposed to $4,2 billion in 2008 and 2007. Today (March 16, 2010) Google is sitting on a cash mountain of close to $30 billion (author’s estimate). Google can also buy pretty much any companies it pleases except perhaps Microsoft. Acquisitions this year (2010) include Aardvaak, reMail, Picnik, DocVerse, On2 Technologies and now AdMob is in play.

Google’s Monopoly Position
Make no mistake under any legal or economic definition, Google has a monopoly in the search market. That and the desire to continue its profits’ drive places Google in a defensive position. And it is tough defending that position. Think back to Zerox, IBM and even Microsoft.

When you are at the top, defending your position is that much more difficult. Would Bill Gate’s Microsoft defense in its court hearings, way back in 1998 have dismissed Netscape as the main threat and looked at Google? Now Google is going into the operating system business slowly slowly…. And watch out Microsoft.

Which is going to be more successful as a Phone platform Google’s Android or Microsoft’s Windows Mobile 7? At least today you can ask the question.

So the new trends, mobile, multiple platforms, games and mobile video, social networking are all taking a toll on Google and leading Google to react – not always in its or the users best interests. But then Google has made lots of right decisions otherwise it would not be at the top of tree defending its position.

At the same time Google is defending a worsening position in China and now in Europe, where at least three companies in the European Union have filed complaints with the European Commission, the EU's regulatory board, charging Google with anti-competitive behavior and this will be taken seriously by DG IV – the competition directorate. The ultimate penalty against Google is 1% of its worldwide revenues per day in fines. Ouch!

Search – the cash cow
It is possible to argue that Google’s financial statements don't even seem to acknowledge generally accepted segments reporting. So hardware, software and search are all in the same segment for financial reporting and, so it seems, internal management accounting:

I bet Patrick Pichette, the Chief Financial officer, has the business broken down by a host of segments. I bet the person running Adwords does not have a say in the development of Android on the mobile phone business.

Here is my guess as a long standing analyst and author. The search business (Adwords and Adsense) is cash cow and principal generator of profits plus contributor to global overheads. The new businesses (with some exceptions e.g. Double Click and perhaps You Tube) won’t make a real contribution to profits. They may not even cover their share (however you define it) of overheads. So my guess is that some of the new and developing business are being funded by the cash cow. This is not rocket science. Google is investing in the next threat and can always argue it is in the user’s interests.

Google claims:
“The actual CPC that each advertiser pays is the minimum amount needed to maintain a rank number higher than the next lower ad”.
Right?. Er… no not actually. Sorry.

How come we can beat and pay 0.02p or $0.02 or Euros 0.02 whilst the next highest bidder is paying £4.01 or $5.12 or Euros 4.56?

These are the mysteries and somewhat slight deceptions that Google and other search engines may make.

See section on the ever increasingly important influence of the quality score. This determines why the top advert may be paying far less than the bottom advert.

Google's Changes major changes since 2008

Thousands of undefined & ambiguous terms remain which you sign away your rights to when you agree to Google’s terms. For example abbreviations and what words you may use in adverts.

Keyword bidding issues:
Inactive keywords – the new nightmare.

Google’s demand for minimum cost per click bid increasing in exponential terms – the minimum demanded by Google to display adverts. Starts with 23c and then goes on $2.56 and then $4.01 and so on.

The importance of Googlers quality score:
has become the single most important factor in maximising performance and profitability of ppc campaigns. The pay per click landscape has become more competitive than ever before and with Yahoos new Panama ad platform moving towards embracing a ‘quality’ based algorithm, understanding the quality score will become more essential than ever for search marketers and businesses alike.

The difficulty in really understanding the Google Quality Score algorithm is the lack of transparency shown by Google, especially with introductions such as the new landing page quality update.

Quality Score:
“Quality Score is the basis for measuring the quality and relevance of your ads and determining your minimum CPC bid for Google and the search network. To encourage relevant and successful ads within AdWords, our system defines a Quality Score to set your keyword status, minimum CPC bid, and ad rank for the ad auction”.

What factors influence Quality Score?

Quality Score = (keyword’s CTR, ad text relevance, keyword relevance, landing page relevance & 100 other factors)

The weight of these factors dynamically change according to constantly rules defined by Google.

Multiple Quality Scores:
Although Google speak of a ‘Quality Score’, many advertisers do not understand that Quality Score is actually held at multiple levels which act in different ways.

Ad Rank:
Keyword-targeted ads are ranked on search result pages based on their maximum cost-per-click (CPC) and the keyword’s quality score on Google (For the top positions above Google search results, we use the actual CPC.)