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Google, Microsoft Woes Ascend as Stock Plunges

Written on
July 18th 2008
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by Kathleen  |
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booo.jpgADOTAS – Google and Microsoft’s quarterly results both missed the Street’s expectations as a dim ad environment, bruising legal/M&A battles and ever-ballooning expenses culminate in a mess that even these battle-scarred titans can’t seemed to extract themselves from.

Google reported $3.87 billion in revenue (sans the commission it shells out to ad partners). However, the search king said expenses were higher than anticipated and interest was lower than expected, creating anxiety among investors. Also fueling concern: Analysts have pointed out that Google chief Eric Schmidt referred to the challenging economic environment, a first for the tech guru.

During a second quarter earnings call, Google execs admitted that they may have created some of the mess they’re currently mired in: the company deliberately cut the number of pages it posts ads on in an attempt to boost the relevance and quality of ads. Sergey Brin said, “There is some evidence we have been a little more aggressive in decreasing coverage than we should have been.”

Microsoft did top $60 billion in revenue for its fiscal year, an 18% increase year-over-year. However, organic year-over-year ad revenue growth shrank from 26% in the first quarter to 8% in the second quarter of this year, sparking a mini-panic attack among investors. Microsoft admitted that its weakest area is its ad business – but it’s not stopping the company from pouring funds into that sector. The company said it would increase its budget for operating expenses by $500 million, in a bid to expand its online ad business.

Adding to Google’s woes, it has been sued for “parked” site fraud. A federal class action suit filed yesterday by Kabateck Brown Kellner in the U.S. District Court, Northern District of California, alleges that Google is defrauding its advertising customers by charging them for clicks from “parked” sites the company knows are worthless.

Google places ads on third-party Web sites based on keywords that the customer selects. For example, an ad for a hardware store may appear on a Web site about home improvement projects. The “parked” sites at issue in the suit, however, contain no content or useful information – just ads. The sole purpose of those sites is to generate ad revenue for Google and the site owner, while not providing any benefit to the ad customer, the suit alleges.

“The supposed advantage of Google advertising is that it’s targeted,” said Brian Kabateck, Managing Partner of Kabateck Brown Kellner. “If Google is simply placing ads anywhere they can make a buck, one has to seriously question the value of their advertising program.”

According to the suit, Google did not disclose to its advertisers the Web addresses of the parked domains where their ads were placed and clicked on, leaving customers with no ability to evaluate or dispute the validity of the clicks for which they were charged.

As of about 11:47 a.m., Google was trading at $484.41 a share, down 9.19%, while Microsoft was trading at $25.45 a share, down 7.52%.



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