This is part 2 in the new series on what are the changes occuring in the domain industry and how Google in particular is controlling the landscape that we all work in. It continues directly on from part 1.

For example, the online games vertical may have a maximum profitable bid price for advertisers of $1 per click. If an advertiser purchases clicks for $1.10 they will eventually go out of business but at $0.90 it's a bargain. There may be slight variations on a day by day basis but they will tend to oscillate around the $1/click price.

As the auction market continues to mature greater numbers of advertisers become more sophisticated and adopt systems for getting the best price for their advertising dollar. This price will be the theoretical maximum bid price for each keyword associated with each market vertical.

This system of selling advertising means that the only way for Google to continue to increase revenues is to expand the market so that there are more possible clicks for advertisers. In other words they need to purchase traffic in greater and greater volumes. This is exactly what they are doing and it's squeezing everyone else out of the marketplace.

What's interesting is that there is an argument that Google should reduce its margins for purchasing traffic to 0% simply to lock competitors completely out of the marketplace. This would allow Google to also sample traffic to identify which is the highest converting for advertisers and then to mix it in with low converting traffic (eg. MySpace). This would further increase the volume of clicks while still keeping advertisers happy.

For example, let's imagine that a Google network publisher had 100% conversion rate for clicks that they supplied for games related traffic. If Google takes their average commission for network traffic of 11.9% (let's round it off to 10%) then they will pay the publisher $0.90 per click and retain $0.10 per click for themselves.  If an advertiser had a budget of $10 then Google needs to supply 10 clicks to the advertiser to consume their expenditure. Google could supply the ten clicks from the high quality publisher (pay them $9) and retain $1 in commission. The advertiser would be ecstatic with the results since every click converted! The problem is that this doesn't maximize Google's revenue line.

Let's now add another variable to the mix. To make the maths easy we'll imagine that Google also has 0% converting traffic. It would make more sense for Google to send one high converting click to each of  ten different advertisers and then follow up with nine "bad clicks". This would mean that ten advertisers would have a 10% click through rate and be paying $10 each to receive one conversion. Google would receive $100 for their efforts.

Google could pay the publishers on an equal footing and like before outlay 90% of the advertising revenue back to both the bad and good publishers. This would mean that Google would pay out $90 and retain $10. Like magic Google and turned the good converting traffic into ten times the revenue it had before. Not a bad revenue model but like a bad TV commercial, "but wait there's more!"

The next installment in the series will explore the impact of Google "Smart pricing" and why there was a strong economic imperative for Google to create it.