Google shares plunged today because investors got worried about reports that Google is testing a toolbar distribution deal with Dell and is rumored to spending about a billion dollars on the deal over the next couple of years.
I’ve covered Google’s toolbar deals extensively on this blog. You can read this post here about Google signing a distribution deal with WinZip back in the summer of ’05.
I never thought something like this could make their shares plunge like it did today. Back then, I was focusing on privacy issues, and the legitimization of adware through the proliferation of search toolbars.
I think the market was freaked because it realized that Google is "buying traffic," signaling that organic growth couldn’t sustain the growth projections for the company. However, I believe that any smart marketer should be buying traffic as a part of their overall strategy. Google knows how much an average toolbar user nets them, so they know how much they can pay to acquire each toolbar user and make the deal profitable. If the lifetime value changes, or if anything else changes, Google can redo the math and figure out what works.
I’m sure that a big distribution deal like Dell will cannibalize some organic toolbar installs for Google but the thing thats hard to quantify here is the hedge this deal provides to make sure that Google establishes a presence on the desktop, especially with the threat of Windows Vista coming in the next 12 months.
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