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Google Posts Strong Revenues, Touts Video's Potential

Google displayed continued revenue growth as it announced its third quarter financial results, and executives speaking on the earnings conference call late Thursday afternoon highlighted the enormous potential of video advertising in the wake of the company's planned acquisition of video sharing site YouTube.

Google reported revenues of $2.69 billion for Q3, a 70% increase over third quarter 2005 revenues of $1.58 billion and a 10% increase over second quarter 2006 revenues of $2.46 billion. Google-owned sites contributed $1.63 billion, or 60% of revenues, while "Adsense" partner sites generated $1.04 billion, or 39% of revenues, a 55% leap over third quarter 2005. International revenues represented 44% of Google's total.

Meanwhile, traffic acquisition costs (the portion of revenues shared with partners) increased compared to the second quarter, from $785 million to $825 million, but decreased slightly as a percentage of advertising revenues, from 32% in Q2 to 31% in Q3. Operating expenses were $710 million.

"Business is very, very good here at Google," said Eric Schmidt, who pointed to strong international results and the contribution of partnerships with companies such as Dell, eBay, Skype, MTV Networks and MySpace. Schmidt says that the YouTube acquisition is "the ultimate partnership, if you will, recognizing the fundamental importance of video of all types."

Google co-founder and president of technology Sergey Brin noted that video can be a more powerful search result than mere web pages for consumers picking up a new hobby. "Often videos are the best medium to learn how to do things," said Brin.

Google SVP of product management Jonathan Rosenberg said that advertisers Saturn and Paramount Pictures have experienced strong response rates from video campaigns with Google, which makes sense since users have to be interested enough to click on the video to see the ads. Polling outside of movie theaters during the opening weekend of Paramount's "An Inconvenient Truth" revealed that 30% of moviegoers had seen the Google campaign, he said.

"We are having great success with the video ads format," he said.

Meanwhile, Schmidt downplayed concerns that Google's latest purchase is simply a briefcase full of legal trouble. When asked by an analyst if Google is basing its YouTube acquisition on a liberal interpretation of the Digital Millenium Copyright Act, Schmidt had a quick and succinct rebuttal:

"We are not relying on a liberal or conservative interpretation, we are relying on the Digital Millenium Copyright Act as it being imposed by law...there is not a lot room for interpretation there. Whether people like it or not, it's the law of the land."

Schmidt also made it clear that the success of Google's video forays will rely more on partnerships than litigation.

"Our strategy with video is to partner, not to focus on the legal aspect but to focus on partnering [with content suppliers]," said Schmidt. "We certainly respect their copyrights. They need us, and we need them."