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Enough people have asked me about Google’s beta test in CPA marketing that I guess I have to write something about it, so here goes.

First, a little background – it was announced last week that Google is testing cost-per-action distribution on part of their network. In other words, instead of paying a publisher for every click on their site, they instead paid them on actual conversions that result from these ads (i.e., every person that fills out a mortgage form from an ad on a publisher site would result in a $10 flat fee to the publisher, irregardless of how many clicks it took to get that one conversion).

Upon hearing the news that Google was dipping its feet into the CPA waters, many affiliate marketing and lead generation companies (like Commission Junction, Linkshare, Adteractive, Azoogle, or Quinstreet) etc must have been quite worried (it reminded me of a great Onion article – “Dolphins Evolve Opposable Thumbs; ‘Oh, Shit,’ Says Humanity“). After all, when Google enters your market – especially if it online advertising-related – you’ve got to be a little worried.

I can imagine a scenario where a Google CPA network could result in the destruction of the CPA industry as we know it. With a team of dozens of engineers developing cool algorithms to optimize CPA conversions, an existing massive distribution network, and Google’s good name, it would be fairly easy for Google to grab a large chunk of the CPA market. Heck, Google could even combine AdSense with a CPA network and test the two products interchangeably until they have a clear winner from a monetization perspective.

Put yourself in the shoes of an online publisher that currently relies on affiliate marketing and AdSense for revenue. Given the choice between guessing which offers from Commission Junction will work for your business and letting Google optimize the entire process for you (assumedly with superior results), this seems like a slam dunk for any publisher.

Frankly, I’ve felt for years now that – when it comes to online marketing- Google has the resources necessary to conquer whatever vertical or distribution-type they want to. And CPA seems to fall into that bucket.

The real question, then, is not whether Google could bite into CPA, but whether it is actually beneficial for them to do so. After a few pensive walks around my 1000 square foot condo (short walks!), right now I believe the cons outweigh the pros. Here’s why.

First, let’s start with the advantages of a CPA network:

1. Even More Market Share: So Google already owns the CPC market, and with increasing competition from MSN, Yahoo, and Ask, I doubt there is a lot more room for additional market share. It makes sense, then, to try to dominate other marketing channels. Google has already demonstrated an interest in this with the acquisition of dMarc (radio ads), the Google print beta, Google site inclusion (CPM), and the new Google Video Ads. A CPC network is yet another extension of Google’s overall strategy – use CPC as a base and work on expanding into other marketing channels.

2. It Benefits Google’s CPC Product: As noted earlier, if you can create a hybrid distribution network that combines CPC and CPA, you are likely to end up being able to offer higher payouts than a CPC or CPA only network (assuming you can optimize the results accordingly). This means that the existing AdSense network could be even stronger with a CPA component.

3. Every Google Wants to Rule the World: As Jay Weintraub speculates in his blog, a CPA product may be part of Google’s overall strategy to combine its “GPay” online payment system with online advertising services. In other words, end-to-end ownership of the entire transaction between consumer and merchant (but see below: this smells of anti-trust issues . . .).

4. Capitalizing on a Trend: There’s no question that CPA marketing is hot right now (recall that I predicted in my 2006 predictions post that this would be the “year of CPA”). Google may think it needs to start developing a CPA product to be ready when CPA really takes off.

5. A Hedge Against Click Fraud: Jay Weintraub also gets credit for this one – it is much more difficult to “game” CPA offers as compared to gaming CPC offers (through pretty simply click fraud techniques). Google is under increasing pressure to address click fraud and perhaps a transition to CPA will reduce the click fraud heat over time.

6. More Control of AdWords/AdSense: If a world someday existed where Google was the dominate affiliate marketing distribution network (replacing Commission Junction and Linkshare), this could give Google a lot more leverage over the dreaded “arbitrage” affiliates that create multiple stealth Web sites to promote online casinos, or credit card offers, and so on. If Google was the biggest CPA network, it would be much easier to restrict affiliates from gaming the AdWords/AdSense system. In other words: if you want to participate in the Google CPA network, you have to police your affiliates on AdWords. A very nice carrot and stick in my opinion!

OK, OK, that’s a lot of very plausible reasons for Google to create a full-on CPA network. Now let’s look at some of the downsides:

1. It Ain’t As Easy As It Looks: Replicating Commission Junction is probably not that difficult – it’s a pretty basic user interface with limited technology (at least by Google’s standards) and a critical mass of customers that already probably do business with Google anyway. Replicating a LowerMyBills for mortgage offers or a Quinstreet for education offers, on the other hand, takes a lot of work. For Google to achieve the eCPMs that these folks have achieved after years of focus, wrong-turns, development of expertise, and aggregation of business relationships, is going to be difficult. An algorithm can’t call 2000 mortgage brokers and create a high-paying mortgage offer. And Google wants to do everything with computers so it seems unlikely that they could really compete against the niche players in CPA (niche in focus only, not in revenue and profit).

2. CPA May Cut Into Google Profits: Right now, there are a lot of dumb advertisers buying CPC ads on Google. By dumb, I mean that there are advertisers that don’t track conversions, engage in vanity-based bidding battles for top position (irregardless of ROI), and in general have no idea whether Google is really making them money or not. For these advertisers, Google really has no incentive to eliminate click fraud or create a product that provides a greater likelihood of positive ROI. My sense is that Google actually makes a lot of money from ignorant advertisers – switching to a model that increases profit transparency could actually have a negative impact on Google’s revenue.

3. CPA is a Slippery Slope: Give someone an inch and they’ll take a mile. If Google starts offering some placements on a CPA-basis, I have no doubt that advertisers will slowly start to ask for more and more CPA and less and less CPC. And why stop at CPA placements? Savvy advertisers will begin to push Google for revenue share deals as well (as is essentially happening in the CPA industry at the moment). As you go closer to rev-share and farther away from CPC, you increase risk for the publisher (Google) while decreasing risk for the advertiser. That’s something that Google probably wants to avoid.

4. Do What You Do Well: As noted, Google is seeing a lot of competition these days in the CPC space, in particular from the new and impressive MSN AdCenter, the upcoming release of “Project Panama” from Yahoo, and Ask’s major marketing push. I think Google would be better off focusing on making AdWords as good as it can be at the moment, rather than going off in a million different monetization directions at once.

5. Too Much Power in Google’s Hands?: I’ve mentioned this before – I really believe Google has become a big enough force in a big enough industry that they have to start being carefully about wantonly taking over new industries, simply because too much power may eventually put them under the scrutiny of the DOJ’s anti-trust unit.

In the end, it’s way too early to tell what Google plans to do with this CPA test. I do believe that CPA is something that all online distribution networks are going to have to confront in the coming years, especially if the market tightens up again like it did after the dot com bubble burst around 2001. Right now, though, Google is on top of the world, thanks almost entirely to its CPC products. With a lot of risks associated with any entree into CPA, my bet is that this is nothing more than a fun beta that won’t see any legs for some time to come!