@Bill, its not that simple..
"what about the opportunity cost of losing advertising revenue that would have been generated form external customer purchase?"
Its not that simple...
I know that the GAAP rules have changed since I took some accounting classes on a whim when back at University....
The issue is something like this...
Google Nexus wants 2 million dollars to advertise their product on Google.
They bid up the adwords... They 'spend' 2 million dollars out of their budget to Google.
Google Adwords bills the department for the 2 million.
In the overall scheme you have a 2million dollar expense on one department, against a 2 million dollar 'revenue gain' in another. So its a wash. At least that's the argument the author is making. (Note: This is an over simplification even if real money did change hands the net result is about the same.)
The net result is that if someone like Moto wanted to advertise their 'Droidxxx' phone against the same key word, they have to raise their bids against Google. And its a blind bid.
In terms of accounting, you can't 'account' for immaterial things like 'opportunity cost'.
In terms of revenue... there isn't a 'loss' .
This is very much akin to Ebay's shill bidders.
Suppose you want to be a shill bidder. You list a product. You use a shill bid to inflate the bids.
On most items, the buyers end up paying more for an item because of the shill. On the chance that the last bid is the shill bidder, then the seller is out the fees Ebay charges to host the auction. If you do this enough times, you make more money than you lose.
Same thing here.
The only nit to pick with the author is that since Google is a publicly traded company, there should be an outside auditor reviewing the books. Cross payments like the one used as an example should be flagged.
However, if we look at the big 4??? (Used to be 8 but that has been shrinking due to acquisitions, and things like Enron killing Anderson and such...) How trustworthy do you think they are when they consider that Google pays their salaries?
Its a FAIL not that the article is bad, its pretty much spot on. But that Google lacks transparency and so that we have to take them at their word 'do no evil' which may mean that getting advertisers to pay more for their services and more cash to the shareholders really isn't evil.
After all, as Schmidt points out... you can always go somewhere else. ;-)