I think that Google is walking a fine line here. On the one hand, it appears that the checkout feature and its intergration with Adwords is an attempt to make Google itself more of a shopping destination (side-stepping the CSE middlemen). On the other hand, Google makes a ton of money off of the CSE’s AND pays several of them a ton of money as well. Google has partnered with several of the major engines (shopping.com most notably and ironically) to include them in its “Search Network” so that they display adwords ads on their sites and recieve a share of the revenue from those ads.

So the arbitrage game being played here is pretty complex. Still, Google has the upper hand because it has the traffic, the brand loyalty, and it doesn’t depend on the CSE’s for it’s revenue. Yes, they spend a lot, but if they died out, Google would likely make up the difference because many merchants would reallocate their marketing dollars directly into Adwords.

I think the key to the future success of the CSE’s is: 1. Building brand loyalty by improving the shopping experience (so that they don’t have to pay for so much of their traffic). And 2. Working to satisfy the needs of their advertisers by providing better options for reporting, bidding, categorization, etc. Oh, and API’s would be nice to.

In case this isn’t long enough, I’d also like to mention that, based on the merchant campaigns that I track and manage, the CSE’s are on very shaky ground in terms of click prices. If more merchants start tracking and the CSE’s start raising prices I think it’ll really hurt them.