• by Shankar Gupta , March 16, 2007

Despite a $1 billion lawsuit recently filed by Viacom against Google, the company's prospects remain solid on the strength of a change to the quality score algorithm that lowers minimum bids for high-quality ads and increases minimum bids for low-quality ones, according to a report released by RBC Capital Markets on Thursday.

"The further extension of Google's quality-based scoring system, announced in mid-February, has contributed to strong mid-to-late quarter momentum, we believe," the report stated. "The strength of the company's core operations should more than offset the increased legal expense related to Viacom and other content litigation."

According to the report, Google affiliates have indicated to RBC analysts that the new quality score model has been a boon. "Checks with Google affiliates indicate that this change has increased click-through rates and monetization over the last month," it states. "Combined with strong overall query volume trends, Google is poised to show upside in domestic search revenues."

The report also predicts that Google and Viacom will likely reach a deal before the lawsuit reaches a verdict.

"The most compelling portion of the legal claim suggests that Google and YouTube could do more to prevent Viacom clips from being uploaded on the site," the report states. "Beyond that, we believe the legal action will take years to address, and the probability is high that the companies can agree on terms at some point."