The penalties for link selling are clear. Matt has mentioned them before. Now it’s Stefanie’s turn (Stephanie Ulrike Dürr from the Google Webmaster Central Blog to be exact):

…there are two ways for optimizing the link-based popularity of your website: Either the meritocratic and long-term option of developing natural links or the risky and short-term option of non-earned backlinks via link spamming tactics such as buying links. We’ve always taken a clear stance with respect to manipulating the PageRank algorithm in our Quality Guidelines. Despite these policies, the strategy of participating in link schemes might have previously paid off. But more recently, Google has tremendously refined its link-weighting algorithms. We have more people working on Google’s link-weighting for quality control and to correct issues we find. So nowadays, undermining the PageRank algorithm is likely to result in the loss of the ability of link-selling sites to pass on reputation via links to other sites (highlights are mine).

The thing is, the average publisher doesn’t give a rat’s ass whether they pass reputation or not. He doesn’t care if his site is permanently condomized. Passing reputation is just too far up his heirarchy of needs.

Any permanent link condomization threat will not be enough to convince publishers to drop paid links as a site monetization model. A typical PR5 site with a couple of thousand pages can earn a few hundred dollars a month just by posting a few sitewide and post-specific links. With so few publishers breaking $100/month from AdSense, there’s just no way publishers (especially those from low AdWord bids/Smartpriced niches) will drop paid links from their monetization baskets.

If Google wants to discourage the practice of link trading, it would have to wield a bigger stick: remove erring publishers from the index.

Is that going to happen? Probably not, since algorithmically, it would be very hard to differentiate a paid link from an editorially given one. Google could still profile a site if 1) it monitored the inventory of marketplaces like TLA, TLB, PPP and RM and 2) watched out for unnatural linking patterns onsite (links under Sponsored-Links titles, sitewide links out to varied industries on the site, keyword-rich anchor text on sitewide links, etc.) But still, all those methods are not 100% accurate, and Google can’t risk dropping legit sites from its index.

Can advertisers tell if Google applied a permanent link condom to a site? No. If the site is in the index and its other SEO vital signs are ok, advertisers have no way of knowing whether a site has been condomized or not. Advertisers engaged in link buys tend to spread the paid links strategy across multiple sites so one can’t readily attribute a ranking increase/drop to one particular publisher. In short, advertisers will still continue buying links from that publisher because they’re still under the assumption that those links are helping their link popularity. And then other advertisers catch on and buy more links on that same site.

It’s a vicious, yet profitable circle.