Google has $8 billion cash in the bank, and it will generate another $2 billion plus in free cash flow this year. Why does Google need to dilute the stock more by selling $2 billion worth of new shares? After $1 billion for the AOL stake and another $1 billion for a rumored distribution deal with Dell, they'll still have $10 billion in cash earning nominal returns.
What is Google planning? What's Google gonna do with all that cash?
A better question might be, in the struggle against Microsoft and Yahoo, where is Google competitively vulnerable? You can be sure that Google is accumulating cash to patch its strategic vulnerabilities.
Vulnerability #1 - Google has no social recommendation engine. Google's done a pretty good job gathering recommendations on everything from movies to restaurants to camcorders from the Web, but there's a limit to how specific you can get.
Vulnerability #2 - Google has very limited e-commerce capability. If Google intends to be a marketplace, there are far more capable commerce platforms than the fledgling Base and Payments that Google has created. Google's done some interesting things with Base and Payments, but they're still in early stages of development and will take a long time to build up a user base.
Vulnerability #3 - Google has a small user base. Sure, Google has the greatest marketshare in search and search advertising. But how many people does Google really know? How many people have a relationship with Google close enough to set up an account? Gmail users? GTalk users? The numbers are tiny compared with AOL, Yahoo, MSN, MySpace or Amazon.
When you look at it this way you can see that investing in Amazon could quickly solve a lot of big vulnerabilities, at a reasonable cost. And Amazon not only has the technology and expertise in areas complementary to Google, but they use similar technology and might mesh well with Google's strategic direction.
Rationale #1 - Amazon's strengths complement Google's vulnerabilities. Each of Google's vulnerabilities is an Amazon strength. Amazon is the leader in social recommendation, and that expertise could be applied beyond consumer products to movies, blogs, newspaper articles, photos and other digital content. Remember, conspiracy theorists, "Googlezon" is a required first step to the Google Grid that will dominate global media.
Imagine if Google could link advertisers directly to sellers using Amazon's ecommerce and payment tools, and take advantage of Amazon's experience with preventing payment fraud. Google is spending $1 billion for access to AOL's users, so what if Google could introduce Amazon's users to the pleasures of Gmail, Chat, Google Flickr and search history?
Rationale #2 - Amazon may be an ecommerce leader, but they're also turning out some very interesting technology that is closely aligned (and possibly competitive with) Google's strategic direction. Gdrive, meet Amazon S3. And have you seen what Amazon's Alexa search engine is up to?
Rationale #3 - Publishers like Amazon's book search. And they hate Google's. Amazon knows books, and books are a big part of Google's strategy to organize the world's information. Nuff said.
Rationale #4 - Amazon owns important patents. They may seem obvious, like 1-click ordering, but as we've seen in the Overture case and with RIM and Tivo, intellectual property matters.
Rationale #5 - Amazon has to do something. It takes a lot of capital to succeed as a global information company, and that never-ending investment makes Amazon investors whine. If not Google, then some other transaction will need to split Amazon's R&D-heavy information capability from its low-margin distribution business. Amazon simply doesn't have the scale to make it long-term.
Rationale #6 - Amazon is cheap. With a $15 billion market cap, Google could almost buy them outright. Just as Oracle did with Peoplesoft, Google could gradually acquire a position in Amazon before their intentions are announced and profit from the resulting run-up in Amazon's shares.
Rationale #7 - No bidding war. What other company could or would bid against Google in a deal for part of Amazon? Yahoo has $2.5 billion in the bank, and its horizontal stock isn't a terribly attractive currency. Microsoft has the cash, but Amazon's open-source technology would never work at Microsoft. Who else has the engineering talent, global reach and earth-shattering traffic to extend Amazon's ecommerce and social recommendation genius?
Yeah, but would Google want all those warehouses full of books and CDs? Certainly not, after all it's all those low-margin physical assets that are constraining Amazon's profitability and price multiple. Google's mission is to organize information, not to deliver consumer products. It's the technology, the user base, and the page impressions that Google needs.
Imagine if Amazon reorganized into an information unit and a distribution unit. Google could buy Amazon's information unit for $4 billion or so (just guessing, I'm not a valuation expert), and continue to run Amazon's systems in exchange for a percentage of sales. The employees wouldn't even have to move.
Google could serve ads on Amazon pages, splitting the revenue with Amazon Distribution. Google could also drive traffic to Amazon's properties through ads on Google and Google Network sites.
And if you think the one-box search results that expose Google Base items are cool, imagine if all of Amazon's items were available through the same search interface. That's powerful.
It just makes too much sense.
So in addition to my eBay puts, today I bought a bunch of shares in Amazon.
Updated 3/31/06 4:32 AM PST: Fixed some links, minor edits.