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There's no delete button on the Web
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Google's secret weapon
It's not an Excel killer, it's the Google Grid
Vonage train wreck realized
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Google and the Paradox of Choice
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Hideous chart may be a gift - 1/20/2006 12:48:00 PM

It's nothing but sunshine while the stock is setting new records, seemingly unstoppable. But when the music stops it can get dark really quick.

In the last three days, Google has shed 75 points, or 16%. That's $22 billion in market value, wiped out just as quickly as it was created. The stock dipped below $400 today for the first time since mid-November, and the drop is so steep and on such heavy volume, that you can taste the fear.

The catalyst for the drop was when Yahoo reported disappointing fourth-quarter results. At the time, BuyGoogle argued that Yahoo isn't necessarily a good proxy for Google, and that Yahoo's troubles may actually be caused by an ascendant Google stealing share and generating more cash per click. So in my view, Yahoo's bad news could be a positive indicator of Google's fourth-quarter results, which will be reported January 31. BuyGoogle ran the numbers, and concluded that analyst estimates look too low, and predicted a blowout quarter.

Based on the last three days' action, I may live to regret that assessment, but we'll see. I'm standing by my observations, even though Google's been knocked for a loop this week.

After the Yahoo news, it seems that Google's vow to "vigorously" resist the Bush administration's demand to harvest Google's trove of user search history has investors spooked. The Google investor shudders at the thought of getting on the wrong side of the government, because the government can make things very difficult and costly if they want to. If you need any evidence of what can happen to a company's dominance of its industry if it tangles with the Department of Justice, take a look at Microsoft.

From where I sit, with a vested interest as both a Google user and a Google investor, I've got to say that Google is doing the right thing here. Right for the user, because it would be evil to cavalierly turn over my private searches to the government without a much more serious and immediate threat to justify this unreasonable search and seizure. And it's right for the investor, because great damage could be done to the Google brand as well as Google's agility and freedom to innovate if it becomes the government's piggy bank for routine surveillance. Not to mention the damage that disclosure of carefully guarded trade secrets could do.

But in the final analysis, it seems that Google should come out of this intact -- its brand burnished among users for Google's commitment to them and their privacy (unlike the shabby way Google's competition has behaved), and with little financial impact from the spat with the DoJ.

And if Google turns in sparkling results on January 31, this 75-point dip might be seen as the last great buying opportunity before $600. A gift, if you will.

It should be interesting.

Heard on the Street - Google's Hidden Expenses - 1/18/2006 11:10:27 PM

Tomorrow's Wall Street Journal features Google (sub req'd) in its venerable Heard on the Street column. According to the article, Google is amassing large stock-based compensation expenses that will burden future quarters, but accounting rules require the liabilities to be disclosed in footnotes and not on the balance sheet.

The numbers are big ...

Few investors are focusing on the growing number of restricted shares and options that Google is handing out to employees, which will emerge as a sizable expense in the next few years. That expense added up to a hefty $600 million or so as of Sept. 30 of last year, all of which will be charged against future earnings....Google is on pace to give out more than one million of these share units a year. With the stock around $450, that means Google will be on the hook for an expense of about $450 million at this rate, most of it to be booked in future years.

... it's a common practice ...

Employment-related costs are an issue for many technology companies, which have begun to count options and other share awards as an expense under accounting rules enacted last year. Microsoft Corp., which switched to granting stock awards rather than options over a year ago, granted almost 45 million of these awards in its fiscal year ended June 30. Since the awards were granted at an average price of about $24, Microsoft incurred an expense of just over $1 billion. The majority of the shares will vest over five years, reducing earnings in that period.

... and it's accounted for properly ...

Bill Miller, who runs the Legg Mason Value Trust mutual fund, a big holder of Google shares, argues that the expense of the units is rightly spread out over time because the benefit from the workers also will be received over time, much like the cost of a tractor is allocated over the period the tractor is used.... Says Robert Willens, Lehman Brothers's tax and accounting analyst, "It's not an unusual method of compensation, but it's something investors need to be cognizant of."

... but it's quite an overhang in future periods.

"These are expenses yet to be recognized, and unless the employees who are incentivized generate more than enough revenue to cover the cost, there could be some earnings shortfall down the road." [Willens]

Thinking dark thoughts - 1/18/2006 03:48:00 PM

With all the blood in the water after Yahoo, Intel, eBay and Apple disappointed Wall Street in the last two days, investors are clearly thinking pessimistically about Google's earnings release on January 31. Google's stock lost 22 points today on these worries. In spite of the fact that BuyGoogle expects a blowout fourth quarter for Google, it's worthwhile seeing things from the other side.

What could go wrong? Here are a few realistic dark-side scenarios:

1. Google pulls a Yahoo and reports in-line with estimates. No blowout, no upside surprise, just a nice, strong Q4 that meets expectaions. If this happens, I would expect to see a 30- to 40-point drop, on top of today's bloodletting. In this market, meeting expectations is the same as missing expectations.
2. Google pulls an Apple and reports sparkling fourth-quarter results, beats expectaions, but issues a warning about the future. Something like, "capex will rise 50% to support Video and Base, but we don't know how we're going to monetize them yet, and we see search growth moderating in 2006."
3. Google says things like, "2006 will be a year of consolidation and retrenchment, while we figure out what to do with all the products we've released. We won't be introducing new products at the rate we did in 2005, but will focus on improving the strong products or dumping the weak products." Growth expectations will be slashed, and the stock will crater.

But after considering these dark scenarios, and recognizing that each of them is a possibility, I come back to the most plausible scenario of them all:

4. Google grabs more market share and continues growing revenue 100% year-over-year in the fourth quarter. Improving margins and more traffic on Google properties, plus a declining tax rate and moderating currency exchange, delivers a 250% improvement in proforma EPS over last year ($2.30 vs. $1.76 expectation). Eric Schmidt croons that "we're only at the beginning," and Larry Page says, "we've made some adjustments in ad relevancy that will be realized in 2006." It turns out that Yahoo's miss was caused by Google's dominance, not by sector-wide sickness.

Is Google stealing Yahoo market share? - 1/18/2006 09:54:00 AM

Yahoo CFO Susan Decker gave a pretty cryptic answer to an analyst's question on market share yesterday. From an unofficial transcript of the call.

----------
Q - Lauren Fine [Merrill Lynch analyst]
Well thank you just a couple of quick ones, some of the external measurement services have indicated a decline in your search traffic and I am wondering what your measurement is suggesting.

A - Susan Decker [Yahoo CFO]
Okay, yeah sure thank you. On the first point the Yahoo search market share, we feel very great about our position we are holding our own. We are on our plan, and its trends really if you look over reasonable periods of time demonstrate broad market share parity between the 2 companies and a widening gap behind the leading 2 companies and all the others. One thing I point out is that when you look at the trends that are put out by external services, you can see broad stability on the domestic side, the international side is influenced by the way comscore worldwide data is calculated, just have 7 countries in that mix. You have Canada, UK, Germany, France, Spain and Italy. So they are primarily looking at countries in which our competitor is quite strong and we are less represented and they are not including the countries in Asia where we are exceptionally strong, and in many cases gaining. So, I would precaution you against using some of those, international services too, too literally but we feel really good about our overall strength as we look at our own internal data, and certainly the domestic external data is a better proxy.
----------

My translation: yes, independent services like Comscore are showing Google stealing share from Yahoo in the profitable markets -- North America and Europe. But if you squint and look at a longer period of time, the differences aren't that bad. And Yahoo's doing well in Asia, which Comscore doesn't measure -- but is also not making much money yet either. And with today's news that latecomer Google is already #1 in China (Yahoo is #3), you've gotta wonder about that last part, too.

Isn't it funny how Decker can't bring herself to say the word, "Google?"

Internet flu or divergence? - 1/18/2006 07:52:12 AM

We've seen this movie before.

Yahoo got slammed, down ~13%, when it missed analyst earnings expectations by a penny. Google was down ~4% after hours in sympathy, apparently on the theory that search advertising or even the entire internet sector is underperforming.

While this is yesterday's news, it could just as easily describe July 19, 2005.

In July last year I posted Google and Yahoo diverge in a wood after Yahoo stock dropped 10% when posting mediocre quarterly results. Google also got hit in sympathy, but I posted then that this was just bovine Wall Street failing to see the difference between Google and Yahoo. At the time, I said:

I detect a more profound shift. I think expectations of Google and Yahoo are diverging, as investors realize that Google has the better growth and profitability story....Google is a breed apart from the internet crowd and is diverging to the upside from Yahoo and the others.

Buygoogle gushed last week that all signs point to a blowout quarter for Google. Did Yahoo's dull results prove me wrong? Is the entire internet sector hyped and overvalued? Is search sick? Will Google show weakness when it reports January 31, just like Yahoo did yesterday?

Last July, when I originally posted the divergence concept, Google was at $300 and Yahoo was at $35. The divergence trend clearly continued through today, with Google up 50% since then and Yahoo essentially flat.

Google has built the better mousetrap. Google is gaining market share in the US and internationally. Google's click-through rates are twice Yahoo's since it's search results and ads are more relevant. And Google's business performs better -- 100% growth rates (vs. 35% for Yahoo), higher margins, stronger cash flow and double the capital investment for the future.

In short, there is a sound rationale for Google and Yahoo to diverge, and I see no evidence that this is changing. While the market takes Yahoo's results as evidence that the internet sector is stalling, I see Yahoo's results as evidence that Google is winning in one of the most profitable businesses on the planet.

(Disclosure: I own Google, Yahoo, Amazon and Microsoft, though my largest position by far is in Google.)

What is fair use? - 1/15/2006 09:57:00 AM

The battle over paid content continues to heat up.

This morning's LA Times features an op-ed by the CEO of Simon & Schuster, "the publishing operation of Viacom." This piece argues that Google's "scanning and commercial use of copyrighted works without permission, amounts to nothing less than theft." Google uses fair use as their rationale, and emphasize that Google's search results for copyrighted material only contains brief "snippets," and then Google points the user to bookstores to purchase the book.

Meanwhile, Jeff Jarvis riffs on on a BusinessWeek article which argues that big publishers could protect themselves from the onslaught of new media by forming a consortium to provide access to their content and lock out the search engines. According to the article, Big Media could keep their gatekeeper powers if they joined together:

Walt Disney, News Corp., NBC Universal, and The New York Times, in an odd tableau of unity, join together and say: "We are the founding members of the Content Consortium. Next month we launch our free, searchable Web site, which no outside search engines can access…. From now on we'll make our stuff available and sell ads around it and the searches for it, but only on our terms. Who else wants to join us? Membership's free.

Jarvis responds that this is ridiculous. The world has changed, there's no going back, either learn to make money in a GoogleWorld, or be destroyed:

Well, that would be hugely stupid. And though huge companies can be stupid, I don't think they'd be that self-destructive. For the truth of life today — like it or not, lump it or not — is that Google is everyone's front page. And, yes, that can make life difficult. Google kills brands; Google commodifies everything. But that's not Google's fault. That comes part-and-parcel with this new, distributed world where we control the entry to the content we want and where there is no longer a scarcity of content that lets a few big players control it and us. Wishing this weren't so won't make it not so.

And I respond that not only would this be stupid, it would also be impossible for these guys to catch up with Google. Google has the brand, the engineering talent, the infrastructure and the scale to pull this off. It would take years and billions to catch up.

This is really a battle for control, with traditional publishers and distributors fighting to maintain their lock on authors and consumers, while new media companies disrupt the status quo with an open many-to-many model.

For an insightful and prescient discussion of how the principle of fair use applies to Google's Book Search project, watch the video titled, "Is Google Book Search Fair Use?" from Lawrence Lessig.

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