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Google is becoming a conventional company - 1/28/2006 08:57:00 AM

In Google's IPO prospectus, it confounded Wall Street with a simple message:

Google is not a conventional company. We do not intend to become one.

Wall Street read this as a sign of naiveté and bid the share price down. But Google has proven that their focus on the long term coupled with an unwavering moral compass can win marketshare and fuel extraodinary financial performance.

John Battelle blogs that Google, by "its very DNA, does not like to be an editor of content. But in China, it's doing exactly that ... deciding which sites to exclude because they might offend the Chinese government." But this is such an un-Google thing to do, it can't be what Brin and Page believe is right -- they have rationalized, or " thought themselves into it."

From the prospectus:

Serving our end users is at the heart of what we do and remains our number one priority....


Don't be evil. We believe strongly that in the long term, we will be better served—as shareholders and in all other ways—by a company that does good things for the world even if we forgo some short term gains.


Google users trust our systems to help them with important decisions: medical, financial and many others. Our search results are the best we know how to produce. They are unbiased and objective, and we do not accept payment for them or for inclusion or more frequent updating....


Google is not a conventional company. Eric, Sergey and I intend to operate Google differently, applying the values it has developed as a private company to its future as a public company.


We will live up to our "don't be evil" principle by keeping user trust...


Google's values aren't just do-gooder hype -- they have made the company what it is today. As Battelle says, "there's still time to pull out, guys."


Censorship changes history and destroys trust - 1/26/2006 06:51:00 PM

Search Google.com for images of Tiananmen, and you'll see students standing up to tanks. Search for Tiananmen on the new, censored Chinese site and there are no tanks or protestors to be found.

Censorship changes history and destroys trust.

Why is there such an outcry when Google does this stuff, but not when Microsoft or Yahoo do? Because Microsoft and Yahoo didn't make Don't Be Evil a foundational value. Google did, and much of their ~130 billion value is based on the trust in the Google brand.

Google's decision to censor search results in China may result in greater income from China, but it may also erase a good deal of brand equity throughout the rest of the world. BuyGoogle is one investor who believes the Chinese decision looks like a strategic blunder in addition to a moral and ethical lapse.

Google.com and Google.cn show Tiananmen


Protest at the Googleplex - 1/26/2006 03:09:00 PM

Did you ever think you'd see this?

Google, Don't Be Evil

Update 1/26 6:51 p.m. - via Google Blogoscoped.


Dueling Google blogs - 1/26/2006 07:28:51 AM

I run two blogs on Google - www.buygoogle.com and www.dontbeevil.com.  More and more, these two blogs are in tension, with BuyGoogle promoting Google's virtues as an investment, and DontBeEvil highlighting the increasingly ambiguous ethical line that Google is trying to follow.

In recent weeks, BuyGoogle has shouted that the fourth quarter looks like it will be a blowout, and that the recent decline in the share price appears to be based on mistaken rationales.  Simultaneously, DontBeEvil has praised Google for its stance on the US DoJ affair, while taking Google to task for caving in to Chinese censorship demands and rationalizing this action.

Last night I accidentally posted an article on Chinese censorship to BuyGoogle that was meant for DontBeEvil.  While it may seem that I'm schizophrenically holding two contradictory opinions on Google, I think this mistake reflects a genuine Google dilemma.

For the most part, the Don't Be Evil postings just haven't been relevant to the Google investor.  But recently, the Don't Be Evil topics are getting much more media attention, and the results of Google's ethical decisions could have a bigger influence on its financial performance.

It's critical for Google's growth to be a leader in the Chinese market, yet the compromises Google must make to do so could tarnish its brand and reputation.  And the mountains of data that Google keeps on users' searches and emails is a billion-dollar asset, yet threatens to conscript Google into becoming a police-state informer.

I expect that in the future, I'll be crossposting between BuyGoogle and DontBeEvil more - and next time intentionally.


Thought police - 1/25/2006 11:55:30 PM

BusinessWeek has an interview with Sergey Brin on Google's decision to censor search results in China.

First, the motivator - Google needs to put servers on the ground in China, since the cost of international network connections is making it too expensive for people to search Google.  Between bandwidth costs and the government's firewall blocking "subversive" queries, Google was severely handicapped:

Sergey Brin: Essentially the great firewall is sophisticated enough that it would block connections based on sensitive queries. The end result was that we weren't available to about 50 percent of the users. Universities can't afford the international bandwidth, so for example students at Tsinghua University -- and I saw this myself -- had to pay in order to use Google, and I mean pay a lot, even 25 cents a megabyte, which would be unaffordable even by American standards.

This is nothing...there's no malicious plan there, it just legitimately is a bottleneck that bandwidth is somewhat limited.

Fortune: It's probably by policy also.

Brin: I don't know. I don't want to speculate. But anyhow the net effect is that all of our services...soon we will be largely unavailable.

You don't know?  Isn't this something you should know?  Is the Chinese government boosting the price of international bandwidth to control information flow?

Next comes the Great Rationalization -- China is better off with Google's presence even if they're not getting the whole picture.  And since Google's only censoring a small amount, who's gonna notice a few missing results here and there?  But isn't that missing slice much more important, byte-for-byte, than most of the rest of the stuff?  After all, the material is censored because the government doesn't want its people to know the truth - and Google's raison d'etre is to be the unbiased source of the world's information.

We ultimately made a difficult decision, but we felt that by participating there, and making our services more available, even if not to the 100 percent that we ideally would like, that it will be better for Chinese Web users, because ultimately they would get more information, though not quite all of it.

In previous posts, dontbeevil was skeptical that Google would be allowed to show a disclaimer on search results pages that flag when results have been censored.  Brin says they're already doing this in France and Germany when government-mandated Nazi materials are censored:

In France and Germany there are Nazi material laws. One thing we do, and which we are implementing in China as well, is that if there's any kind of material blocked by local regulations we put a message to that effect at the bottom of the search engine. "Local regulations prevent us from showing all the results." And we're doing that in China also, and that makes us transparent.

Just to try this out, I searched for [nazi] on google.de.  Sure enough, there is a disclaimer at the bottom of the first page of search resultsGoogle Translate says this means, "From arguments Google removed 1 result from this side.  Further information about these arguments finds you under ChillingEffects.org."  It doesn't exactly say that results have been censored, but this is a pretty transparent approach.  It remains to be seen if this will be tolerated in China.

The disclaimer is OK as far as it goes.  But I don't buy the argument that 98% of the information is good enough, or that Google's censored presence is a lesser evil than its free absence.  Google is allowing themselves to be used as an instrument of oppression, and that's just not right.

And I also don't buy the argument that Chinese censorship of information on freedom, democracy, Tiananmen and human rights is morally equivalent to the United States' prohibition on child porn or Germany's restriction on Nazi materials.  Neither the US nor Germany are using Google to restrict political thought.

Google has volunteered to join China's thought police.  That's evil no matter how you rationalize it.


Don't look a gift horse in the mouth - 1/24/2006 01:28:00 PM

Google gapped up the last two days straight, on heavy volume, reclaiming 60% of the irrational drop from last week.

BuyGoogle usually ignores the random day-to-day wanderings of the stock price, and focuses instead on the long-term strategic direction and business model that should be important to the Google investor. But when we get a rare opportunity to buy in at a $75 discount, you bet I'm gonna shout it out.

goog_gift_chart


Yahoo CFO cries "Uncle" - 1/24/2006 11:29:19 AM

BuyGoogle posted a week ago that Yahoo CFO Susan Decker was making some pretty curious comments about the rivalry wtih Google.  It seemed like Yahoo was giving up.  Words like "we are holding our own" and other weasel words didn't convey a rabid push to reclaim share lost to Google.

Today the blogs are alive with more comments from Decker that spells it out more plainly:

Yahoo! Inc., one of the first Internet search companies, has capitulated to Google Inc. in the battle for market dominance.

"We don't think it's reasonable to assume we're going to gain a lot of share from Google," Chief Financial Officer Susan Decker said in an interview. "It's not our goal to be No. 1 in Internet search. We would be very happy to maintain our market share" ....

"In some countries, it's already game over in search, with Google the clear victor," said RBC Capital Markets analyst Jordan Rohan in New York. "Google's product development pipeline runs at such a fast rate that it's very difficult for any company, Microsoft or Yahoo! to catch up" ....

"It kind of makes you wonder about how serious they are about search," said Danny Sullivan, editor of London-based SearchEngineWatch.com, which tracks the search industry. "It really ought to be their goal" to be No. 1, he said. "Whether it's realistic or not" ....

"We have held our own, and we should gain revenue share in the industry as we roll out these new initiatives," Decker said in the interview after the company reported earnings last week.

advertising
"Our goal has been to hold our share and to be a leading, if not the leading, total marketing platform, which would include both brand and search."

As reported by BuyGoogle previously, Google is systematically stealing market share domestically and internationally from Yahoo.  And not just fractions of a percent, either.  From the Bloomberg piece:

Yahoo! handled 19 percent of global Internet searches in November, a drop from 27 percent a year earlier, according to Web tracker ComScore Networks Inc. Google's share, by contrast, rose to 60 percent from 47 percent.

Thomas Hawk expresses outrage and writes a business plan for Yahoo to get back in the game.  Greg Linden says this talk is " utterly destructive" to morale and the ability to retain top talent.  Danny Sullivan says that if #2 Yahoo can't catch up to Google, then what chance does MSN have?  And Steve Rubel vows to give up on Yahoo search if they don't even aspire to oust Google.

This is more evidence that when Yahoo disappointed Wall Street, these were Yahoo-specific issues which should be seen as a positive for Google.  While the market took a bite out of Google in sympathy, that punishment is appearing more and more unwarranted.  Look for a nice upside surprise from Google on January 31.



Tastes great or less filling? - 1/23/2006 04:51:00 PM

With most things, it's one or the other. Have your cake or eat it. Tastes great or less filling. Paper or plastic.

And with most companies, you can have fast growth or big juicy margins -- but not both at the same time.

I've posted many times that the great thing about Google is that they give you both, and to the extreme. Not just fast growth, but the fastest growth of its peers. And not just high margins, but the highest margins of its peers.

Here are a couple snippets from a Lehman Brothers report issued today. (It's not available on a publicly accessible site, so no link.)

Incredibly fast growth - what other large company do you know of that's growing 100% per year, quarter after quarter?
lb_snip_a
Incredibly fat profit margins - what other company do you know of that's turning in 50% operating margins, quarter after quarter?
lb_snip_b
And those fat profit margins are getting fatter. Last year Google was producing 43% operating margins - a fantastic performance by any measure - yet this year operating margins will actually expand to 53% or better.

While most analysts forecast slowing growth and shrinking margins, Google has defied conventional wisdom on both measures.


Yahoo's issues are not Google's issues - 1/23/2006 03:52:12 PM

BuyGoogle maintains that Yahoo's miss was evidence of issues at Yahoo, not an indicator of problems with the search advertising industry.  Moreover, the problems at Yahoo should be buy signals for the Google investor, since it means that Google is stealing share and wringing more pennies per click than their closest competitor

And the gap continues to widen.  On Yahoo's conference call, Terry Semel said he didn't expect meaningful improvements to monetization to show up until 2007.  That's a loooooong time, all the while Google's working on polishing the next big thing.

Google seems to have built the better mousetrap, and it will take the competition a long time to catch up.  And because Wall Street doesn't understand this, Google's stock has been punished for Yahoo's sins.  The market will remedy this when the facts are known.

But at BuyGoogle, I don't really know anything.  I choose my sources carefully, understand Google's products and prospects, and separate the Wall Street blather from what's really happening.  So far that's worked well.  Now here's someone who knows a lot more than I do about what's happening with Google's AdWords customers.

Andrew Goodman of Traffick posts a comment on Battelle that says Google is monetizing searches much better, which should make the fourth quarter sparkle:

It sounds like clicks convert better to revenues out of these top ("premium") spots, at least on popular mainstream terms, according to the Atlas Research studies.

So if commercial traffic is being better monetized AND it also converts better for advertisers, it would have been full steam ahead at a higher average revenue per page in Q4.

Countering that was an entirely different phenomenon, the introduction of a new Quality Scoring system to replace the old ad ranking formula. The result of this seems to be the removal of some lower priced clicks from the system (fewer ads showing on some queries). While this might have dampened revenues slightly, it seems inevitable that Google in Q4 will have significantly reversed the stagnating trend in average CPC's.

Overall revenues may be at or slightly below expectations, but profit margins should surpass expectations. Presumably, if you work for Yahoo, you don't manage a wide range of AdWords accounts. We do and I can't for the life of me see any reason to doubt that Google had a monster Q4. AdWords runs very efficiently compared to Y!SM.

Andrew has more depth here:

Seems it's come to the attention of top Yahoo execs that Google's ad platform kicks Overture's tail. No, not just a little bit. I mean this Overture thing is really holding Yahoo back. Terry Semel's being polite about it in public, but I imagine he's becoming more and more impatient the longer it takes that unit to overhaul the Overture (Y!SM) beast....

Google's new quality scoring formula will have had a measurable impact on Google's financials, since it clearly affected a wide range of advertiser accounts. We won't know until we know, but my strong suspicion is that Google intends (or expects) to wow Wall Street with a higher average cost per click. They've knocked out the lower-priced clicks, taking on lowball bids from a number of angles (albeit indirectly, through a new ad ranking system that is intended to solve numerous problems at once). What this will appear to do, I think, is raise the average CPC, and thus Google's reported profit margins.

Yet it leaves quite a bit of inventory unmonetized, leaving further room for growth, and keeping users happy....

Boy, it'll be good to get beyond the quarterly speculation and focus again on more strategic issues.  But this appears to be a make-or-break quarter, where Google will either succumb to the realities of the market, or confound its skeptics yet again.

The result could determine how much clout Google can bring to negotiations with content providers and bandwidth gatekeepers this year.  And how much longer the search ad business can underwrite Google's extension into new domains.


Google's drop was a gift - buy the dips - 1/23/2006 01:16:00 PM

BuyGoogle posted that last week's 75-point fear-driven drop may be a rare gift for the Google investor who was looking at a nearly $500 price and regretted not getting in earlier. Google was first hit by fallout from the Yahoo disappointment, but if this is really a Yahoo issue and not an industry-wide issue, then this should be good news for Google as it's stealing share from Yahoo. Google was then slammed by the dispute with the Justice Department, which the contrarian in me sees as a positive -- enhancing the brand with consumers without much risk of a financial hit.

Today, with Google bouncing back 20+ 28+ points, some analysts are making the same argument. Dow Jones says analysts stick up for Google after drop :

Piper Jaffray analyst Safa Rashtchy reiterated his outperform rating and $600 price target. "We believe these news items merely represent headline risk and could have no meaningful impact on the company's fundamentals or the long-term opportunity of the stock," Rashtchy said.

Bear Stearns' Robert Peck reiterated his outperform rating and $550 price target: "We view the weakness in Google's stock as a buying opportunity and we advise both short-term and long-term investors to take advantage of the weakness and buy the shares."

Lehman Bros.' Douglas Anmuth reiterated his overweight rating, and believes "the recent sell-off in Google shares has created a buying opportunity at current levels

UBS Analyst Ben Schachter asserts, as BuyGoogle did, that Google shouldn't see much real fallout from its dispute with the overreaching Justice Department

While the selling continued as media headlines placed Google's name alongside the word "subpoena," wrote Schachter, a look at the actual issues in this case indicates zero financial impact for the company.

The article also points to a dissenter:

In a more bearish fundamental note, Stifel Nicolaus analyst Scott Devitt, wrote that Google shares are fairly valued at $400. The analyst cites a number of fundamentals that could keep Google shares down, including "click fraud," pornography, privacy issues in its search engine business, and competition ... Devitt wrote that investors should be buyers of Google shares in the low $300s.

Separately, John Battelle points to a Yahoo employee who asserts that because Google used "tricks" to juice EPS in the third quarter, and since such shenanigans weren't used in the fourth quarter, Google's fourth quarter will surely disappoint. This individual discussed shorting Google back on November 22, when the stock first crossed $400.

And Paul Kedrosky thinks Yahoo's stumble may have "broken the fever dream in which Google investors find themselves."

We'll know soon if Google advocates are in a "fever" or if Google skeptics are just covering their bums from the dot-com bust. In eight days we can put the speculation to rest and begin speculation on what 2006 will hold.


 buygoogle.com