Battelle links to Greg Linden's latest in a series of thought experiments on Google's vulnerabilities titled, "Kill Google." The thrust of Greg's post is that Microsoft should do whatever it takes, including using Microsoft's "market power," giving away the product for free, and employing other scorched-earth tactics to eliminate Google's AdSense offering. Greg reasons that since AdSense (where Google places ads on third-party websites) is half of Google's revenue, Microsoft should "strangle Google's air supply" rather than trying to beat Google in mundane things like search quality and a better user experience.
But Greg misses a fundamental characteristic of Google's business model -- AdSense isn't as important as it looks. Here's the comment I posted on Greg's blog:
[begin quote]
Even if Microsoft could reduce Google's AdSense revenues to zero, it wouldn't hurt Google as much as you think.
From a financial standpoint, the relevant revenue number is the one *net* of traffic acquisition cost (the amount Google shares with content owners). On this basis, AdSense revenues were only $573 million in 2005, or less than 15% of Google's total net revenues.
That's because Google gives back about eighty cents of every dollar in revenue to the content owner. To count the whole dollar as revenue instead of the 20 cents Google keeps would be the same as eBay counting the total value of merchandise sold on its site instead of just the auction fees eBay charges.
(It's confusing because GAAP accounting rules require Google to count the whole dollar, while they require eBay to count only the auction fee. But economically and from a cash-flow standpoint, the important revenue number is the one ex-TAC.)
For Microsoft to beat Google at the AdSense game would require a lot more than giving the product away - a 100% revenue share wouldn't make publishers as much money as Google's 80% share, since Microsoft doesn't have the inventory of ads to sell or the techology to place them on the right sites. In short, Microsoft doesn't have AdWords, which is where Google gets the inventory of ads to sell.
So the *real* way to kill Google is to kill AdWords, not AdSense. AdWords generates 85% of Google's net revenue, and it provides the inventory for AdSense.
But to kill AdWords, Microsoft has an awful lot of difficult technology to develop, while Google continues to innovate at a higher clock speed than Microsoft. And just as network effects make eBay nearly invincible in the online market for physical goods, network effects make a very high barrier for entry into the market for keyword advertising that Google owns.
Google's certainly not invincible, and I'm looking forward to reading Anil's thoughts on the chinks in Google's armor. But going after AdSense will be a long, hard battle that even if won wouldn't do more than dent Google's cash flow.
[end quote]
I'd posted two years ago about the problem analysts were having with Internet math, and it looks like it continues to confuse people.
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| Google's prospects from a Google user and independent investor |
Killing Google by ending AdSense - 4/15/2006 10:25:00 PM
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It's the little things - 4/14/2006 09:59:00 PM
I spend a lot of time typing in that little box in the upper right corner of my browser - the Google search box that suggests keywords as you type. It's simple to use and helps me frame my searches even before I press Enter.
I use the search box for much more than traditional searches. I use it as a calculator and to convert hectares to square miles. I also use the search box to help with spelling, by beginning to type a tough word and seeing what spellings Google suggests. So I was watching this fascinating yet maddeningly quirky video of Verbatim author Erin McKean, and she said her favorite word was "erinaceous." Naturally, I guessed (wrongly) at the spelling in the search box [define erinacious]. It's a little thing, but it's new -- now Google gives you "did you mean" spelling corrections as you type in the search box, without ever opening a browser window. So cool!  By the way, "erinaceous" means "characteristic of a hedgehog." |
Another idea for Google's warchest - wireless spectrum - 4/13/2006 06:44:00 AM
In addition to the dumb ideas for Google's cash identified by cnn.com, here's another one from Investors Business Daily and our friends at AT&T: Google could spend $10 billion on wireless spectrum in a June auction.
Presumably, Google would want to build its own network because it's now at the mercy of the big network gatekeepers like AT&T and Verizon. Maybe all that spectrum could connect with the Google Cubes in everyone's living room? Or Google could provide free bandwidth for everyone paid for with ad revenue? Or Google could build its own private internet using all that dark fiber, using wireless for the last mile to homes and businesses? The gatekeepers are locking their customers in, suppressing the growth of cheap high-speed networks, and behaving like the monopolists they are. So while I'd love to see Google upset their expensively lobbied monopolies, I have a hard time seeing 5000-employee Google becoming their own telco. |
Who cares if Google is a portal? - 4/13/2006 06:38:00 AM
Battelle says that the release of Google Calendar shows that Google has become a portal.
But the is-a-portal/not-a-portal debate isn't terribly relevant anymore. Yes, Google used to just redirect the user to other people's content, now Google is hosting more of that content - but does that make Google a "portal," and does it matter? This shift started with Gmail, and was confirmed 4/1/05 with the "infinity plus one" announcement. Once you accept Google hosting all your email and providing a killer app to do it, the next steps follow logically -- Video, Base, Writely, Calendar ... Google Flickr? Hosted Desktop? Google Grid? The word "portal" is so imprecise and loaded with negative connotations -- walled gardens, lock-in, banner ads, conflict of interest -- that the word has lost some of its descriptive power. So I don't know if Google is a portal or not, and it doesn't really matter to me. I do know that Google is now directly hosting and managing a lot more of my information and not just referring me out to thrid-party search results. And that is a major shift that will require competencies that Google is only starting to explore such as personalization, social recommendation and fine-grained access control. |
Better satellite imagery - 4/11/2006 10:08:00 PM
Zawodny says Yahoo updated their satellite imagery, and gives an example of a remote airport where the images are higher res than Google's. I've seen similar differences between Google Maps and Microsoft's Live Local, with each service stronger in some cities than others. It's the same for Yahoo and Google.
I zoomed in on my own neighborhood in Yahoo and Google, and in this case Google's satellite images are far superior. On the left is a 300 x 200 pixel screen shot from Yahoo at its highest zoom level, and on the right is the same size image from Google's service. In my neighborhood, Google's imagery is clearly superior, you can easily see cars and read street markings in Google.   Interestingly, Microsoft's Live Local seems to have the best imagery in my city -- you can view the same spot from four different perspectives, and zoom even tighter than Google and much better than Yahoo. I'm sure somebody's done a more thorough and scientific comparison of the services, but I haven't seen it. So until then, to each his own. As a Google investor, the back-and-forth on features is fun, but not strategic. What's important is that Google is known for innovation and leadership, while the others take months and years to copy Google's strengths. And what's really important are the things competitors can't easily copy -- Google's massive infrastructure, its deep pool of engineering talent, and Google's brand and reputation. |
Dumbest ideas for Google's warchest - 4/11/2006 10:59:00 AM
 CNN has a great example of worthless news analysis. Stories like this with little insight or creative thinking give business writing a bad name, and strengthen the case for the many perceptive and original blogs written by people who know what they're talking about. The worst thing about this "news" article is that there is nothing "new" there -- it just rehashes old, tired stuff. (And what's the deal with the gorilla graphic -- Google's $12 billion and 6,000 employees are nothing compared with Microsoft's $35 billion and 60,000 employees.) Let's start with an obvious non-sequitur: The company didn't sell the stock because it needed cash. The article says Google sold the stock not for the cash, but because S&P 500 index funds needed the stock. Huh? Every corporation sells stock to get cash, not to supply stock certificates. Google seized the S&P opportunity when demand for shares would spike, but Google's SEC filing spells out the need for cash in clear (if open-ended) English. Google needs cash for: General corporate purposes, including working capital and capital expenditures, and possible acquisitions of complementary businesses, technologies or other assets ... And now for the five dumbest uses of $12 billion, according to CNN: #5. Buy Facebook - social networking is certainly on fire, and Google's Orkut isn't hacking it outside Brazil. But spending $2 billion for college site Facebook doesn't seem like the frugal Google that we've come to know. #4. Buy YouTube - whether or not YouTube is appropriate to augment Google Video's mission, this is not a billion-dollar company (at least not yet). It wouldn't be surprising to see YouTube get snapped up, but it wouldn't sop up much of Google's cash balance. #3. Hire more engineers - Google doesn't need $12 billion to hire engineers, because engineers are paid out the normal operating budget. If Google *doubled* its R&D, that would cost an additional $0.5 billion annually, easily covered by Google's $2.5 billion in annual operating cash flow. #2. Build wireless broadband - it's an intriguing idea to make an end run around big network gatekeepers like AT&T, and Google's already blazing new trails in San Francisco and Mountain View; but at an estimated $10 million per city, you don't need $12 billion bucks to blanket the 10 largest metro areas with Wi-Fi. And the number one dumbest use for $12 billion in cash is ... #1. Buy a cable TV company - A big cable company like Comcast would cost at least six times more than the cash Google has to spend, and there are cheaper ways to get access to customers than spending that kind of money. Google's more likely to build a marketplace for TV advertising that would involve content providers and network owners as trading parties, or maybe even a dedicated marketplace with Comcast or Tivo. But buy a cable company? Google's mission is to organize the world's information, not to own the means of distribution. And here's a bonus asinine assessment ... #0. Pay a dividend - let me get this straight, you're saying Google should issue new stock, diluting existing shareholders just so Google can give the cash right back to shareholders as a taxable dividend. You're damn right the stock would tank if Google pulled a boneheaded move like that. How exactly would this benefit anyone but Google's competitors and short-sellers? Who writes this stuff anyway? Google is an information marketplace that solves difficult problems at massive scale, and the market for online services is ripe for consolidation. Any major acquisition or investment will support Google's core mission and methods, and strengthen an area that today is a strategic vulnerability for Google. It would be refreshing to see the mainstream press dig in with deeper analysis rather than superficial drivel like this CNN piece. |
Google is a cheapskate - 4/11/2006 09:05:16 AM
And I mean that in a good way.
It's common knowledge that Google can squeeze more processing power out of a buck than most companies by using commodity PCs, open-source software and internally developed code. When you see Google spending a billion dollars in capital expenditure, most of it in data centers, you can bet that's a ship load of processing power. But it's comforting for the Google investor to witness Google's frugal nature in other areas, like the fees it pays its investment bankers. It was rumored that the banks that organized the IPO were paid a small fraction of their usual fees. And now we hear that Goldman Sachs, which was excluded from the IPO but was invited back to underwrite this month's $2 billion offering, did the work at a stunning 98% discount: Goldman was paid just $1 million by the search-engine company, representing about 0.05 percent of the value of the 5.3 million shares it agreed to sell, according to a March 31 regulatory filing ... At Goldman's average fee of 2.65%, Google would have paid $55.6 million in fees, but negotiated that down to just $1 million. Impressive. |
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