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Google as a long-term investment
What's the real growth potential here?
Sharky




msg:1238666
 5:11 am on May 4, 2004 (gmt 0)

I'm interested in hearing what people think about Google's prospects as a long-term investment.

Today, their revenue comes mostly from advertising. Where is the revenue growth going to come from? Is it search, or something else? Surely not GMail.

What do you think they'll use their IPO money for? Acquisitions? Capital? Law suits? Snacks?

I'm also curious if the tone of the S-1 letter struck anyone else as incredibly arrogant? They talk about the culture, wanting to do good in the world, high-risk this, high-reward that, and tons of other useless crap. But when it comes to the real business stuff, there's no meat. They're not going to give income guidance? Publically traded shares won't have full voting rights? A triumvarate? "Don't be evil"? **** are they smoking?! Amusing, yes. But is this a real business, or the social project of two soon-to-be-rich mathematicians, with no real sense of business?

Yes, they included a bunch of income numbers. It seems like the legally-required bare minimum to me, though. They quote Warren Buffet, but these guys clearly are no Warren Buffet. I came away from the S-1 with no better understanding of their business or their future prospects than I had before.

The whole Microsoft issue looms large in my mind, too. Steve Ballmer has basically said that there is absolutely no way that Microsoft will let Google win. MS has a huge new search service coming out in June. Today, MSN Search has 45 million users compared to Google's 65 million. Surely a few billion dollars of development by MS could swing the tide the other way. Combine that with MS marketing muscle and a possible tie-in into Windows, and could be pretty compelling.

Then factor in Google's recent treatment of their AdSense webmasters. The whole debacle was massively mis-managed. Is this a sign of things to come? From posts on this forum, it sure seems like a lot of webmasters would be willing to jump ship if something decent came along. With so much of Google's current revenue tied to ad income, that would certainly hurt if it happened.

Don't get me wrong -- I love Google. It's a great search engine, and AdSense has been very good for me. But what I'm wondering now is, will it also be a good business? I would be interested to hear your thoughts along these lines.

 

Swash




msg:1238667
 7:50 am on May 7, 2004 (gmt 0)

Interesting. You're certainly right on the adsense point, as an adsense publisher I can say the bottom line comes before any loyalty to the big G. The s-1 letter did also seem a little 'what the' to me.

loanuniverse




msg:1238668
 1:33 pm on May 7, 2004 (gmt 0)

Surely not GMail.
IMHO, Gmail is just another advertising channel for them. It is the kind of thing they do. Take a look at something being offered by the market {free email with ads} and make it better from the point of view of the user and more profitable from the point of view of the advertiser.

Acquisitions? Capital? Lawsuits? Snacks?
I would say acquisitions. They have acquired a few companies already now they will have not only a couple of billions to play with, but also their own currency.

…. else as incredibly arrogant?
Somebody’s arrogant is another person’s refreshing. Frankly, it is their company and they are going to let people buy in under their terms. I don’t see how someone could call that arrogant, when we would do the same thing if we were in the same position. Also a lot of companies start off with one corporate culture and vision that lasts as long as the founders are around. It also comes down to the powers that be at Google being honest as to what they want to do, and the investor deciding whether or not they want to jump in. There will be no reason to complain later if you get in at IPO.

… no better understanding of their business or their future prospects than I had before.
I think they sell ads :) Prospects are bright or gloomy depending on whom you talk to. IMHO, Sunny with a 30% chance of showers and late thunderstorms.

… The whole Microsoft issue looms large in my mind
Microsoft looms large in the minds of almost every single software and internet company. I would be worried about Yahoo as well. When was Altavista #1? How long did it take Google to surpass it? Talk about the reliability of future cash flows.

… Then factor in Google's recent treatment of their AdSense webmasters. The whole debacle was massively mis-managed.
What debacle is that? The April 1st “smart pricing”? Are they willing to jump ship for additional revenue? Sure, it all depends on the percentage increase, the reliability of the new revenue and other matters. For most it will be a purely business decision. However, there are a lot of happy adsense publishers who think that they have been treated reasonably fair, and better than most ad networks out there.

john_k




msg:1238669
 2:39 pm on May 7, 2004 (gmt 0)

There is definitely potential for them to be a long-term big player. Microsoft got where they are today by leveraging every advantage to get into related and emerging markets. Google can explode if they can:

- convince the world's web publishers to become an extension of Google, and
- adapt to what comes after the Web.

When people consider what Microsoft did in a little over 20 years, everyone remembers how they leveraged their original position as the maker of a PC operating system into applications and then into servers. They now have tenticles into any and everything related to computing.

What people don't often think about is how they also leveraged the developer market to create a push-pull demand for programmers that use Microsoft tools to develop applications that require Microsoft desktops. To me, this was their ace-in-the-hole, and they played it like Hoyle.

Anyone that has done some under-the-hood programming for Windows can tell you that ALL programs developed for Windows are really just extensions of the operating system (essentially they are call-back functions). When VB came along, it made it easy for people to want to program for Windows. Someone with little to no programming experience could create a working windows program in a few minutes; and a useful program in a few days. With the C++ tools they put out, more experienced programmers could cut down their development time by using the "Foundation Classes." The side-effect of using them was that all thoughts of writing programs that would run on Windows, Macs, and OS2 were buried. People learned to write for Windows. Consequently Apple and IBM were left with a shortage of new applications. Sure, many programs were adapted or rewritten for the other platforms, but the "Windows first" development strategy meant they were always a year or more behind.

So, Microsoft got a lot of people to build extensions to their OS. And they sold them the tools to do it. And (for shrink wrapped software) MS charged the makers to test their software so that they could claim it was Windows 3.0/3.1/95/98/ME/2000/2003 certified. And by doing all of this, they locked out their competition.

To be sure, they had some failures. One was something called "Blackbird" in the mid '90s. Microsoft's vision for the original MSN was that it would be bigger and better than the Internet. And separate. And all owned by Microsoft. Blackbird was the development tool that would allow developers to create MSN sites or applications that went way beyond what a standard web site could do (in 1995 anyway). The main reason it failed was that they were too late to market with it. Blackbird was not HTML so sites developed with Blackbird could not also be used on the Internet. The Internet was already exploding and MSN was not. So given the choice of developing a standard website or an MSN site, people generally went with a standard website.

If you look at a lot of the concepts behind .NET and Blackbird, you will see a LOT of similarity. It took them eight years to turn it around, but they have not given up on owning the Internet. Their recent push at developing a search engine is further evidence. Not only because it will give them a ton of revenue, but because it is leverage on one of their biggest future competitors. In the 90's, they dumped their OS on the market until they were the king. Then they dumped their office suite so that now Word Perfect, Lotus, dBase, and Harvard Graphics are all trivia answers. A search engine positions them so that they can force Google to gain steam more slowly because they won't be able to charge for something that MS gives away.

That is what Google is going up against. They have the position, and they still have a little bit of the honey-moon effect going for them. To get a Microsoft like kind of domination Google will need to convince people to build sites that are an extension of Google. They won't be the only ones trying to do it though.

gopi




msg:1238670
 7:55 pm on May 7, 2004 (gmt 0)

Good post John!

dude




msg:1238671
 8:47 pm on May 7, 2004 (gmt 0)

"Its a search engine"...

1.Google have nothing unique in the short to medium term see www.mooter.com as an example.. They are very well placed at this point in time (which is why they are IPOing).

2. Their Adwords has a very short life span, as it realy does nothing for sales only for google..

3. They have no customer support, and are incredibly arrogant towards their customers ( see form letters now resposnses to emails for weeks etc..etc.... This will make any competition more appealing.

4. Who would want to buy second class shares anyway?
They are likely to be just as arrogent when it comes to dividends and consideration of share holders as they are of their customers.

5. They have no idea about anything outside of America. Have no idea that there is even somethign called GMT etc...

My two cents worth...

loanuniverse




msg:1238672
 10:18 pm on May 7, 2004 (gmt 0)

Dude:

If I could address some of your points:

… .Google have nothing unique in the short to medium term see www.mooter.com as an example……
For one thing they have been able to differentiate themselves from the competition. Using this reasoning Wal-Mart is just a retail store. By the way, your example gives me the following:
From mooter.com description The server encountered an internal error () that prevented it from fulfilling this request.

Does it make it unique that Google works?

… heir Adwords has a very short life span, as it realy does nothing for sales only for google…..
A lot of people have become rich being the middle man.

… They have no customer support, and are incredibly arrogant towards their customers…
All I can say is that both an advertiser and a publisher, I have always been treated as well as I expected. Then again, other people might have higher expectations.

…. Who would want to buy second class shares anyway?
Hmmm something tells me that they won’t have trouble selling all of the shares to be auctioned. I am willing to bet you US$100.00 that there will be enough demand. I am serious… maybe we can get someone to escrow. <Assuming it happens within the next six months>

They have no idea about anything outside of America…..
There is something outside America? Too bad you can include pictures as there is a great map going around the internet for years that shows how Americans view the world. Pretty funny. On this one point, I will have to concede since you are probably outside the US and more of an expert on that. On Google’s defense, I would say that most of its revenue comes from US advertisers so they probably have to cater to this market more. However, I think I read something in the S-1 that most of the traffic is from outside the US.

Sharky




msg:1238673
 8:17 am on May 10, 2004 (gmt 0)

Nothing posted here so far makes me any more comfortable that the management at Google is really capable of taking their current $1B/yr business and transforming it into the $10B++/yr business that they aspire to be. If the past is any guide, using IPO money for acquisitions is a sure path to disaster. I can't say that their recent acquisitions, like Blogger, have been confidence-builders.

I agree that their technology is cool. But tech alone isn't enough to warrant the outrageous valuation that's likely to happen with the IPO. For that to make sense, there needs to be a lot of clearly-visible growth on the horizon. Maybe I'm blind, but I just don't see where the growth is going to come from.

As one of the recent posts said, Google is really in the business of selling advertising. I agree with that view. However, I don't think that's the way Google sees themselves. Do they really understand who their customers are?

I read somewhere that the Google IPO probably won't happen until August. If that's right, it will be interesting to see what happens to the IPO fever when Microsoft releases their next-generation search engine in June (assuming that they don't slip their schedule). In its basic form, large-scale search is a pretty well-understood problem. People have been treating Google like they have some secret sauce that no one else can duplicate. The corporate graveyard is littered with companies that have underestimated Microsoft's ability to reverse engineer, then improve, refine, polish and market a competetive product. While I believe Google is currently the best search engine out there, I also find that there are many cases where it returns crappy results, so I'm looking forward to the competition.

dude




msg:1238674
 1:19 am on May 11, 2004 (gmt 0)

loanuniverse:

"Its a search engine"...

My point is that Google owns no content, unlike say Sony or others..

In fact it could be said they violate copyright with their cache... They are already doing a Msoft with legal fights on trademarks etc..

At the moment content owners provide most public content "feely" so crawlers like Google have free access to the content which is the basis for their busieness. Note they are not a "whitepages" type engine, but rather a content search engine (which by the way is getting less useful by the month)..

Anyway, back to the point..

1. There is nothing to say that content will continue to be provided for free to crawlers.
a) See the terms and conditions appearing on most sites which google voilates.
b) The copyright is not owned by google, but by the content owners. The copyright owners has total control over what can be done with their content.
c) As and example we currently allow only three crawlers to our sites, we have banned about 12 in the last three months ( robots.txt then IP denial for those that persist). These have been sites which make money from our content and produce no benefits to us.
d) When people make money from the content owners, it is likely that the content will not remain free..

So how much is google worth if a) they have to pay for content, and b) they have no content to base ads upon, or c) google does not provide the seach result to customers?

Bottom line they dont own anything, but they are currently the market leaders in a very untried ads business.. No tangible assets? which can become google.bust.com at anytime, for almost any of the numerious reasons in circulation.

Especially when their management says they dont want to be a "real business" anyway...

Just my two cents worth...

MarkHutch




msg:1238675
 1:24 am on May 11, 2004 (gmt 0)

Wait a year and then think about buying their stock.

loanuniverse




msg:1238676
 1:11 pm on May 14, 2004 (gmt 0)

Wait a year and then think about buying their stock.

It depends on each person's individual aversion to risk. Would I cash in my retirement mutual funds and buy the stock? No way! Would I be willing to take a gamble with a couple of thousand US$? Sure, why not.

On the other hand, some people will never invest on anything with the term "internet" ever again, and some people will buy more than they should.

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