Google (GOOG)

Business model: Indeed, Google's business model is quite attractive. The company provides its basic service for free, guaranteeing a steady and growing stream of users. Its costs are, as a fraction of revenue, also remarkably low (less than a third).

The internet is still growing in terms of users and usage. More people are spending more time online. Devices such as the iPhone are contributing to this trend. Online advertising only accounts for 10% of total ad spending. As advertising on the web continues to grow, Google stands to capture a significant amount of expenditures.

TV advertising is facing major battles. The popularity of DVR devices is leading to declines in live viewer-ship as more people are recording content to watch later. It’s very likely that a significant number are skipping through commercials while viewing their recordings. According to an IBM study, 25% of US households own a DVR device, and 53% claim the majority of their TV viewing are recordings.

In addition, the proliferation of available television channels and content has dispersed the audience around the dial. This implies that on any given channel, there are less viewers. Audience dispersion encumbers advertisers seeking a mass audience in a single place (network TV). Declines in TV advertising will result in increases in web advertising.

User-generated content, such as videos found on YouTube, are boosting web usage. The explosion of blogs, as well as more free content from the media and press, are also catalysts. Print readership - newspapers and magazines - is declining, yet online readership is growing. Advertising spending will follow audiences online, and Google is well-positioned to benefit.

The numbers: By any measure Google has been a fabulously successful company, growing rapidly and maintaining incredible margins. It's hard to argue with a 70% profit margin.

On 17th Apr 08, Google proved the hand-wringers wrong by reporting Q1 earnings and revenue growth above expectations. It was the 12th time in 15 quarters as a public company that Google beat estimates.

Data from ComScore (SCOR) showing Google's ad clicks to be slowing missed a key reason why. Google deliberately limited the volume of commercial links so it could serve up more compelling messages creating actual sales. Google gambled that advertisers would be willing to pay more for each ad link if doing so created more revenue with fewer clicks.

According to the first quarter's results, that gamble is paying off. ComScore should adjust the way it delivers its findings. It claims to have never passed judgment but just reported a slowdown in clicks, but reporting a slowdown without providing context made Google's situation look bad when it was actually good. If the purpose of reporting clicks is not to understand the health of the business, then what's it for? Understanding that the quality of clicks is as important as the sheer number of clicks seems like a key part of ComScore's job, and one it messed up. Little surprise, then, that its stock fell 8% on Google's strong report. ^[1]

1. ↑ http://www.jasonkelly.com/2008_04_01_blogarchive.html#5538481216922366564

As of 2008 Google no longer has any competition! It is expending it's operations into many other areas other than search, and will most likely start eating away at Microsoft's market share through their internet applications. Google’s share of online search is more than 65%, while Yahoo, the closest competitor, is only around 20%. Google’s share has been rising, while Yahoo’s (YHOO) has been falling. Google’s search engine is far superior to the alternatives, so much so that “Google it” has become part of the English lexicon. As the web continues to expand, search is critical for navigation, thus Google will always be relevant.

Google dominates the paid-search category, which generates high ROI for advertisers. Yahoo has been stumbling for the past few years which has allowed Google to build a sizable lead. The fact that Microsoft (MSFT) is making a bid for Yahoo is an admission that it can’t compete with Google. I don’t know that buying a company that can’t compete with Google will help Microsoft. I believe that the merger discussions are a distraction for both and are giving Google the opportunity to further increase its lead.

Google’s growth potential is just not limited to paid search. Implementing ads in YouTube videos presents another avenue for growth. The acquisition of DoubleClick will boost display advertising revenues. In addition, Google has been experimenting with online applications for software as a service [SaaS] possibilities.

Innovation: Google has expanded not only by cutting its costs but also by aggressively looking for new products, improving old ones, and enhancing the quality of its searches. Although the company has seen tremendous growth, its business plan looks to the long run. As a part of this plan, Google is planning to plunge into the wireless communication market(mobile) and social networking which are amongst the most promising fields today.

Google's new era of software development that includes Gears, Android, App Engine, Web Toolkit, and OpenSocial API. Arguably, it all (the future, natch) belongs to Google -- "In a landscape littered with potential Google rivals, it seems premature to declare victory. But as Google and the Web become ever more interdependent, it becomes harder and harder to bet on another horse."

The people who pigeon-hole Google are likely the same people who misuse the word "titan" -- you know, as in business titan. They forget, if they even ever knew, just who were the Titans. And if they did know, or could recall, they would not misuse the term as they do, casually tossing it about. Unless its use were explicitly accurate.

Talk about branding?

Can you think of any other corporation whose brand name has become THE VERB to describe the service it offers?

"If you can't find it, just Google it up"

Yeah gads! Do you have any idea how much money it would take another company to make their brand name part of the everyday lexicon of their market?

They've done everything right, and that brand/verb connection shows us just exactly how right, too.

Google would have probably hoped and preferred Microsoft would focus its attention on this proposed buyout and merger, if successful, for as long as possible. This would clear the way for Google's continued successes. And a widening lead ahead of its primary competitors.

Sure, Microsoft and Yahoo are also-rans in online advertising, but as the space grows so rapidly, there remains room for several worthy competitors to keep the game... honest. Distressingly, I learn that Google's reliance on algorithms rather than humans irritates many of their clients and even their advertisers -- albeit, of the mom & pop variety -- who decided to spend their advertising budget elsewhere; a reality that seems to trouble Google little, if at all. Yes, as corporate advertisers (especially those companies with a national footprint, and thus huge advertising budgets) move online, attracted by the comparatively low CPMs, Google's revenues remain sky-high. And growing.

The debate surrounding Google's future is a microcosm of the more fundamental debates pertaining to information economies. As we begin to integrate our new understanding of dynamic systems into the torturously non-predictive state of contemporary economic theory, new perspectives on Value and growth-potential will not only vindicate Google's more hotly debated investments, but will in fact prove an integral factor that will influence their ability to adapt to growth cycles in such a manner that minimizes the effects of an increasingly volatile economic sector. One demonstration of this increasing volatility exists as the decreasing lifespans of information-age companies (see: "Why Most Things Fail" by Paul Ormerod http://www.volterra.co.uk/paul.html ), which also highlights the leverage given by Google's functional form as discussed above. The fundamental point here is that only in a large-scale company that demonstrates rapidly increasing and internally ordered complexity, is it possible to maintain not merely controlled, but directed growth in today's (and more importantly tomorrow's) economically lethal environment. It is these very properties that lead to the slowing growth-rate commented upon by the Bear perspective, which is, ironically, the very property that makes Google an extremely sound investment.

As a general conclusion, Google's business model allows them to effectively mold the information-architecture of the globe. The sheer size of the communication channels owned by Google is astounding (first corporation in history for which the speed of light is a salient impediment to efficiency), but most importantly their business-model allows them to passively generate consistently increasing returns while they actively focus their attention on creating a fertile infrastructure for the Information Economy of the 21st century. Basically, Google is seeding the very soil that the rest of the world will build upon, and its always great to own land.

The numbers: By any measure Google has been a fabulously successful company, growing rapidly and maintaining incredible margins. It's hard to argue with a 70% profit margin.

The Bearish perspective on Google's slow-growth stems from a fundamental misunderstanding regarding the very concept of slow-growth and what it implies. Their perspective stems from a frame of reference that has not yet incorporated the many verifiable facts of evolutionary economics. From this alternate perspective (one outlined well in Wall Street terms by Eric Beinhocker, of McKinsey & Co., in his book "The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics". See: http://www.mckinsey.com/ideas/books/originofwealth/index.asp ) slow-growth and high market-saturation is in actuality a wonderful indicator for those interested in value investing. There are many reasons for this, but the most important are:

Dynamic Stability

An entity, biological or economic, displaying internal dynamics which are inversely proportional to slow-growth, meaning that the internal complexity of the corporation is scaling at multiples much greater than the global growth rate, is a highly adaptive entity in an environment saturated by disruptive patterns such as those demonstrated by the technology markets. I would venture that when considering Google's investments in infrastructure and the global expansion of the "Googleplex", it is safe to say that the internal complexity of Google is growing quite rapidly, and as the Bears have observed, we know that the global growth-rate as a function of market-share is slowing. One study on the relationship between infrastructure investment, expansion, and complexity can be found at ( http://pwm.sagepub.com/cgi/content/abstract/4/4/274 ), and one can also find the fundamental information theory behind this concept in Steven Wolfram's "A New Kind of Science".

The Irrelevance of Standard Valuation

After one becomes comfortable with the science behind the first assertion, it follows that in regard to the adaptive efficacy of a company that satisfies the conditions discussed above, traditional valuations of profit models and market-share are poor indicators of Value growth. If the system in question, for our purposes Google as an evolving corporation, is in reality a global information-infrastructure, market-share becomes a poor indicator of long-term potential (market-share as denoted by profits from ad-revenue does not demonstrate the extensive influence of their privately owned info-infrastructure). To demonstrate this point, consider the Bears' argument regarding Google's profit-model and its near complete dependence on advertising revenue. This "dependence" is actually an indicator that something fundamentally novel is happening concerning the types of large companies that can maintain stable-growth, and I would challenge anyone to name a company that sees one-tenth of Google's revenues with a passive profit model (and I would not consider social-networking sites passive, anymore). The key idea to take from this is that by passively generating revenue in a large-scale market, Google is able to spend time and money actively contemplating and developing their strategies over longer hypothetical time spans, which focuses them on the horizon rather than the bottom line.

Business to a Different Drum

The debate surrounding Google's future is a microcosm of the more fundamental debates pertaining to information economies. As we begin to integrate our new understanding of dynamic systems into the torturously non-predictive state of contemporary economic theory, new perspectives on Value and growth-potential will not only vindicate Google's more hotly debated investments, but will in fact prove an integral factor that will influence their ability to adapt to growth cycles in such a manner that minimizes the effects of an increasingly volatile economic sector. One demonstration of this increasing volatility exists as the decreasing lifespans of information-age companies (see: "Why Most Things Fail" by Paul Ormerod http://www.volterra.co.uk/paul.html ), which also highlights the leverage given by Google's functional form as discussed above. The fundamental point here is that only in a large-scale company that demonstrates rapidly increasing and internally ordered complexity, is it possible to maintain not merely controlled, but directed growth in today's (and more importantly tomorrow's) economically lethal environment. It is these very properties that lead to the slowing growth-rate commented upon by the Bear perspective, which is, ironically, the very property that makes Google an extremely sound investment.

As a general conclusion, Google's business model allows them to effectively mold the information-architecture of the globe. The sheer size of the communication channels owned by Google is astounding (first corporation in history for which the speed of light is a salient impediment to efficiency), but most importantly their business-model allows them to passively generate consistently increasing returns while they actively focus their attention on creating a fertile infrastructure for the Information Economy of the 21st century. Basically, Google is seeding the very soil that the rest of the world will build upon, and its always great to own land.

Business model: Indeed, Google's business model is quite attractive. The company provides its basic service for free, guaranteeing a steady and growing stream of users. Its costs are, as a fraction of revenue, also remarkably low (less than a third).

Google will be the dominant search engine on smart phones, this will provide the company a new growth path. There are billions of people around the world using cellphones, and in the future millions of people using smart phones.

An entity, biological or economic, displaying internal dynamics which are inversely proportional to slow-growth, meaning that the internal complexity of the corporation is scaling at multiples much greater than the global growth rate, is a highly adaptive entity in an environment saturated by disruptive patterns such as those demonstrated by the technology markets. I would venture that when considering Google's investments in infrastructure and the global expansion of the "Googleplex", it is safe to say that the internal complexity of Google is growing quite rapidly, and as the Bears have observed, we know that the global growth-rate as a function of market-share is slowing. One study on the relationship between infrastructure investment, expansion, and complexity can be found at ( http://pwm.sagepub.com/cgi/content/abstract/4/4/274 ), and one can also find the fundamental information theory behind this concept in Steven Wolfram's "A New Kind of Science".

After one becomes comfortable with the science behind the first assertion, it follows that in regard to the adaptive efficacy of a company that satisfies the conditions discussed above, traditional valuations of profit models and market-share are poor indicators of Value growth. If the system in question, for our purposes Google as an evolving corporation, is in reality a global information-infrastructure, market-share becomes a poor indicator of long-term potential (market-share as denoted by profits from ad-revenue does not demonstrate the extensive influence of their privately owned info-infrastructure). To demonstrate this point, consider the Bears' argument regarding Google's profit-model and its near complete dependence on advertising revenue. This "dependence" is actually an indicator that something fundamentally novel is happening concerning the types of large companies that can maintain stable-growth, and I would challenge anyone to name a company that sees one-tenth of Google's revenues with a passive profit model (and I would not consider social-networking sites passive, anymore). The key idea to take from this is that by passively generating revenue in a large-scale market, Google is able to spend time and money actively contemplating and developing their strategies over longer hypothetical time spans, which focuses them on the horizon rather than the bottom line.