Google (GOOG)

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Matthew Martos

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Google Inc (NASDAQ: GOOG), a global information technology leader, specializes in how people access and interact with information. Google provides the leading search engine along with many online services such as Gmail, Adsense, and Chrome. In fiscal year 2010, Google reported $29.3 billion of revenues and $8.5 billion of net income. Google operates in over 50 countries with unique domain names for each country. Internet advertising is the fastest growing segment of the advertising market, but still only represents 8% of total U.S. advertising dollars -- suggesting considerable room for further growth. To tap these opportunities, Google has used the profits from its paid search business to support innovative projects such as Google Editions and the Android Market.

Interesting! Though IE has absolute dcianmnoe at the moment, one can notice that that gap is closing. A year back ~70% of our visitors were using IE. That figure has come down to ~50%. Chrome has a long way to go in terms of popularity!

Trends and Forces

Google's Advertising-Based Business Model is Susceptible to Economic Cycles

Advertising is a major revenue driver for Google, with 96% of its revenue coming from advertising. This dependence is a concern in a down economy since advertising is generally the first source of cost-cutting for companies^[1]. Google has seen an increase in the number of paid clicks generated by an increase in aggregate traffic and the continued global expansion of their products, advertiser base and user base. The decrease in the average cost-per-click paid by advertisers was primarily the result of the strengthening of the U.S. dollar relative to foreign currencies.^[2]

Google's Free, Advertising-Supported Offerings Prove Highly Disruptive

Google has completely transformed the world of advertising in its efforts to connect users to information. Its free offerings have been highly disruptive to well-rooted industries, provoking frequent legal conflict. Viacom is seeking damages in excess of $1 billion from the posting and distribution of copyrighted materials on YouTube. With the 2004 launch of Google Book Search, authors and publishing houses reacted to the millions of copyrighted books being downloaded for free. The Authors and the Association of American Publishers sued Google for copyright infringement in 2005. Through a settlement, Google continues to make books digitally available, to the chagrin of publishers and book retailers such as Amazon. With the launch of Google Earth, the appeal of America Online's MapQuest basically disappeared overnight. Google's Android-based smartphones, equipped with free GPS navigation services, have upended the need for TomTom, which comes at a charge to consumers. Google's Gmail, Google Apps, and Chrome also competes directly with Microsoft's Hotmail, Office Suite, and Internet Explorer respectively^[3].

Competition

Although Google in its broadest perception has gained an unparalleled marketplace acceptance, in the narrower search market its competitors are Yahoo! (YHOO) and Microsoft (MSFT), which is currently expanding into the online search and advertising business within the US and Baidu.com (BIDU) in China. Yahoo, founded four years before Google, was historically the leading online search site, but in January 2009, Google made headlines by overtaking Yahoo in unique users per month. Relative to Yahoo!--and almost any company--Google's expenses are quite low. The expense breakdown suggests different priorities for the two companies: Google's highest cost sector is product development, at 9%, while Yahoo! allocated 20% of revenues for sales. And while Google spreads its costs evenly among the three principle areas, Yahoo!'s expenses are clearly concentrated in sales, with development and administration trailing far behind.

Because Microsoft has many sources of revenue beyond advertising, it is difficult to compare it in more detail to Google and Yahoo!.

With a plethora of social networking websites and platforms making their way onto the internet, Google faces stiff competition from websites such as Facebook, Twitter, Groupon and LinkedIn.

Google's Android smartphone operation system is also in direct competition with Apple (AAPL) , Microsoft (MSFT) and Research in Motion (RIMM) in the fast-moving, competitive smartphone market.

As Google expands into e-commerce and Local services using its Google Offers, Checkout, and Wallet , it is also encroaching on an estalished player in Groupon as well as Facebook's Deals.

Sources

1. ↑ GOOG 2008 10-K pg. 19  
2. ↑ GOOG 2009 10-Q1 pg. 27  
3. ↑

46. Android GPS tracking 47. The Android Phone