The company is hot. It's stock closed yesterday at 466.25. It has gone up $50 or 10% so far this year. That's in like 2 weeks! Google has all of the technophiles loving it and nearly all technology companies fearing it. At any time you can find dozens or perhaps hundreds of bloggers pontificating about when it will render the work of desktop computing irrelvant. It is coming out with a new operating system any day now--or so I'm told.
The ABM (anybody but Microsoft) crowd is fully in Google's court. It is the latest company to be given mantle as the Microsoft Slayer. If I were Google, I'm not sure I'd want that title. I mean, consider some of the others who have had that title: IBM, Sun, Oracle, Netscape, Novell, Linux, Corel, Apple, Pointcast, the list could go on. The track record of Microsoft Slayers is short on wins. If they were in the NFL, they would be the Houston Texans (2-14 this season).
Is Google any better or stronger than these others? To listen to the mainstream press tell it, yes. Then again, they told the same story about the companies above and countless others. Google is like the stronger companies in the list. It has a good product and solid earnings. It isn't the next pets.com. The trouble is that it has really only one profitable product: search. That's a great product but I'm not convinced it is very sticky. Not long ago I tried to MSN Search. At first, it couldn't compete with Google and I ended up using Google a lot. Lately, however, it has gotten much better. I have fully switched and almost never go to google.com anymore. I changed my search toolbar to MSN and never looked back. It was painless. I still find everything I'm looking for.
So what? Everyone besides me is still using Google. True. However, my experience says that Google doesn't deserve the high margins it is getting. It says that it is really in the commodities business. When I switch from Windows to Linux, I feel it. When I switch from a BMW to a Daewoo, I feel it. When I switch from Charmin to Cottonelle, I don't. Google is much closer to the third than the first two. It is easily replaceable. I suspect that if I switched to Yahoo, I'd get the same results I got with MSN.
But, you say, Google has more eyeballs than MSN and Yahoo. They can therefore charge more for their advertising. If Google were a magazine, they would be right. Google, however, has changed the rules of advertising and rendered the supposition incorrect. When I buy an ad in a magazine or on TV, I pay a fixed price for it to appear and get a non-fixed response. An add on the Superbowl gets more people watching it than an add on The View. The Superbowl can thus charge more than The View for the same ad. I'm paying for placement and getting whatever eyeballs happen to be looking at that placement. Take the Superbowl again as an example. Ads this year will cost $2.4 million for a 30-second spot. If I pay for an ad, I spend $2.4 million whether the viewership is 50 million or 5 million. When I pay for an ad on Google, I pay not for the timeslot, but for the click.
Why does that matter? Because a click coming from MSN search is just as good as a click coming from Google. I don't get more clicks for my money at Google. In fact, because there is more competition for each ad word, I probably get fewer clicks per dollar. As an advertiser, if I'm buying 1,000 clicks, I don't care if Google has more customers than Yahoo. 1,000 clicks is 1,000 clicks.
To reiterate, this means that Google is in the commodity business and just doesn't know it yet. Microsoft and Yahoo could conceivably just keep the price per click down and customers will come their way. It makes good business sense. Some customers like FTD (the flower company) are already starting to balk at Google's prices. What effect would it have if lots of customers left? Google's earnings would lower which, with a P/E ratio of 105, would cause the stock to drop like a rock. That has other repercussions and a downware spiral would begin.
What do you think? Am I missing some critical fact which renders my analysis void?
-Godshatter