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If Search is Settled, Will History Repeat Itself?

Written By Drupad Sil | May 13, 2008 | Share This | Print This Post

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A lot of talk on Google today, probably spawned in the wake of the failed Microsoft-Yahoo (MicroHoo?) merger. First up is a fantastic Financial Times article written by Richard Waters that discusses Google’s business outlook now that the company’s greatest short-term threat is out of the picture. From the article:

“The scale of Google’s victory over Microsoft in online advertising, sealed by the failure of the Yahoo takeover approach, is hard to exaggerate. By next year, half of the world’s online advertising – set to reach $55 bn in total – is expected to flow through Google’s systems. Of that, slightly more than two-thirds will come from advertisements that run on Google’s own websites. The rest represents advertising that the internet company, acting as a broker, places on other companies’ sites in return for a small cut of the action.

It is a stunning victory that raises two overriding questions. Will Google be able to use the respite provided by the disarray at Microsoft and Yahoo to carry its dominance of search over into other areas of online – and broader digital – advertising? And should it now be a cause for alarm that one company is in a position to control so much of the lifeblood of the internet?”

Even if Microsoft and Yahoo weren’t in disarray, it would be difficult to keep up with the sheer volume of projects that Google seems to be working on. Google has been sticking its fingers in every pie imaginable, from social networking to WiMax and mobile technology. Adding these to the already-placed bets on the growth of display advertising and online video with its acquisitions of DoubleClick and YouTube, Google is reminding some observers of one of its biggest competitors… Microsoft.

This has spurred some speculation as to which company will be bigger in the long run. Henry Blodget at the Silicon Valley Insider claims that Google Search will be bigger than Microsoft Windows in 2009 for the following reasons:

“Both products are natural monopolies. Google’s share of the search market should continue to approach Microsoft’s share of the operating system market (90%+).

Both products are wildly, fantastically profitable. Microsoft’s Windows business has operating margins of 75%-plus. So does Google’s search business (once you factor out the billions Google is spending on products that produce zero revenue).

Google natural monopoly is growing a lot faster than Microsoft’s. Google’s search business should be bigger than Microsoft’s Windows business by early next year (at the latest). Google is also growing faster than Microsoft’s two monopolies combined – Windows and Office. Google has yet to develop a second huge, fantastically profitable monopoly - the Office equivalent – but AdSense is getting there.”

While I certainly agree with Blodget’s general analysis, I think he’s missing a couple points. First off, I think the barriers to entry are a little more complex than described here. On the one hand, you could make the argument that barriers to entry in online search are low – there are a large number of engines out there with significant market share, especially outside the US market (Baidu comes to mind). However, the counterargument here is that while producing engines may be relatively simple, getting people to pay for ads on their pages is another story entirely. With Google dominating the online space the way it is, its conceivable that more and more people will have to turn to them to deliver the search volume required, leaving other engines out in the cold. And, as we learned in the late ‘90s, it actually takes real revenue to build a successful company, not just a cool idea.

That being said, people dismissing anyone else’s chance at competing with Google are forgetting the lessons of the not-so-distant past. After all, it wasn’t that long ago that Yahoo was cruising out in the lead. Then Google appeared with its streamlined search results and quickly crushed the apparent king. In order to avoid the same fate, Google has wisely diversified its services beyond just search, increasing the company’s long-term profitability and causing talk like that at SAI and this at HipMojo by Ashkan Barbasfrooshan:

“So in 2010, Google’s current historical growth rate projects a revenue figure of $34 billion, with 25% profit margin of $8.2 billion, and with a P/E of 35, could technically command an enterprise value of $287 billion. It currently boasts some $10 billion, so at these levels it would carry enough cash to push up its market cap northwards of $300 billion.

Today MSFT has a market cap of $284 billion, and that includes a wallop of cash.

Tale of the tape: Google $287 billion; MSFT $284 billion…

There you have it. Told you it’s not a bubble, we’re actually talking revenues, profits and P/E.”

That last was a posted estimate from 2006, but the general sentiment is echoed by many observers. While I agree that Google’s outlook is definitely strong, there’s a real danger in extrapolating historical data points to predict future performance, especially in Google’s case. The company hasn’t made a mistake yet, but there’s no guarantee of this going forward. Getting complacent, pushing a shoddy product out the door, a poor acquisition – these are all very real possibilities. Even the highly touted purchase of YouTube hasn’t generated serious cash yet, a la NewsCorp and MySpace. Furthermore, the company’s reputation may begin to create more problems than goodwill. Despite longstanding positive perception of its brand, Google’s growth and massive access to data have brought this angelic standing under some fire, both from individual supporters, who are starting to worry about the privacy of their data, or the monopolistic power the company is starting to wield, and companies it works with in other domains, like phone companies hesitant to partner with Google to serve ads on mobile networks. Today, however, Google is making all the right moves and is a tech story for the ages, but it’s still premature to declare victory, even just in the search domain.

Topics: Advertising: Online, Google, Investment, M&A, Microsoft, Yahoo! |

7 Responses to “If Search is Settled, Will History Repeat Itself?”

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