IT HAS been a grisly month for Google: its shares have been clobbered after disappointing profits growth figures; it has been accused of invading people’s privacy through its desktop software; it has been attacked for alleged copyright infringement over plans to digitise entire libraries; and this week came a bruising
coup de grâce from the US Congress, whose international relations sub-committee accused it and other companies of conspiring with the Chinese Government to censor the web.
Tom Lantos, the committee’s leading Democrat, unleashed both barrels: “Your abhorrent actions in China are a disgrace. I simply don’t understand how your corporate leadership sleeps at night.”
For Sergey Brin and Larry Page, Google’s youthful, idealistic co-founders, it must all be a nasty shock. Google, after all, was meant to be different, cuddly, moral.
From its slogan (“Don’t Be Evil”) to its pro-consumer stance, Google should have been winning friends. Instead, it seems to be offending everyone from ministers to its own paying customers. Even in parts of the business community, it’s acquiring the image of a somewhat sanctimonious bully. Last week it (rightly) blacklisted BMW for manipulating its website so that it would come higher up search rankings.
It’s probably all inevitable. No company could grow so fast and get so powerful without acquiring enemies. In his new book The Search, John Battelle sees web-searching in general, and Google in particular, as changing pretty much everything. “Every day millions upon millions of people lean forward into their computer screens and pour their wants, fears and intentions into the simple colours and brilliant white background of Google.com . . .
“Link by link, click by click, search is building possibly the most lasting, ponderous and significant cultural artefact in the history of humankind — the Database of Intentions.”
You don’t have to buy into Battelle’s breathless view of Google’s cultural impact to be impressed by the the sheer volume of clicks on Google.
It is by far the most popular search engine in the world and is getting more popular. According to Comscore MediaMetrix, Google’s worldwide share of search has grown from 70 per cent in March 2005 to 72 per cent in June, 76 per cent in September and 81 per cent in December.
Revenues are pouring in. Thousands of young geeks at Google’s headquarters in Mountain View, California, are working on hundreds of new ways of making money but, for now, Google has, in essence, just two income streams, both from advertising.
First, companies pay for their pages to appear when users type in certain key words. The more they pay (on a per click basis), the more prominent their pages, although their results are always separated as “sponsored links” in search results. Second, Google gets a share of the advertising take from a large network of web publishers that feature its search engine on their own sites.
It is the breakneck pace of advertising income growth — up year on year by 95 per cent, 98 per cent, 96 per cent and 86 per cent in each of the past four quarters — that has made Google such a hot stock.
Project those growth rates a few years into the future and it isn’t hard to see Google’s investor appeal. Actual revenues in 2005 came in at $4.02 billion (£2.3 billion) and earnings per share were $5.67, putting the company on a historic multiple of 62 times, based on the opening share price yesterday of $370. That’s high, of course, but not stratospheric compared with the dot-com era, when multiples of revenues, let alone profits, were routinely in the 100s.
W. R. Hambrecht, the California-based broker, reckons that revenues could more than double to $8.9 billion by 2007, with earnings per share also more than doubling to $11.63. Neither forecast looks particularly demanding. The forward multiple then drops to 32.
Yet doubts are creeping in. The shares have slipped already from a high of $475. Barron’s, the financial weekly, caught the sombre mood this week with a 4,000-word piece that laid out all the different ways that the Google gravy train could be derailed.
The first of these is competition. Yahoo! and Microsoft are working on improved search offerings, while Amazon.com is pushing into Google territory with plans for a network of associates.
The second is price. As mainstream advertisers get more familiar with the medium, prices are bound to come down. At present there is a bidding frenzy for certain key words, but that may subside as searchers become more sophisticated and use a wider variety or combination of key words.
Another concern is costs. Google is eating through its $7 billion cash pile, hiring with abandon as it tries to replicate its advertising model in country after country. The rapid push is understandable, but the expenses are soaring. It’s a recipe for muddle, too. Visitors to Mountain View describe the culture as little short of chaos.
Perhaps the biggest risk to shareholders lies in the ownership structure of Google and the barely concealed contempt for conventional capitalism of the founders. Messrs Brin and Page dominate the company because their shares carry ten times as many votes as the ordinary shares. “Google is not a conventional company. We do not intend to become one,” they say in their Letter from the Founders in the prospectus of 2004. (See the Investor Relations site via Google.com).
In it they give themselves carte blanche to do what they like, buy what they like, diversify wherever they like and pay no dividends. There’s no denying their past talents, and this may be the way to create long-term shareholder value, but it’s not the way to bet. Avoid.
