As the managing director of an Internet company people often (wrongly) assume that I’m an expert about everything to do with the Internet. So it is that I’m often asked whether Google is worth its currently high share price. I try to be diplomatic in my response, and point out that I’m neither a stockbroker nor an accountant, so what do I know?
Whilst it’s true to say that I’m no financial expert, it’s also true that for quite a while I have been meaning to write an article about Google and the course it has apparently plotted for world domination of the Internet – or Googlation as it is referred to in our office!
The profusion of questions about Google, together with moves that Google themselves have made this month has finally prompted me to put finger to keyboard and explain Googlation and whether or not Google’s stock price is good value.
Okay I hear you say, he’s finally lost the plot this time! Google is just a search engine; so where do you get world domination from? It’s true that we’ve all become used to the fact that Google has decimated its competitors in the search engine sector – a position richly deserved in my opinion. But it’s all the other services that they are launching that I’m referring to. It’s quite phenomenal and could easily fill a book much less my puny article.
A quick browse of Google’s website and in particular their own published milestones (see more information below) shows that just this year they have launched Google Video , Google Maps , Google Web Accelerator, Google Blog, Google Sitemaps, Google Earth, Google Talk, Google Blog Search and most recently Google Analytics, which proved the final impetus that I needed to spur me to write this article.
Ok, so Google is releasing an awful lot of services, but that’s hardly a case for world domination. Get a grip man!
True, but consider for example, that Google not only controls the taxonomy of the Internet i.e. the way the Internet is categorised but that it also controls what results it returns to you. So by definition it has influence over what you are able to find, and hence see – unless you happen to know the exact address of course. Yes, there are other search engines that might list the content that you are looking for but these are becoming increasingly obscure and many take part, if not all, of their search results from Google anyway!
By providing the majority of Internet users with the answers to their search questions Google can, on a global scale, infer what is of interest to people and what isn’t. This is extremely privileged information that Google’s AdWords service utilises very successfully to generate the majority of Google’s income (circa $6bn).
Originally launched in 2000, AdWords works by inviting advertisers to ‘bid’ for keyword combinations that Google users might search upon. If a bid is successful the advertiser’s advert is shown on Google’s Search Engine Results Pages (SERPs) when a visitor uses the relevant combination of keywords. Advertisers are only charged their bid amount if the user clicks on the link contained in their advert. This “long-tail” revenue model has proved extremely successful and is what has set Google apart from earlier entrants to the search engine sector – that relied on a low number of high volume advertisers such as IBM, Oracle et al.
But this is only the start of the story for Google, as it is intent on leveraging its knowledge of our Internet usage; enter Google Analytics! Launched this month having acquired the web statistics company Urchin Software in March, Google’s analytical service is set to do precisely that. Anyone that has a website of their own has probably also looked at the statistical analysis of their website usage. Historically this has been a chargeable service offered by web hosting companies. But a company like Google has a different agenda, thus it is offering its service for free!
Google’s analytics service is extremely feature rich and from what I’ve seen of it, rivals the functionality of even the very top-end analysis packages that cost many Ј1,000’s per year. So what’s in it for Google? Why give away a service that many companies are used to paying good money for? The answer starts to become a little clearer if you think back to how successfully Google has been at generating revenue from the knowledge of our search keywords habits.
Google’s search engine service gives them a great idea about what people are looking for, but once they’ve left Google’s website and have gone to the website that they were searching for, Google is out of the picture! They’ve no idea what the users’ habits are beyond their service (unless you have Google’s Toolbar installed – but that’s another story). However, by definition, if you are using Google’s web analytics service then you HAVE to tell Google all about your website users and what they are doing on your website. It’s a classic symbiosis; you get a great service that tells you how your visitors behave and Google massively extends its knowledge of Internet usage. In my opinion the widespread adoption of Google Analytics is inevitable and it will elevate Google’s ability to monitor global Internet usage well beyond any company on the planet.
As stated above, I’m no financial expert, but a bit of simple research into Google’s financial performance reveals some compelling information. Their share price has done virtually nothing but rise since their IPO in August 2004, today being $419 – up nearly 500%. Their market capitalisation is over $83Bn and their net profit (after tax) for the nine months to 30 September 2005 is over $1Bn. And I very much get the impression that they’ve only just started! Analytics is only one area that I have discussed that demonstrates how Google is increasing its reach, by increasing its services. I could write articles on each and every one of their services and each would reinforce the notion that Google probably is worth its current share price. If one then considers Google’s market dominance, its rate of innovation and its apparent insatiable appetite for growth then the case for their share price is even stronger.