GOOG Hates A Coward
Fred Wilson’s post yesterday got me really thinking about Google’s future. I’m undecided, but I might like them at $400ish.
When their share price got over $600, I thought it was highly overvalued, and when it broke $700 I damn near put some cash in the old trading account. I decided not to because at the time I’d been without my main source of income for a year (due to starting up Draftmix) and was facing the possibility of selling a home and moving to a much more expensive part of the country, possibly within a few months. It seemed wise not to risk it, and it was, though with the benefit of hindsight I would be literally kicking myself now if I thought I could manage doing so without falling over. (I don’t know where that expression comes from, but it’s pretty hard to pull off.) I shudder to think about how much I could have made per put.
My logic at the time (and now) was that Google’s growth was going to undergo some serious leveling. It had to. Their stock price was some ridiculous multiple of earnings (it’s still a little high even after losing 40+%, but certainly not astronomical any longer) and their growth prospects were (and in the short term, I think, still are) pretty slim.
Their money still comes almost entirely from their core search advertising business. And there are only three ways to grow your revenues from one business. That is to increase your market share, increase your revenue per unit, or increase the overall industry. Or, as Google had done for the past 9 years or so at that point, all three.
Increasing revenue per search might be the hardest because ads are already so focused. They’ve clearly put a lot of time and effort into it, and the market aspect of search ads on Google means that it was already extremely efficient. The economy doing better might have helped there, but most people foresaw (and still do) the opposite in the short term. I’m not an economist, but I read The Economist, and as such it was (and still is) pretty hard to expect much there.
Google’s market share can’t be increased by much because the maximum is 100% and they’re not too far away. Depending on who you ask, they’re somewhere between 60% and 70% in much of the developed world, which means that at best they can increase it by about half. That’s incredibly hard to do, and even if they could, it wouldn’t justify a 40-50x multiple.
So even if you think they’ll sustain small but steady market share growth, and that the economy will hold stable, they still have to grow the industry overall. Short-term, that’s a problem. They’re an also-ran in much of the developing world, often for reasons beyond their control, and even if they weren’t it remains to be seen if there’s any money there. China may have more people on the web than we do here in the U.S., but the spending power of each of them is an order of magnitude smaller. So even if China gets to 2x the number of internet users we have, and Google achieves the same market share there, it’s still not going to have a huge impact on profits.
Much of their past growth came from general Internet growth, which was considerable over the first decade of their existence but is all but stalled in the developed world now. Again, the maximum percentage of the population that can use the Internet is 100%, and we’re not all that far away from that. We’ll get closer still as time goes on, but unless we start handing out free laptops and Wi-Fi, it will be very slow. Most people who can afford a computer and broadband already have it, the rest are forced to live their lives without.
Google has also increased the industry size in the past simply by making search better. As search became more useful, people became able to find more stuff and as a result searched more. But as Marissa Mayer said search is 90% solved. A lot of people have differing opinions on that, and I agree with many of them, because there are many definitions of "solved". From a technical standpoint, perhaps it is not. But I would define (and a Google investor would define) search as being 100% solved when a customer can use it to find what they want 100% of the time, provided what they want to find exists. By that definition, I would agree that it’s 90% of the way there now, or at least close.
As far as I can tell, Google has one option left for increasing the overall industry, which is to make search more accessible. I think they agree, and that that is the logic behind Android. Right now for most people to search, they have to be near a computer. What this means is that if you only spend two-thirds of your waking hours near one (in your home or at work or school or wherever) there’s still 5 or so left where you can’t just Google for whatever you want to know.
I actually have a phone I can search on, and Google works perfectly on it, but the pages Google takes me to are usually not designed for mobile devices, and the whole experience after Google is so bad that I just avoid it all together. Google, of course, can’t go around and optimize every site for mobile (though they actually do have some functionality that helps) but what they can do is make sure you have a device that can read the web pages as they exist with such little pain that you actually will.
The iPhone has been fairly revolutionary in that regard, though it’s still plagued by some serious problems. Data speeds on the non-3G network are so abysmal that they make it somewhat painful. It works spectacularly on Wi-Fi, but a lot of the time you’re within range of that, you are within range of a computer you could use anyway, so it’s not a 100% improvement from Google’s perspective. And the 3G version is still suffering from some growing pains, and being tethered to a network with piss-poor 3G coverage to begin with. And the iPhone has a very real (but often overlooked) glass ceiling imposed on it in terms of adoption due to being tethered to one carrier in every market.
So Google’s going to let you surf the web just as well as you could on the iPhone (and close enough to as well as you can on a computer that you’ll actually do it, if maybe still not as much) but do it on any carrier network that wants to be a part. It’s going to actually deliver on the iPhone’s largely unfulfilled promise of making it more about the device and less about the carrier. And it’s going to increase the overall size of the search industry in the process.
But again, not by all that much. Even a 50% increase, which would be truly impressive, or even a 100% increase, which would be world-changing, might not justify the $700 price tag for a share of Google, or if it did so, only would barely, and not for a few years. But it would certainly justify well over $400.
So I think Fred might be right. It might be time to buy. Now that I’ve moved up from no salary to almost no salary, I might just run it.
