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Why Google is at $700 per share
Posted by: Billy Hollis on Wednesday, October 31, 2007

Over at Daily Pundit, they're having a discussion about Google, and why their share price just hit $700.

One of the commenters doesn't understand Google's model, and asks:
How does g**gle produce? Where does the profit come from? Is it advertising? I pay them nothing. I receive a free search engine and free email. Sounds like a bursting bubble.
This is a reasonable question, because Google's business model was brilliant and unprecedented. And it's not just that they have a new model. It's also that all the old models suck.

The comment thread over there covered the fact that Google has the technology to exquisitely target ads. Unmentioned is the fact that Yahoo and MSN are not too far behind. For any of those, keywords in web pages can tip off the engine so that it makes a pretty good guess about what kinds of ads you might be interested in seeing at the exact moment you are reading that page.

This technology isn't perfect, but it's pretty darn good. Certainly I don't object to ads from Google, Yahoo, and MSN the way I do to the typical pop-up ads that get in my face from a lot of old media companies.

But a $200 billion market cap for a company that does $10 billion in sales? That's where the "competition sucks" factor works heavily in Google's favor.*

Old forms of advertising are in trouble. Big trouble.

TV has long since maxed out the amount of commercial time it can insert, and people have found ways of dumping those ads, from DVRs to just buying the DVD. Never mind how irritating the ads are; it makes sense to take some extreme measures just to save massive amounts of time.

Say I get Battlestar Galactica on DVD. Season 1 is about fifty bucks and has 756 minutes. If I watch that on TV, it inflates the viewing time over 50%, so that I'm losing about seven hours of my time - to save fifty bucks. More if I watch the episodes more than once. (Not to mention the increased conveniences of watching it whenever I want.)

In our neighborhood, the going rate to avoid a 90 minute yard mowing is $50 bucks. Getting seven hours for the same price is a heck of a deal.

The story on print advertising is even worse. It's dying so rapidly people don't even care any more. Magazines are being given away in a desperate attempt to keep the circulation numbers up. I got a flyer from Northwest Airlines that some frequent flyer miles that expire at the end of the year could be exchanged for various magazines - US News, Readers Digest, even Scientific American. No cash from me at all, and it's obvious that the magazines are paying Northwest rather than the other way around (because Northwest could just let the miles expire and be ahead).

We all know about newspapers' sinking circulations. But did you know that about 10% of a typical newspaper's advertising revenue is from movie ads? Unfortunately for the newspapers, the primary market for movies is young people, and most of them would no more think of looking in a newspaper for movie listings that they would think to look in one of their textbooks. They use Fandango or other web resources to find out all about movie times and such.

We're getting close to the day when the studios and theaters will quit spending that money because it isn't cost effective. I'll leave it to you to imagine what's going to happen to a lot of newspapers when that 10% of their revenue is lost almost overnight.

Then add the fact that the Internet is the perfect advertising medium for many products. Want to know more? Just click on the link. That's over and above the technological advantage of being able to exquisitely target the ads.

There's about $150 billion per year spent on advertising. It's going to be spent somewhere. Google's model doesn't have to be perfect - it just has to be better than the competition. And it is.

(*- I have no idea if that market cap is sustainable. Google is exhibiting signs of strains from its fast growth. And their left-wing politics irritate me and others, and angering a large portion of your customer base isn't usually a very good idea. I'm just saying that it's the dominant player in a market segment that looks to eventually absorb most of the total money spent on advertising, and that's a big pot.)
 
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Google’s also got a plan for small business advertising. It’s got several parts to it, including:

* Buying large blocks of tv and radio commercial time cheaply, and then selling it to small businesses participating in its plan. Kinda like Costco for ads.

* Helping small businesses make plans to target their ads to the right audiences, making their ad dollars more efficient.

They’re doing some interesting things, making some smart acquisitions along the way. I don’t know if they can sustain their market cap, either, but they’re certainly playing their game well.
 
Written By: Steverino
URL: http://
Google’s left wing politics? Que?
 
Written By: nonenon
URL: http://
this is off topic, but why do you have blog radio start up immediately on opening the page. Is there any way to turn it off?
 
Written By: bob
URL: http://
Fifty for a mown lawn? Either there’s been far more growth in the "chores for kids market" or I was getting ripped off...I was mowing lawns no more than fifteen years ago and it was usually 5-10 per lawn in CA (and I don’t mean small lawns).
 
Written By: Lysenko
URL: http://

There’s about $150 billion per year spent on advertising.
That alone is a pretty good argument that Google is overvalued. Google will never capture all advertising dollars any more than Amazon will capture all retail dollars. So, what fraction of the total are they likely to capture? And how does that relate to the paper valuation?

I do think that you’ve addressed part of the reason for the high valuation. I think the other is that there’s a lot of dollars out there looking for the big score. Basically, too much liquidity.
 
Written By: Dave Schuler
URL: http://www.theglitteringeye.com
this is off topic, but why do you have blog radio start up immediately on opening the page. Is there any way to turn it off?
If you’re talking about out blogtalk radio page, you’ll have to take that up with them, that’s their design. I think you can pause it.
 
Written By: McQ
URL: http://www.qando.net/blog
Thing is, I don’t think it matters. Google has become a staple.

Here are examples you can compare it to:

Ouch, I cut myself. Do you have a Band-Aid?

Do you have any Jell-O?

Where’s your Xerox machine?

Do you have a Whirlpool?

Even in spanish. My Grandparents fled Cuba in the mid-late sixties. To this day, they call the refrigerator a ’frigidaire’, or a ’Frigid Air’ (Frigid Air was the most popular label for refrigerators in Cuba back in the day).


Now, compare it to the modern day staple. You don’t ’web search’ something. You ’Google it’.
 
Written By: Joel C.
URL: http://
Unmentioned is the fact that Yahoo and MSN are not too far behind.
Correct me if I’m wrong, but I believe both of them license their tech from Google.
 
Written By: Bill Quick
URL: http://www.dailypundit.com
Bill, in Microsoft’s case, I’m positive that they don’t license the technology directly from Google. They might have licensed a few patents, but I’ve spoken directly to some of the folks inside Microsoft that work on their searching technology.

Microsoft is still playing catchup to Google. The core of the advertising strategy is the relevance engine for searching, and Microsoft is behind there. To demonstrate with something you’ll find familiar , try to search the phrase "house price estimator" in both Google and Live.com. Google will give you zillow, which is what I was trying to find (I couldn’t remember zillow’s name). Live.com gives a bunch of much less useful links. Zillow is not even on the first page of live.com, but a useless link for findsolar.com is. So Microsoft’s relevance engine is clearly inferior to Google’s, though they’ve closed the gap considerably in the last two years. (I’ve had a few searches in which Live.com gave me better results than Google, though that’s still rare.)

Microsoft is investing heavily in the whole search/advertising area, and related services areas such as email and light hosting, to challenge Google. Yahoo is as well. Both realize that the potential market just for advertising is $100 billion plus. But Google has the most mature search/relevance technology, and that helps them maintain their market leadership.

 
Written By: Billy Hollis
URL: http://
Joel C: the problem is, no one cares if you have a Band-Aid(TM) or some other bandage. No one cares if your copier is made by Xerox or Canon. At least, it’s a problem from J&J’s and Xerox’s point of view. They have the name recognition, but their competitors do fine anyway. If another search engine with better results comes around, maybe we’ll still google with it. If the main reason Google is valued is because it’s the only game in town, the next good competitor to come along will cause quite a drop.
 
Written By: kevin r
URL: http://
Nice explanation Billy. I suppose I already understand this, although I do not understand the worth of google based on current ad sales. As I said over at DP, it’s just me, I don’t even notice the ads. Since I don’t see them, I find them worthless. Clearly, lots of folks see and respond.
 
Written By: Barry
URL: http://
that would be the case if the company goes sour, like Compuserve did against AOL or IBM’s before the Clone Wars. Remember: Before a computer was a ’PC’ it was ’IBM Compatible’. Things were either ’A Mac or IBM Compatible.’ Today it’s Mac or PC. It’s true that they don’t have any major competitors, but it hasn’t made Google become complacent, either. They’re rolling out new things very often and continuously building up their image.
 
Written By: Joel C.
URL: http://
QandO does not appear to host Google adverts. If it were so very marvellous...
 
Written By: unaha-closp
URL: http://warisforwinning.blogspot.com/
Do you know you can use a Firefox plug in called Adblock to block ads from your favorite websites, including google ads?

 
Written By: Harun
URL: http://

 
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