GOOGL - Google

[Guest VAL9000]

Hi Tom,

 

Here are my thoughts on these questions.

 

- Will pricing and profits margins in the ads business remain sustainable enough for Google in the future?

Do casual and heavy internet users even ever click those things? I know I don't. Or will innovation save the day and keep interest of the common internet users high enough?

You need to split up the ads business in order to answer these questions fairly.  AdWords is the crown jewel at Google.  These are the ads that run next to search results.  My opinion is that these ads will continue to be extremely high margin for the foreseeable future.  My simple reasoning is that online ad spend growth is outstripping search growth.  More dollars per search query are entering into the ecosystem.  AdWords is an extremely effective form of advertising because users who are searching are signalling that they have a need.  AdWords will continue to command a disproportionately large share of online ad spend until a better use of ad dollars is invented.

 

Google's other ad businesses are more commoditized in their economics.  They're still good businesses that are better because they can be sold along with AdWords.  I don't know what to make of these long term.  Google has started to offer search history / clickstream parameters to their ad buying tool kit.  This could really improve all aspects of the advertising businesses, but we'll have to see if they roll it out across the platform.  This could get a bit creepy, but as an internet user I would prefer that I see highly targeted ads over poorly targeted ads.

 

To answer your second question, of course people click on ads otherwise Google's business wouldn't exist.

 

- What would happen with profits from the ads business if Bing would become a dominant second player with 20-35% market share and starts a price war? Does Google have any pricing power?

 

Through its partnership with Yahoo, Bing already commands about 30% of the market in terms of search volume.  They aren't doing a good job on the ads business side, but I think that will change.  If you assume that a click on Bing is worth the same as a click on Google, then there is room for the no arbitrage principle to operate.  Keyword prices on Bing will rise relative to the prices on Google.  I don't really think they'll close though.  The number of advertisers competing on Google appears to be a greater factor than the price differential between the two services.  I'm not sure how to anchor this thought to a fact or argument, though.

 

Overall, I think that both Google and Bing have excellent market economics working in their favour.  That is, it should get better before it gets worse.

 

[Liberty]

 

Video advertising will be the keyword - text will fall by the wayside like Morse code/buggy whip did.

 

I seriously doubt that. As good as video is for some things, it isn't as good as text for many other things.

 

Both types of content will exist side by side for the foreseeable future.

[DCG]

You're looking at it wrong, in my opinion. Internet traffic of videos is separate from text. People search for videos though text. Videos are content. Just like how people search Google to find news articles. They search for videos containing content they're looking for.

[Liberty]

Internet video is now 40 percent of consumer Internet traffic, and will reach 62 percent by the end of 2015, not including the amount of video exchanged through P2P file sharing. The sum of all forms of video (TV, video on demand [VoD], Internet, and P2P) will continue to be approximately 90 percent of global consumer traffic by 2015.

 

If you're talking about bandwidth/terabytes/etc, sure, video will dominate. But that's a different metric from what I was talking about. A short Youtube video probably takes more disk space than most novels, but it doesn't mean that people will spend as much time on it as on a book...

 

People will keep consuming a lot of text because it's the most efficient and convenient way to do many things, and because it is much easier to produce than video (even if the camera, bandwidth, and editing software is free, it's much harder to make a video that is fun to watch than to write something that is worth reading).

[Liberty]

Intelligent people such as yourself who have an inquiring mind, will always have a burning desire to know. So reading a book or ebook will appeal to them, however the marjory of the humans on this planet prefer to seek the meeting of the eyeballs not the mind.

 

Apparently someone spends a lot of time watching videos online. In my opinion, the best way to attract attention and retain it for an ad, is the use of interesting content targeted for the end user. People don't spend a lot of time reading text advertisement compared to video.

 

To have a brand stick in the memory of a mind, a picture or video is the method that best reinforces brand loyalty. Think about it, does Coke use a lot of text to advertise?

 

 

Video will grow for sure, and probably faster than text for a while until it matures more, but many things will remain - as I said - better with text.

 

Looking for which fridge to buy? You'll do a text or voice search, and peruse text pages to read up the specifications, prices, look at photos, reviews, etc. Will there be video reviews? Sure, there are now. But it's a complement to text.

 

Text is non-linear and easily scannable. You can stop paying attention and come back without pausing. You can read much faster than someone can read the text out loud to you, which is why scanning news in text format is so efficient compared to waiting for someone to read them to you in video format. The gazillion of bloggers and journalists out there won't all become expert video producers (though I'm sure some will). Video will always be harder to do right than text, and always be more expensive and time-consuming (if you do it right), and most people will probably remain too self-conscious to release public videos of themselves.

 

My point is not that video won't become a huge deal, because clearly it will (and GOOG is a leader in that). I'm just saying that text isn't going anywhere, because it has inherent advantages over video for many applications. But in some areas, there will be great synergy (text search for cars, click on ad and land on a page that has lots of video info, reviews, etc).

[Guest valueInv]

[

 

Internet video is now 40 percent of consumer Internet traffic, and will reach 62 percent by the end of 2015, not including the amount of video exchanged through P2P file sharing. The sum of all forms of video (TV, video on demand [VoD], Internet, and P2P) will continue to be approximately 90 percent of global consumer traffic by 2015.

 

http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-481360_ns827_Networking_Solutions_White_Paper.html

 

Text will always be needed for fine details, but the predominate use of the eyeballs will be for video as the above statistics show. That doesn't leave much room for text at 10%.

 

Video is a branding medium, while search captures intent, video captures interest. Both are valuable, but in a very different way.

 

We’re still early in the development of the online video business, but we are starting to figure it out.

 

As the saying goes, a picture is worth a thousand words and a video is worth a million words!

 

The numbers you quote are video traffic volume by bytes. An average video standard definition video  on youtube is 10 times larger than an average web page i.e. for the same amount of bytes you can get 10 webpages or 1 video. A high quality video such as that shown on Hulu or Netflix is much, much larger.

 

So equating video traffic volume to eyeballs is a mistake. On the contrary, it is much more expensive to serve a video to a user when compared to serving a web page.Your costs are higher due to storage, processing and bandwidth needed. That's one of the reasons why youtube took a long time to be profitable. 

[biaggio]

I prefer reading news and other information as it is faster then watching a video

[Liberty]

I don't really trust analyst projections, but for what it's worth:

 

http://business.financialpost.com/2011/06/27/googles-mobile-business-to-grow-to-us14-billion-by-2015/

 

Canaccord expects the global mobile ad market to grow to US$28.6-billion in 2015, way up from this year’s projected US$5.3-billion.

 

Meanwhile, the global smartphone market is booming: handset sales totalled 297 million in 2010 and are projected to grow 49% this year to 442 million. Google’s Android is expected to represent 39% of the operating system market in 2011 and looks set to seize a larger share of that market going forward, Mr. Terry said.

[Liberty]

GOOG unveiling some social stuff today:

 

http://googleblog.blogspot.com/2011/06/introducing-google-project-real-life.html

 

http://mashable.com/2011/06/28/google-plus/

 

WIRED has a huge article: http://www.wired.com/epicenter/2011/06/inside-google-plus-social/

[goldfinger]

GOOG unveiling some social stuff today:

 

http://googleblog.blogspot.com/2011/06/introducing-google-project-real-life.html

 

http://mashable.com/2011/06/28/google-plus/

 

I am amazed by the amount of projects Google undertakes and develops in-house to fend off competition and "reinforce" its moat(s).

It seems they can do all of what their competitors do and more and all for free too!

[Liberty]

I am amazed by the amount of projects Google undertakes and develops in-house to fend off competition and "reinforce" its moat(s).

It seems they can do all of what their competitors do and more and all for free too!

 

Indeed, they keep busy. But there's a popular misconception about Google, that they are scattered and spend a lot of resources on stuff that doesn't provide much revenue...

 

Most of their projects start out as the personal project of 1-5 engineers (or of a small startup that gets bought), and they build them because they think it's going to be cool and/or useful (a lot of bottom-up initiatives, from what I can tell). They release lots of it as beta, and when some of it gets traction they sometimes shift in higher gear and start putting resources into it (GMail was a side project of a developer for a while, for example).

 

But the vast majority of their resources are in search and ads, with a smaller amount into strategic platforms/products (Android, Chrome), and then a bunch of handfuls of people working on small projects (often in their 20% time). I think that social can now be included in strategic stuff, now that Larry is CEO and has created a 'social' org inside the company. We'll see how they do..

[Liberty]

From the WIRED piece that I posted above:

 

The parts announced Tuesday represent only a portion of Google’s plans. In an approach the company refers to as “rolling thunder,” Google has been quietly pushing out pieces of its ambitious social strategy — there are well over 100 launches on its calendar. When some launches were greeted by yawns, the Emerald Sea team leaders weren’t ruffled at all — lack of drama is part of the plan. Google has consciously refrained from contextualizing those products into its overall strategy.

[Liberty]

Looks like Chrome is going strong:

 

Google’s Chrome browser exceeded 20% of the global Internet browser market in June for the first time, according to StatCounter, the website analytics firm.

 

The research found that Chrome took 20.7% of the global market last month, which is up from a mere 2.8% in June 2009.  In the same period, Microsoft’s Internet Explorer (IE) has fallen from 59% to 44% globally, whilst Firefox dropped slightly from 30% to 28%.

 

Chrome is already ahead of Firefox in South America, and the browsers are neck-and-neck in the UK. These stats suggest that Chrome is well on its way towards usurping Firefox into second place in the browser market across the globe.

 

http://thenextweb.com/google/2011/07/01/google-chrome-has-20-market-share-firefox-in-its-sights/

 

That's excellent for their moat, it helps them set the pace of browser/web standards innovation, and it's good for the brand. I also bet Chrome users do more searches because it's so well integrated.

[Liberty]

Zynga filing for IPO. Google had at least 100m invested in them.

 

http://techcrunch.com/2011/07/01/zynga-files-for-1-billion-ipo/

[Liberty]

500k Android devices are now activated every day, and it's growing at 4.4% week over week, according to Google's Andy Rubin:

 

http://news.cnet.com/8301-13506_3-20074956-17/google-500000-android-devices-activated-each-day/

 

EDIT: also some reports that GOOG is in talks to buy Hulu:

 

http://www.google.com/hostednews/afp/article/ALeqM5hVPp0oCACt0N3YcsL8ZON_K2-yJg?docId=CNG.e740b6d0077ba8c28f6d1dd931c6f679.581

 

EDIT2: A couple years old, but nice interview form Charlie Rose with Marissa Mayer:

 

http://www.charlierose.com/view/interview/10129

[Liberty]

Looks like Google will consolidate other brands into Google+:

 

http://mashable.com/2011/07/05/google-blogger-picasa-rebranding/

 

 

[moore_capital54]

 

Here are my thoughts on why I think Google has done it with Google+ and that Facebook will literally become irrelevant. I know this is a very bold statement and it is just my opinion but here is the logic behind my thinking:

 

Where does most traffic on the net originate? Google. Google is the foundation of the web. Facebook was trying to swallow the web into its own organic network, one where the user wants to share personal experiences with his personal connections. But this was really just an oversight on google's part, that facebook was able to get to this point.

 

The second google added the +1 widget to every search result, everything changes. Facebook, no matter how big it gets will never have a "Like" widget next to search results. Most internet activity originates on google. Now, when you like a link.. Whats easier? To +1 the result right there, immediately sharing it with all your personal connections? or cutting and pasting a link into facebook or twitter. The addition of the +1 widget is game changing as this is the key to viral expansion and will feed the google+ network.

 

Next, what is the most preferable email service on the web? Gmail, by a long margin. Now what makes more sense? To "Message" my personal connections through Facebook? or to have one account where I can receive all my private communications.

 

Circles achieves two things, one it makes twitter irrelevant, as I can now have followers who I broadcast to and can broadcast more than 140 characters, more importantly, I can segregate my personal connections but again most likely facebook will copy this, so this is not going to be a moat that will last.

 

The key is to understand  the internet flows like a river, a high pressure river, and almost all traffic originates from google. Next year when we all search for something on google, chances are we will see results recommended by some of our personal connections. This will transform the search process as we know it and make the experience a lot more dynamic.Google also tackles linked in as obviously google+ profile results for your name will rank higher on google than LinkedIn or Facebook, again think of the amount of traffic flowing, over time this is a huge advantage. Google does not need ads on its social networks, Facebook does. I am willing to bet that google+ will not have ads for years, the goal is to keep everything flowing within the google network. Why someone needs an external network like facebook is beyond me unless facebook carves out a niche like myspace did, but as you can imagine the economics won't be there.

 

Again the moment Google decided to even enter this in a big way, I believe all social networks are destined for failure. I hope to see google use its incredible cash hoard to attack on all fronts, I am rooting for them as I don't believe in any of the recently IPO'd tech cos and hated to see the misallocation of capital in equity markets.

 

This includes: OPEN,LNKD,QIHU,YOKU,CYOU,YNDX - Zynga/Groupon/Facebook/Twitter. These are not businesses, they are novel services.

 

 

 

 

[Liberty]

Interesting prediction.

 

One thing that I would add is that Google+ will pick up tons of users because of how you can receive content even if you don't have an account. You simply get a email from your friend with a G+ post, and you can click and see it on the site, see their profile, etc, and there's also a link to create an account.

 

Lots of people will just keep reading the emails, but tons of people will create accounts.

 

It's kind of like Google had a chance to look at Facebook, Twitter, Myspace, etc, and learn from their mistakes and successes and try to do something that improved on them all. And they haven't even officially launched yet, there are yet more features to be announced (as per the WIRED article..).

 

We'll have to wait and see, but it certainly seems like a quality effort, and they've said that if some things don't work, they'll just fix them and keep at it until they get it right. They won't drop it like Wave or Buzz (from which they've learned a lot).

[roundball100]

 

Here are my thoughts on why I think Google has done it with Google+ and that Facebook will literally become irrelevant

[...]

Facebook, no matter how big it gets will never have a "Like" widget next to search results. Most internet activity originates on google.

[...]

 

To play devil's advocate: what stop's Facebook from teaming with investor Microsoft and putting a "Like" widget next to Bing results?

[moore_capital54]

Roundball Facebook has more traffic than Bing, that would make no difference, Microsoft can rename Bing "Facebook"  and it still wouldn't matter. The key is to understand that in internet world for the first time, these novel services are going to have to fight for the traffic that has been free from google. Without google none of them would exist.

 

Google could offer all its partner sites revenue sharing agreements to put +1 widgets and comment boxes instead of facebook/twitter/inshare that will really be the nail in the coffin.

 

 

[hyten1]

 

moore_capital54

 

i think you have quite a deal of bias towards google

 

the way you have described it i get google is end all be all, it'll dominate everything.

 

hy

 

 

[Liberty]

It's still in semi-private beta and Google+ is already a top 10 source of Traffic for Techcrunch, a VERY popular site (and they're not using it yet to share links and promote things):

 

http://techcrunch.com/2011/07/05/google-plus-sharing/

 

the way you have described it i get google is end all be all, it'll dominate everything.

 

Not everything, but it dominates search and ads, and it has a shot at doing very well in social (though we'll only know for sure in a few years). Facebook's problem is that while everybody uses it, few people actually love - or even like - the company, and so it doesn't have the kind of loyalty that brands like BMW and Coke have. In some surveys Facebook rate around the IRS and AT&T, while Google on the other hand has a great brand. That helps, because average users care about being associated with a great brand (Myspace totally lost its brand through neglect, but Apple's still got it and cherishes it).

 

Update: Google flight search tool coming.. they've really gone into overdrive lately:

 

Google will launch its long-awaited flight search tool in a few weeks, according to a report by TechCrunch.

 

That means Google’s legal nightmare over its $700 million acquisition of ITA might finally be at an end. The whole hullabaloo started when the U.S. Department of Justice initiated an antitrust investigation, shortly after Google announced its plans to acquire ITA in July, 2010.  At the time it announced the deal, Google stated that it wanted to “build new flight search tools” using ITA’s data while continuing to serve ITA’s existing customers.

 

http://venturebeat.com/2011/07/05/google-flight-search-engine/

[moore_capital54]

Hy you are 100% right, I am biased. The reason I am biased with Google is because as an investor I can participate if my predictions are right.

 

After subtracting cash, google is currently trading at about 15x forward net income. Compare that to Facebook/Linked In or even Twitter which is now raising capital at an $8B valuation. If I can get all this potential growth for free, of course I am excited.

 

I don't know if google will dominate everything on the web, I don't think they need to. Social is an area where they need to.

[goldfinger]

Hy you are 100% right, I am biased. The reason I am biased with Google is because as an investor I can participate if my predictions are right.

 

After subtracting cash, google is currently trading at about 15x forward net income. Compare that to Facebook/Linked In or even Twitter which is now raising capital at an $8B valuation. If I can get all this potential growth for free, of course I am excited.

 

I don't know if google will dominate everything on the web, I don't think they need to. Social is an area where they need to.

 

I can feel your excitement and that's cool. I just think that there are and there will be multiple companies competing for each of the main segments of internet business like any other area. Even in search it is what seems to be happening more and more at the moment.

[S2S]

Again the moment Google decided to even enter this in a big way, I believe all social networks are destined for failure. I hope to see google use its incredible cash hoard to attack on all fronts, I am rooting for them as I don't believe in any of the recently IPO'd tech cos and hated to see the misallocation of capital in equity markets.

 

This includes: OPEN,LNKD,QIHU,YOKU,CYOU,YNDX - Zynga/Groupon/Facebook/Twitter. These are not businesses, they are novel services.

 

The problem is that you quickly run into limits with regards to the number of sets of friends people are willing to/can reasonably maintain.. on Yelp, Twitter, FourSquare, Facebook, etc. etc.. Hence Facebook's first mover advantage as the overarching social network means something.

 

Having used Google+ for a couple of days (thank you for trying to help, btw), I reckon it has been fun because it is new; but at the end of the day, I doubt I could afford the time to be active on anything other than the big three (FB, Twitter and G+), if that.

 

Reid Hoffman once said "Social networks do best when they tap into one of the seven deadly sins. Facebook is ego. Zynga is sloth. LinkedIn is greed.” What is Google+?

 

What's more, a large (and growing) percentage of Internet users are in Asia where neither Google or Facebook commands a dominant position. Perhaps other players (Bing/Baidu?) are in better positions to integrate search into social networks.

 

Disclosure: long GOOG. I just happen to hate viewing things in rose colored glasses.