Thursday, July 20, 2006

On Google

Enough of you have asked me about tech stuff and my job and whatnot that a Google post was inevitable. So why not now...

Google. The enigma. I lived with two kids last year who embodied the two polar opposite (least coast) opinions of the company. One firmly believes Google is the company, destined to change the world and make billions doing so, while the other maintains that its financials reveal it's nothing but another overpriced Silicon Valley company.

The truth is probably somewhere in between. Though they continue to beat the Street (earnings were 12% above expectations), they struggle against absurdly high expectations placed upon them. But the funny thing is that people take such strong stances on the firm without knowing much about what it does. Today, almost all of Google's revenue comes from ads, whether brokering deals as a middle man or hosting them on their site. So all those cool gadgets that they regularly roll out aren't making money.

So the state of Google's then boils down to the sustainability of their business model. I'm not saying some of their other profit-seeking ventures won't succeed (Google Checkout, for example has potential to steal some market share from PayPal, especially if it can be as innovative as Gmail was for email), but I think a thoughtful analysis of the company should start there.

With online advertising spending projected to double by 2010, Google is in good position to profit even if their market share slips a bit. But all sorts of new competitors are moving into the space, so they will have their work cut out for them. In the end, they are atop the industry now but will need to be careful going forward.

The issue then turns to all that other stuff they're doing, begging the question, "Why?" I mean, I love that they give me almost 3 gigs of email storage now, but what is it doing for them. Sure they make more advertising revenue, but is that it? Some claim the services are primarily to gather information on users, which can be used later to roll out even cooler applications.

So, overall, I think Google's ability to "take over the world," as my roommate often put it, will depend on their ability to leverage all these side activities into meaningful profit at some point down the line. If they don't see a dime for all the widgets they put out, they are doing their investors a grave disservice by not consolidating operations to search and ad revenue and enjoying an absurdly high ROI.

One last point on Google - in talking to VCs and entrepreneurs in the Valley, I've noticed that, above all, the fear is gone. People aren't scared that big, bad Google will put them out of business. Time will tell if the beast has really lost its fangs.

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