Tuesday, September 11, 2007

Google Analysis (Part 1/4) by Ana V. Ricaurte


Google has been the one of the few success stories in tech industry (and the U.S. start-up arena in general) post the tech bubble burst in 2000. Google started by being the only internet search engine that actually worked to be the recipient of most of the advertising money that poured into the internet market. Google was able to monetize its traffic and technology by using targeted internet ads in its network.

Now the problem is obvious. At a revenue CAGR of 148% for the past 4 years, Google needs to keep the fast pace to not disappoint its valuation of $215B+ and its 50x+ PE multiple. Google needs not only to keep its high revenue growth (60% for the last twelve months) but also its high margins (EBITDA 37.5% for the LTM).

For that reason Google is constantly exploring different alternatives to keep the fast pace. It strategy can be summarize in the following chart.

Products / Markets

Old Markets/Channels

Old Products

[Doing it better] Optimize the way of doing business. Google is exploring different ways of making sure that its ads are getting to the right people at the right time. It moved away from charging for ad display to a more realistic pay per click. Google would continue exploring path for a more profitable way to exploit its platform and its product/service portfolio.

New Products

[Leveraging its network] Create new products/services that can be utilized by its current platform/network. Google has constantly created new products for its current platform. A good example is its quasi-Office offering (Docs, Spreadsheet and Presentations, Gmail + Calendar + Contacts). Monetizing all its new offering is the complicating part of this strategy.

Products / Markets

New Markets/Channels

Old Products

[Leveraging its technology] Obtain access to new markets/channels for its existing products/services. Google has been exploring in the recent years new way of expanding its reach. Being a advertising platform Google wants and needs to expand to other channels (printed media, TV media –i.e. YouTube, and Mobile media-i.e. Androide) to be able to further monetize its technology. Google is also expanding to new markets (e.g. China). This represents a new set of capabilities that needs to develop to be successful.

New Products

[Leveraging its know-how and knowledge pool] Exploring new opportunities. Google is constantly exploring new products in new channels (i.e. 23&me, Google Earth, ). Google either invest (minority/majority) stakes in other companies or actually develops the product inhouse. It is still unclear for me how Google plans to monetize these ideas. One possibility could be that Google never plans to (following its unsaid motto “Don’t be Evil”

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