Tuesday, December 11, 2007

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


Google has still too much to worry about. With growth CAGR of +100% it needs to keep improving every day and penetrating additional markets every second.

To obtain such an audacious goal, Google has several strategy, two of the main strategies are: (a) Penetrating China, and (b) Expanding its service to the Mobile arena.

Developing Economies Strategy - China Penetration

For Google the developing markets are very different from what they are used to in the US and UK. Given that paid search in the international markets is immature, Google needs to change the name of the game.

For example in China, Google needs more than just a CPA strategy. Google have been playing in the China market since it established a Chinese-language version in 2000. Nevertheless Google have had great problems with its services in China.

Chinese government have put in place since the inception of the industry era in China, a technological “firewall” that restricts access to prohibited or banned information.

The government provided a blacklist of banned IP addresses and URLs featuring information and news about politically or culturally sensitive topics and required operators to block access to them. Users who attempted to access blocked sites would receive a non-specific error message, such as “the page cannot be displayed.” [i]

Google services has been affected by this firewall that impede its systems to run smoothly. On the contrary it services seems erratic and poorly managed, given space for local competitors.

Google’s own research showed that the company was perceived in China as an international brand and technology leader, but “a little distant to average Chinese users.” More than half of Internet users who knew about Google could not spell the name correctly, and more than half thought the company should have a Chinese name. By contrast, Baidu was perceived as being a Chinese brand with good technology, “friendly,” “closer to average Chinese people’s life,” and as having entertainment products. [ii]

Given that Google do not work closely with the Chinese government on terms of internet censorship, Badu –Google’s top competitor and local player in China— that does work closely with the Chinese government has been able to capture most of the Chinese market.

Baidu works with the government more closely than other search companies. Baidu launched a more aggressive system to censor their key words. They started to censor their search service earlier and more extensively than others. That’s why the government likes Baidu.xi

In this case Google has two possibilities. (a) Follow Baidu game book and work with the Chinese government to censor its services from the beginning, and (b) Improve its search services inside China and extend its entertainment service to target China heavy internet users.

For China as well as for other developing countries, Google needs to change the name of the game. On one side Google needs more traffic and on the other side it needs to improve its monetization of this services. To attract more traffic to its Chinese search engine it needs to provide a more extensive service. To better monetize it services it needs to change the way it does business with advertisers (to overcome the immature online advertising market)

An analogy to the problem that Google faces in the developing economies where the paid online advertising market is still immature is what happened in the mobile phone industries more than a decade ago. When penetrating new markets mobile phone service providers changed the way they provide services. In the U.S. it is accustom that both receivers and callers pay for the mobile phone service. This idea never worked outside the U.S. It was too expensive just to carry a mobile phone per se that to have the user pay for the receiving calls it was unconceivable. In Europe and some developing economies the caller is the one that pays for the call. In Europe and Latin America, mobile phone service providers were really successful at penetrating the market when they changed the name of the game. Something similar has to occurred with the online advertising market in developing markets. I believe that advertisers in developing economies would wait until a successful CPA effective cost per action) platform is functioning to fully participate in this online industry. Until then you are going to see an ‘inmature’ industry in these regions.

An step towards changing the name of the game was the partnership that Google signed with Western Union in November 2007.

The Western Union Co. announced a program that allows Google AdSense(TM) Website publishers to receive payment in cash in nine countries via the Western Union Quick Cash®service. The Google AdSense advertising program enables Website publishers to serve Google AdWords(TM) text, image and video ads that are precisely targeted to their Website's content. When visitors to the site click on the ad, the AdSense publisher earns revenue. Before the launch of this program, Website publishers using Google's AdSense program received payment through paper check or electronic funds transfer (EFT) into a bank account[1].

Developed Economies - Mobile Focus

Google strategy in developed countries should focus on expanding its technology to new channels. One particular channel that I believe would be the future is the mobile space. I’m not talking only about cell phones but anything that would be describe as mobile (i.e. PDAs, portable game consoles, smartphones, etc).

Few analysts believe that the mobile focus would bring big advertising dollar for Google. The street believes that the big ad dollar would come from Google’s penetration to traditional media (TV, Printed and Radio). On the contrary I believe that the advertising market would continue to shift away from traditional media towards new media.

Forrester’s 2005 Benchmark Study, although consumers spend 32% of their time on the Internet, advertisers currently only spend 7% of all ad dollars on online advertising. Google believe that over time, this gap should shrink, with more dollars continuing to move online where consumers are. The parallel increase in the number of Internet users with broadband connections will also help stimulate growth and demand for online advertising. Much of the growth in the coming years is expected to come from the emerging markets regions as the online advertising market is relatively more mature in the United States and Western Europe.[2]

Google has recently focus on acquiring or developing a mobile platform that allows them to capture this new nascent market. In recent weeks, Google announced the world that it is going to release its own mobile platform in 2008 and it is already seeking partnership with wireless operators. The Google mobile platform (Android) would make Google applications and services as easily accessible on mobile phones as PCs, allowing Google to capture more ad business from the more than three billion users of cell phones and other wireless devices. On top of that other companies (e.g. Artificial Life Inc) have announced plans to develop games and applications for Android.

Interesting enough this new platform would be less costly than others (i.e. iPhone), attracting new opportunities for low cost providers and new solutions for developing countries. Google anticipates that this emerging platform will soon attract handset manufacturers because of the lower costs for the operating system and expects Android to be successful especially in China due to its Linux base.

Google is also exploring other alternatives to improve its mobile platform:

v Google has also developed plans to acquire mobile phone spectrums in both the U.S. and the U.K.

v Acquired (Oct 2007) Jaiku that operates as a conversational microblogging community that enables users to post thoughts from Web and mobile applications, and comment on the posts of friends and family.

v Acquired (Sep 2007) Zingku that provides mobile text and picture messaging services.

v Acquired (July 2007) GrandCentral Communications that provides a Web-based voice communications platform to manage phones and phone numbers.

v Developing (Nov 2007) a technology that will find the location of people using its mobile mapping service, even if the phone making the connection isn't equipped with a GPS receiver.


Google needs to constantly innovate and growth to be able to manage its investors expectations. The new goal in the future would be its expansion to the mobile and traditional media platforms, and its path to penetrate new markets (China being the most relevant of all those).

It seems that Google is accomplishing in each step of the way the relevant milestone to fulfill this audacious goal of organizing the information of the world. Only time will tell.

[1] Capital IQ News Run

[2] Google Inc. HBS Case 9-806-105 by Thomas R. Eisenmann and Kerry Herman (Nov 9, 2006)

[i] Google – Figuring Out How To Deal With China. Babson Case BAB131 by Anne T. Lawrence (August 2007)

[ii] Google – Figuring Out How To Deal With China. Babson Case BAB131 by Anne T. Lawrence (August 2007)

Sunday, November 11, 2007

Google Analysis (Part 3/4) by Ana V. Ricaurte


Google strategy can be describe in five main efforts:

v Market Strategy – Differentiate product and service with high quality, accessibility and easy-to-use motto

v Innovation Strategy – Create the best technology available to perform the best service out there (i.e. PageRank)

v Human Capital Strategy – Bring the best of the best to create a knowledge base that can preserve the level of innovation necessary to continue serving its clients with the best products/services

v Management Strategy - Create flat structure (anti-bureaucracy) that fosters cooperation, flexibility and fast pace

v Don’t Be Evil Strategy – Create an environment where people love to do the ‘the right thing’


Top Line Related

Google top line growth in the past 5 years has mainly come from Developed Economies. In the future, Google expects that a big portion of its top line growth would be related to current offerings in Developing Economies (i.e China) and to the Mobile Platform in Developed Countries.

The growth in international revenues in the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006 resulted largely from increased acceptance of Google advertising programs, increases in Google direct sales resources and customer support operations in international markets and Google continued progress in developing localized versions of its products for these international markets. [ii]

Domestic and international revenues as a percentage of consolidated revenues, determined based on the billing addresses of its advertisers, are set forth below: [iii]

Year Ended December 31,

Nine Months Ended




September 30,

September 30,

United States











United Kingdom











Rest of the world











Besides the increase in revenues from international sources, Google U.S. region has been affected by the relative weakening of the U.S. dollar. Nevertheless, it is clear from the online traffic numbers that the future of Google resides outside the U.S. While international revenues in each of the periods presented accounted for less than half of Google total revenues, more than half of its user traffic during these periods came from outside the U.S. [iv]

Another recent trend that could potentially affect Google’s top line and margin is the debate between Cost-per-Action (CPA) vs. Cost-per-Click. Where cost-per-click means someone pays Google (or another entity) each time a user clicks on a particular piece of advertising, cost-per-action means that someone pays when a user completes a potentially larger and more involved transaction[1]. Advertisers will migrate in the future to CPA models, in that scenario Google not only has to guarantee that its ads are well targeted but also guarantee that the user would take action.

Margin Related

When advertising dollars go through the Google Network (user-owned website), Google needs to share the ad revenue with them. For that reason it is more profitable if the ad dollars go through Google-owned websites. Since the beginning of the Google Network in 2002 through the first quarter of 2004, the growth in advertising revenues from its Google Network members’ web sites exceeded that from Google-owned web sites. Beginning in the second quarter of 2004 this changed, growth in advertising revenues from Google-owned web sites exceeded that from Google Network members’ websites. i


Google potentially competes with nearly every company in the information technology industry. The problem for companies outside the advertising world is that Google for the most part doesn’t compete for part of the business (i.e. revenues), it competes for what I call ‘purpose’ (maybe purpose that can be later monetize). Google is not planning to charge for some services or products. It seems that it wants to expand its platform and later develop a way of monetizing its reach.

For ‘purpose’, Google has a product that quasi-competes with Microsoft Office (i.e. Docs & Spreadsheets), a product that kind of competes against eBay or Amazon (i.e. Froogle), a product that competes against Mapquest (Google Maps), Snapfish and Kodak Photos (Picasa), Cable providers (Google Video and YouTube), and Free email providers (Gmail). For revenues, Google competes head to head with Yahoo! and Microsoft. These three mega players (Google-$215B in market cap, MSFT-$315B and YHOO-$35B) seemed lock in arm race to obtain part of the advertising budget.

On top of that, Google could also be a future competitor to other media companies (i.e. cable providers, TV channels, newspapers, radio station, etc). Google has been constantly exploring how to expand to other media channels without any proper incursion. So far it has products that provide some related services (Google Video and YouTube) but it doesn’t have a mechanism to exploit in full extent its technology. Google is providing its clients with access to its technology to place ads in different media channels but it is sharing the revenue with those media channels (Google Video, Audio, Print, and TV Ads). In the future, I expect that Google will move to buy or develop technologies that would close this gap. This channel has a similarity with what happens in the Online space and the difference between Adwords and Adsense. I believe Google will give priority to developing its own channels to improve its margins. If Google has done it for Online Searches, I don’t see why it wouldn’t do it for the other media channels.


Google has grown from $86.4 million in revenues in 2001 to $10,605 million in 2006 (expecting $16,598 million in 2007). This grown is explained by the increase of ad revenues due to an increase in effectiveness (Google technology) and an increase in online advertising spending (overall market).

Return on Equity (ROE) has been between the 20-25% range, but return on capital (ROC) has decreased from a high 54% in 2003 to a 17% in 2007 (LTM). This proves how Google moves away from a strategy that focus on bringing ‘business’ to a strategy of bringing ‘purpose’. In other words, Google goal is not only improve its shareholders value but also the world by organizing the information available.

Most of the liquidity and liability ratios do not make sense with Google given its zero debt level.

On the balance sheet side the most important number here is the increase in cash & equivalents for the past years. This allows Google to not have any debt and to have money to acquire new companies (i.e. new technologies).

Margins at an operating level had improved since 2004 because of the focus on Adwords strategy more than an AdSense strategy. Previously in this paper it was explained how these two strategies affect Google margins.

A company comparison (comps analysis) against Microsoft and Yahoo! it’s almost unfair. Google is growing so fast in top line without penalizing its margins that any comparison would leave the other two competitors at the bottom. Stock performance for Google has been a magnificent story (going from $100 at in 2004 to almost $700 today) only comparable to the earlier MSFT days.

[i] Capital IQ, Analyst Reports (Bear Stearns & Credit Suisse) November 2007

[1] Google deems cost-per-action as the 'Holy Grail', by Stephan Spencer (August 22, 2007)

[i] Google Inc SEC Fillings (10K – Feb 2007)

[ii] Google Inc SEC Fillings (10K – Feb 2007)

[iii] Google Inc SEC Fillings (10K – Feb 2007)

[iv] Google Inc SEC Fillings (10K – Feb 2007)

Thursday, October 11, 2007

Google Analysis (Part 2/4) by Ana V. Ricaurte


On its own words, Google is a global technology leader focused on improving the ways people connect with information. Google first product and core advantage is its search engine platform. Google maintains an index of websites and other content, and makes this information freely available to anyone with an Internet connection. Its search technology allows people to obtain nearly instant access to relevant information from its online index. For the common users it is unclear where Google index finishes and the internet starts. Google seems to be searching the internet instantly but what it is actually doing is searching in its indexed part of the internet. Google generates revenue by delivering online advertising.[ii]

BUSINESS UNITS[iii]—Search and Personalization

Google first product and the key to its success is its search engine. Nevertheless, Google continue to expand its product portfolio. Other products now included are:

v Google WebSearch . Lets you search inside a website.

v Google Image Search . Lets you search for images.

v Google Book Search . Lets you search for books.

v Google Scholar . Lets you search for relevant scholarly literature

v Google Base . Lets content owners submit content that they want to share on Google web sites. Google Finance . Provides an interface to navigate complex financial information

v Google News . Gathers information from thousands of news sources worldwide

v Personalized Homepage and Search . Allows personalization

v Google Co-op and Custom Search . Google Co-op extends the power of Google’s search technology by combining its algorithms with the context, knowledge and expertise of individuals. Google Custom Search allows communities of users who know a lot about particular topics to build customized search engines.

v Google Video and YouTube . Google Video and YouTube let users find, upload, view and share video content worldwide.

Communication, Collaboration and Communities (Online Products)

Google wants to allow its users to share content so it has developed tools that have this ability.

v Google Docs & Spreadsheets . Word-like and Excel-like products, offered by Google without any cost. Accessible with an internet connection and a web browser. Next year Google would see Presentations, a Powerpoint-like product. All of these lets you share the file with others.

v Google Calendar and Gmail . Google’s free webmail service combined with a free calendar that lets you share your events and post with others.

v Google Groups . Helps groups of people connect to information and people that interest them.

v Orkut . Enables users to search and connect to other users through networks of trusted friends.

v Blogger . Allows users to publish their blobs (weblogs)

Downloadable applications (Desktop Applications)

Google wants to bring essential applications to its users for free (e.g. antivirus, photo organizers, media players, office-like solutions)

v Google Desktop . Lets people perform a full-text search on the contents of their own computer.

v Google Pack . Free collection of safe, useful software programs from Google and other companies that improve the user experience online and on the desktop. It includes programs that help users browse the web faster, remove spyware and viruses and organize their photos.

v Google Toolbar . Search box to web browsers.

Google GEO—Maps, Earth and Local

Google wants to provide geographic information at all levels.

v Google Earth . Lets users see and explore the world from their desktop.

v Google Maps . Helps people navigate map information (i.e. MapQuest competition).

v Google Sketchup . 3D modeling tool.

Google Checkout

Google Checkout is a service for users, advertisers and participating merchants that provides a single login for buying online and by helping users find convenient and secure places to shop when they search.

Google Mobile

Google Mobile lets people search and view both the “mobile web,” consisting of pages created specifically for wireless devices, and the entire Google index, including popular products like Image Search. Users can also access a variety of information using Google SMS by typing a query to the Google shortcode. Google also offers Google Map, Blogger and Gmail Mobile.

Google Labs

Google Labs is the tech lab where google creates all its new products. Users can try prototype versions.


Google generates revenue primarily by delivering relevant, cost-effective online advertising. Google has five channels to distribute its advertising:

v Online . With AdWords, an auction-based advertising program that enables advertisers to deliver relevant ads targeted to search results or web content. There are two channels inside the online space:

o AdWords: Delivers online ads inside Google owned websites. Online ads placed in the right side of the site, next to the search results.

o AdSense: Delivers online ads inside Google network (user owned websites). Google recruits million of users that use its AdSense platform to provide online ads in their website. The users get a share of the profit.

o Interesting enough Google doesn’t disclose separately its revenue from the Mobile effort and platform.

v Video . With Google Video Ads, user-initiated click-to-play video ads that run on its web sites and the web sites of its Google Network members.

v Television . With Google TV Ads, an automated online media platform that schedules and places advertising into TV programs.

v Radio . With Google Audio Ads, an automated online media platform that schedules and places advertising into radio programs.

v Printed Media . With Google Print Ads, a web-based marketplace for placing ads in print media.

Google derives most of its revenues from fees Google receive from its advertisers through its AdWords and AdSense programs.[v]

[i] Google Inc SEC Fillings (10K – Feb 2007)

[ii] Reuters

[iii] Google Inc SEC Fillings (10K – Feb 2007)

[iv] Google Inc SEC Fillings (10K – Feb 2007)

[v] Google Inc SEC Fillings (10Q – Oct 2007)

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”