Internet Futures: All Google, All The Time
Look past Google's new search advertising service pact with Yahoo and all of its anti-competitive brouhaha. It can be as frightening as it is enlightening.
A recent exhaustive report by Bernstein Research declared that Google and Amazon will dominate the Internet-driven world in the next decade. In some ways, a maturing Google's future scenarios sound like every other media giant wrestling with the usual demons in an economic downturn. Google's 33% operating margins will fall to 30% this year and in 2009, while it consolidates lower-margin businesses and meets the revenue guarantees of social networking deals with MySpace.
Although its overall growth continues to slow, it remains the healthiest in the pack. Despite a ramp-up in assets, Google's return on tangible invested capital (at 20%, or $25 billion) remains on par with other large-cap Internet players, except for eBay (at 33%)--and is more than triple that of Yahoo, its most comparable competitor.
The post-merger integrations of its mostly smaller private Internet acquisitions make it unlikely that Google will engage in a "transformative" deal, according to Bernstein Research analyst Jeffrey Lindsay. To date, Google generally has spent about 9% of its free cash flow, or about $2 billion of $14 billion available, on smaller strategic technology-related acquisitions--with DoubleClick and YouTube as the exceptions.
There is no need to do more, given Google's monopoly in online search advertising and its multi-pronged play in display advertising through its exploitation of DoubleClick (already underway with the free hosted service Ad Manager) and Yahoo's proposed paid-search outsource deal-rendering more than 90% of the search market, according to rival Microsoft. Morgan Stanley estimates it at more than 61% of all online advertising revenues.
Quite simply, online advertising's continued double-digit, albeit slower, growth provides Google with a foundation that remains rock solid. Despite all the ruckus about comScore's tracking of lower Google shares in recent months, Lindsay expects its paid-search and network advertising businesses to continue demonstrating "remarkable recession resistance" and the controversial recalibration of its AdWords algorithm to pay off in spades.
Clearly, the vehicles of its growth will include the open handset Google Phone, its creation of another wireless broadband platform on the soon-to-be-released TV broadcast white-space spectrum, the electronic tools and targeting expertise it offers traditional offline media, and international expansion that already renders 50% of overall revenues.
Google has the mechanics to help transform the traditional media advertising model into a more pliable, auction-based, user-priced, automated form of interactive marketing and more secure pay-per-action commerce model. It has launched TV ad-targeting trials galore: EchoStar, DirecTV and Astound Broadband. Although Lindsay does not drive home the point, it is that bookended might--of dominating emergent online advertising and transforming offline media advertising--that gives Google an unrivaled stature for the foreseeable future. Moreover, Google will also have its hand in nearly every potentially lucrative venture in between, from matching Microsoft's Office with its own Apps to facilitating personal private health records to developing a profitable ad-supported video social network model in YouTube.
From that formidable vantage point, there appears to be no stopping Google as it positions itself for a 50% increase in its existing business Net revenues to $31.3 billion by 2012 (from $20 billion), with its products near complete release (such as DoubleClick, Checkout, Premiere Apps and Gmail-related advertising) swelling to $5 billion by 2012. Emerging opportunities such as video and rich media will render $2.3 billion, making for a total of nearly $10 billion in total revenues generated by new initiatives by 2012, or about one-quarter of Google's overall net revenues--about $17 billion of which will be annual operating profit in five years. Put another way, Lindsay forecasts that new products and initiatives will give Google 16% incremental growth in fiscal year 2008, and an average five-year growth rate through 2012 of 52%.
That deeply rooted financial strength and competitive positioning are rooted in a flexible, enterprise-driven corporate structure that is not encumbered by legacy operations carried over from pre-Internet times. Still, Lindsay warns that Google could become a victim of its own success.
Google has struggled to monetize its development of incremental product enhancements and add-ons to search extensions, tools and assorted widgets. Underneath its lightweight product development process is an "industrial-strength infrastructure," Lindsay said. Google's stillborn foray into wireless has been characterized by more bark than bite, although Google CEO Eric Schmidt considers mobile the next major Internet platform. Viacom's $1 billion copyright infringement lawsuit against Google and YouTube may draw a line in the sand for all Internet content and distributors.
Marketplace fears that Google could become the de facto digital gatekeeper for online/interactive publishing revenues worry Silicon Valley, Washington, Hollywood and Madison Avenue--which cried foul on Google's latest moves on Yahoo. But as Bernstein points out, with the depth and breadth of compelling research, this is one train to the future that has already left the station.