Sunday, October 30, 2005

NYTimes: Google Wants to Dominate Madison Avenue, Too

A long but really good article on the rise of Google's business model, and where it might be headed in the future. Reading for those that are serious about their investments in Google, otherwise you might find it too long.

Saturday, October 29, 2005

Google Growth Compared To Yahoo! Growth

Both Google and Yahoo! posted Q3 results last week. I don't compare with Microsoft here, because I generally believe, that Microsoft won't succeed with its current plans. I don't think that Microsoft will become a larger player online, in fact as Henry Blodget recently did a piece on (see my post the 7th of October), Microsoft is still after ten years of trying falling behind the current two leaders Yahoo! and Google. Also I believe that Microsoft's software domination will diminish, as more and more software will be served over the Internet. Especially now where Google is planning to offer free Internet, first in the sense of Wi-Fi in San Francisco, but I am sure that it will offer this across North America and then later the rest of the world. If they can make a business out of it in San Francisco (local ad + other ad sales > cost of delivering access) I am sure, they can make the same business model work elsewhere. Especially when access costs will be working their way towards zero cost. Eventually free wireless Internet to the civilized world will dramatically change the desktop model for software usage. As I earlier wrote: Microsoft has never been an innovative company, it has just had a strategic advantage in owning the operating system - the rest is sloppy business they still have made a fortune out of, since they could hold competitors out. This old school monopoly will not stand the wind of change brought about by Google, Sun Microsystems, Yahoo! and a lot others.

Maybe I am being too hard on Microsoft, but I just don't believe in their future, and neither does the stock market. Alright that was Microsoft out of the equation, lets have a look at the last few quarters growth in Yahoo! and Google.

EBITDA (Earnings Before Income Tax Depreciation and Amortization) is generally a good way of looking at a company's current and future ability to generate revenue and profits. That's why I focus on this number. Also I find it very reliable at determining the development of the share price of a company. Let's have a look at the quarterly EBITDA numbers for Google and Yahoo! in 2005.

It should fairly be mentioned, that Yahoo! last Q4 had a Q over Q growth from Q3 on 25,8% while Google "only" grew 17,8%. So apparently Yahoo! grows faster than Google during Q4. However, since then Google has shown significantly higher momentum during 2005 than Yahoo! so this might change in Q4 2005.

When this is said my personal conclusion is, that obviously both companies high growth is coming down. But very importantly: Although Google is growing faster than Yahoo! - Yahoo!'s growth is coming down faster than Google's. From Q1 to Q3 Yahoo!'s YoY growth came down 16 percent point (64% -> 48%), while Google's only came down 6 percent point (115% -> 109%).

Then when you compare the EBITDA P/E (Price/earning, how much you as shareholder pay per dollar of EBITDA when purchasing the stock) of the two companies, I must say, that the premium you pay on Google as the faster growing company with today the far superior R&D budget and probably also brand value - I think that Google turns out to be a better buy. With last Fridays share prices the EBITDA P/E for the two companies is as follows:

Yahoo! EBITDA P/E: 32,6
Google EBITDA P/E: 37,2

Google is growing more than 100% - Yahoo! is growing less than 50%. Google might actually also have the better brand value today. Would you rather own shares in Yahoo!? I mean Yahoo!'s YoY growth one year from now might be 30%, while Google might still be around 80%-90%. That is three times Yahoo!'s growth. The gap in finances for R&D is just going to be staggering. Yahoo!'s investment in Alibaba in China might keep Yahoo!'s growth a bit higher though.

Personally I invested in Yahoo! October 1997 and have kept my investment. I invested in Google in April 2005 - when the share was at $193 just before Q1 results. Although I think that Google is a better buy I am keeping my Yahoo! investment, as it is a defensive investment of my Google investment. Yahoo! is after all the 2nd best search engine today, and they are trying hard to get better than Google.

Wednesday, October 26, 2005

Google Is Not A Search Engine

Some journalists, brokers and analysts are still afraid that Google is diversifying too much away from a search company by:
  • Offering free Wi-Fi
  • Building Gmail/email
  • Creating a payment service
  • Developing a classified feeds format
  • Making a news site
  • Building a messenger client (by the way with superior Voice over IP quality)
  • Creating Google Maps
  • Etc etc

I don't agree! Google is no longer a search engine - its primarily a user aggregator. Its all about making a lot of products, some are brilliant but not all. But those that are brilliant and catch on, gain a lot of eye balls. As Yahoo!'s former CEO Timothy Koogle once said: "Dollars follows eyeballs". That is exactly what Google is all about these days. The difference with Google is:

  1. They started out with a superior search engine gaining by far the largest amount of search queries
  2. Which generated the largest base of advertisers of any of the online media
  3. Which generated the largest online revenue stream ever
  4. Which in turn created the largest online R&D budget on the planet (yes even more than Microsoft) (And due to the high growth of the revenue -> high growth of the stock price -> Google being the most attractive place to work financially due to the more attractive employee stock options compared to the lackluster flat no growth shares of Microsoft)
  5. Which again leads to the fact - that unless Google get arrogant about their products quality and fail to be humble and paranoid about competitors product innovations - well then they will rock this online planet for a looong time

So my point is: Don't be afraid that Google will get confused and loose focus because they build other products - they are just aggregating users, and with their superior advertiser base, they can capitalize on these products far better than any of their competitors.

Friday, October 21, 2005

FT: Lex: Google

This article pretty much says it all. Google is riding the wave.

Thursday, October 20, 2005

Fantastic Q3 from Google - outgrowing Yahoo!

What an excellent result - what I hoped for - YOY EBITDA growth on 109% compared to yahoo!'s 48%. Google for sure has momentum. More comments next week - but really positive!

Wednesday, October 19, 2005

Yahoo! Q3 2005: Growth Slowing Down

Yahoo! did okay but are not really blowing anyone away. To me the most important thing is the fact that growth is slowing. It is expected to slow, but the question is where the long term level of growth is for Yahoo!? This of course partly will be determined by Google's doings.

Yahoo! grew YOY (Year Over Year) EBITDA (Earnings Before Income Taxes Depreciation and Amortization) by 48%. That is a nice yearly growth rate for most companies. However, for Yahoo! it is the slowest YOY growth since Q4 2001, which was the time when everyone was still licking the wounds after the bubble burst. I believe that the growth rate will fall further. A 30% growth rate does not seem far ahead.

Since new years Yahoo! is up on EBITDA with 48% (same as YOY as it includes the four last Q reports) but about 12% down in share price. This means that Yahoo! has been getting a lot cheaper on P/E (Price/Earning - the price you as investor pay for one dollar in earnings). The reason is that Google keeps adding momentum and keeps outgrowing Yahoo!. Its just more fun as an investor to own a share in a faster growing company. I am still an investor in Yahoo! and I will stay that for a very long time I think. But I do think that Google Thursday will show more momentum and that they will be the more fun company to have stocks in. Their P/E is only slightly higher than the one of Yahoo! so there should be sufficient room for it to grow even more, as Google should be rewarded for the significantly higher growth - almost double the growth. Lets see what happens Thursday when Google reports Q3.

Please feel free to comment on Yahoo!'s result or my assessment of it.

Sunday, October 16, 2005

Yahoo! Q3 Tuesday - Google Q3 Thursday

Four weeks a year I hold my breath - the weeks when Yahoo! and Google report quarterly earnings. I expect to see EBITDA quarter over quarter growth in both companies. Also I expect a higher growth from Google than from Yahoo! That is the way it has been since Google went public last August.

For both companies the result will determine the direction of the shares in the months ahead. Yahoo! has been pretty flat since Google really left Yahoo! behind earning and growth wise since the turn of the year.

Yahoo! Q3 can be heard live here on Tuesday 5 PM ET / 2 PM PT(after market close):

Google Q3 will be webcasted here on Thursday 4.30 PM ET / 1.30 PM PT:

Friday, October 14, 2005

Yahoo! and MSN the new alliance?

Yahoo! and MSN have created a partnership on instant messaging so the two former competitors' products will be able to communicate with each other. This means two things. First of all it is a recognition of AOL's clear leadership on this product in USA. The other very interesting fact is that it recognizes the strength that Google has gained - not in messaging - but generally. It is interesting to see two such big players make an alliance against AOL that just doesn't include small time messenger client Gtalk from Google. Google could easily have been part of this alliance against the AOL messenger, but they are not! It seems that Yahoo! and Microsoft really are acknowledging the Google threat.

From comments the 24th of September:

I agree Google seems to be making the right moves and everyone else is doing catch-up. Is a merge between MS and Yahoo possible? They would have a better chance of slowing the growth of Google then by working separately. My enemy's enemy is my friend?

My answer:
I don't think that a merge between MSFT and Yahoo! is likely, although you are making some very valid points! MSFT has been offering to buy Yahoo! since they were much smaller, but Yahoo! has always been wanting to do it on their own. I guess partly because they also have the chance of beating MSFT and then partly because MSFT has become a slow growth business, while Yahoo! still is growing 57% a year on EBITDA (Earnings Before Income Tax Depreciation and Amortization). Yahoo! shareholders would loose out on this growth, if they were to become part of MSFT. So I don't think, that Yahoo! shareholders would like it - even though MSFT most likely would.

I guess the anonymous reader was a bit more foreseeing than I! Its really interesting! Two main competitors are joining up. Not totally on all products, a merger or anything like that, but just the fact that they are cooperating is interesting. They use to be head on and still are on many areas. But along came Google and surpassed Yahoo! as the online wonder child with capabilities to rewrite the tech industry rules. So now Yahoo! and Microsoft are starting to cooperate. Question is how far they will go? Maybe Google will become so strong that they will eventually get a lot closer - basically because they have to?

Google will have the capability to distribute online software currently from Sun. Microsoft will need to continue to distribute software be it offline or online. Most likely they will also need to distribute software online, and here Yahoo! could be a formidable partner in the competition against Google. An interesting new direction in this game!

Tuesday, October 11, 2005

Microsoft is old school

Or you might even say "slow school". Microsoft got their one big break about 30 years ago, when IBM thought it was a great idea to outsource the production of an operating system for their new computers. What turned out to be a grave mistake by IBM was also the greatest thing that ever happened to Microsoft. It gave them their glory days, but these are over now.

The operating system turned out to be the largest strategic advantage the next thirty years in computing history - period. This and mainly this made Microsoft what it is today, or what it was 6 years ago (the stock price has been flat since then). The strategic advantage gave Microsoft the ability to dominate almost all other applications related to the personal computer. They were not necessarily the best, but they could either price their way into the market like they did with Office and Explore or muscle their way with better knowledge of upcoming features in the operating system than their competitors. Office was very cheap when there was still competitors around, and Explore remains free till this day. But what about Open Office - its free - isn't that competition? No not yet! It doesn't have the distribution, but that's what we will see through Google most likely.

So where does that leave Microsoft today - a lean mean customer oriented machine ready for the ever changing future? No not really. They did great because of their strategic advantage, but they were never great and profitable because of superior products. Bill Gates was a great strategist, but never a great innovator. Explore is a copy of Netscape. Office is a copy of Wordperfect, Lotus 1-2-3 and more. Even Windows graphical interface was originally a copy of Apple's interface.

Internet changes the landscape. Power is shifting away from Microsoft due to one single very important fact: The most lucrative business in Internet and fastest growing area of matter in the IT world is NOT under influence by the operating system: Search. Microsoft can't control this - but have to fight their way into it, and be chosen by the consumer for once (first time?) and they are not doing all that well. It might come with a heavy integration into everything in the Vista operating system due for launch late next year, but it remains to be seen. That would be the old muscle approach.

Microsoft has never been competitive beyond their strategic advantage of the operating system and the next 5 years or so will show this. Its a large, heavy, slow, non-innovative, old school company of the time before Internet. This is a new playing field - Microsoft you don't belong here - or prove us otherwise!

Sunday, October 09, 2005

Popular to down play Google-Sun alliance

Surely Google and Sun didn't get all that concrete last Tuesday when they announced their joint efforts. But why does everyone influential have to jump the "Yeah - I can't really see what's gonna come from this either" boat? So GS (Google-Sun) wanted to let everyone know that they were going to cross promote before a lot of products are ready to be shipped. Well its not that bad. The potential here is really amazing. Don't worry smart people - the products are going to come!

There is one major reason that the free Office from GS will come: Microsoft's best chance to gain share in Search (which is so extremely lucrative) is with money from Office (41% of their operating income) and with integration of Search into office. This leaves Office as the most powerful weapon MSFT has in its arsenal to compete with Google. This naturally leaves Google with a desire to gain market share in Office - not necessarily for themselves - but for Sun is fine, as long as its share taken from Microsoft. At the same time Google can get and will get the same integration into Open Office that Microsoft is planning for MSN Search in their coming operating system Vista's Office.

But hasn't it been tried so many times before - attacking MSFT Office? Yes it has. But every single time without proper distribution apart from people being able to download it from somewhere. This time around it is backed by mighty popular Google, where Open Office can be integrated into many of the functions of Google Toolbar, Gmail, Gtalk etc. etc. Also Google has build the world's largest parallel computer covering no less than "earth". With this extraordinary power Internet based software actually becomes possible. Expect Google to support it by free broadband. If they can supply free Wi-Fi, then why not free broadband? It will be paid for by Adwords of course. If Yahoo! in their new beta mail have changed everything to feel as easy, quick and nimble as a desktop application, although it is just online - then it must be a matter of time, before Google can do the same.

So don't worry - you didn't hear those vast product launches last Tuesday, but you can be sure, that they will come! Its probably the most important priority for Google the next 2-3 years.

Friday, October 07, 2005

CHR: The Web War Is Over - And Microsoft Lost

The most important 9 pages you have to read, if you are an investor in Google, Yahoo! or Microsoft or if you are considering to be one! Fantastic reading and great analysis from Cherry Hill Research (CHR) which has former Top ranking Wall Street equity analyst Henry Blodget as President. This is really the essential reading on the battle between the three contenders.

If you don't have Adobe reader - get it here:

Conclusion from the analysis:
"There will be no great war between Microsoft and Google/Yahoo!, because despite Microsoft's vast resources, Google/Yahoo! have already left MSN far behind. There will be skirmishes, of course, but these will be irrelevant. Microsoft is as far behind in the web business as it was when it launched its online effort ten years ago, and short of disastrous mistakes by Google and Yahoo! nothing Microsoft does on its own is likely to change that. Microsoft's best chance to make MSN the industry leader is to spin off, most likely in a merger with AOL. This won't guarantee success-the combined entity would still be in third place-but it would create a company far stronger than either AOL or MSN on its own.

Some of the most important points from this paper in my opinion:
  • All the other "battles" that Microsoft has won was software battles - this is not software, its media
  • MSN might be trying to play catch-up - but they are still today loosing ground on Yahoo! and Google (fast)
  • Google's 2005 operating profits will most likely exceed MSN's 2005 revenue
  • Most industries tend to have three large players and a group of niche players - MSN and AOL are fighting to be the third - one will most likely dwindle unless combined

Have a great weekend!

Thursday, October 06, 2005

Google has more buying power than Microsoft

Before I comment the Google-Sun alliance further, I just want to make one point. People keep saying, that Microsoft has more cash - hence they can "buy" their way to victory. I strongly disagree.

No doubt MSFT has a large supply of cash - $40 billion I think it is. But as I know from one of my former colleagues now working at Yahoo! Search, then you can't just buy your way to the best search engine. It takes skilled engineers/developers and they don't come in huge supplies. Google has the advantage here compared with Microsoft. Because those that choose to work with Google, also get options in Google. These options can become extremely valuable and make the employee economic independent. This doesn't happen at Microsoft anymore.

At MSFT you get shares instead of options. Amongst other reasons simply because the company isn't growing the way it used to. Surely Microsoft still grows, but the share price has been flat for 3 years. It has been flat for several reasons: The antitrust threat, slower growth than earlier, the threat of Linux and especially the threat from new competitors like Google, that has the capability to produce software, that threatens Microsoft's core revenue streams.

This all means, that although Microsoft has a ton of cash, they can't compete with Google's far more attractive options packages. If Microsoft wanted to compensate its programmers at the same financial level as Google, but in cash, it would severely hurt their financial statements and further send the share under pressure.

As long as Google's shares keep going up (and they will if they keep growing like that), its almost "free" for Google to compensate employees with options, since the market is paying for the show. I think this is one of the fundamental reasons that a growth company like Google can get the better brains, and thereby possible beat stagnate companies like Microsoft.

Tuesday, October 04, 2005

Reuters: Sun, Google in office software distribution pact

Apparently it is happening! A Java Desktop and Open Office from Sun will be distributed by Google. I will follow up with more comments later. Just had to pass the news on!

Well I have now seen the webcast and read about 30 news stories on the topic. Before I write a longer comment - which I will within days - then I must say, this is GOOD news for any Google or Sun investor. Personally I am long in Google, and I certainly will stay that after this. This is history changing. One paradigm being replaced by another, it will just take 2-3 years to be fully happening, but it will happen. Good luck Microsoft, it will be uphill for you from now on!

Link to Google and Sun Live Conference Webcast

Click above for a link to the Live webcast at 10.30 am PT.

NOTE: I have changed the link to the replay of the webcast, as it is no longer live.

Monday, October 03, 2005 Sun Rises on Google Talk

"Sun announced on its Web site that CEO Scott McNealy and Google CEO Eric Schmidt will hold a news conference at 10:30 a.m. PDT Tuesday at the Computer History Museum in Mountain View, Calif., to "discuss joint activities." No additional details were provided." Source:

EXCELLENT!! It looks like it is happening already! I am extremely excited about tomorrows joint news conference held by Google and Sun Microsystems! Sun - the company I used to love for the potential to challenge Microsoft with Java based software. It never really happened - Sun didn't have the distribution that Microsoft had. But today Google has that on the Internet. Combined it could be a real challenge to Microsoft. No one outside the two companies know, what the news conference is about. However, it could be that big moment, where official plans that could shift power from ever dominant Microsoft actually are released. It could be the single most significant event since the launch of graphic Internet in 1993.

What do I mean by "It looks like it is happening already!"? Well it is only nine days ago, that I wrote this post - "Will Google hurt Microsoft with free software?"

I thought, that it might happen some where down the road 1-2-3 years from now. But now it might actually happen already tomorrow. We don't know, but we can certainly speculate.

Techweb: Google's Patents Reveal Strategy To Beat Microsoft

This article reveals some truly great points from the new book "The Google Legacy" by author Stephen E. Arnold. I must say once again.. I totally agree! The article is a really good read! The two below passages are from the article:

In placing Google’s patents under microscopic scrutiny, Arnold said he believes Google is not so much protecting its past technology innovation, but is positioning itself for the future with the first stop targeting Yahoo!’s Web advertising. Microsoft will come into its gun sights later.

“These patents suggest that Google is looking beyond search, possibly targeting such companies as Microsoft, as Google tries to become the leading info tech company of the 21st Century,” he said Tech titans ready to brawl Google, Microsoft look to square off on Net and desktop

A must read article, if you are interested in the "Microsoft muscling for search - Google gunning for software" topic!

Microsoft is doing everything they can to gain share in the search market, but are far from succeeding yet. I don't think that positive change, will happen before the launch their new operating system Vista. And since that is 1-2 years into the future, it might be to late to stop Google from gaining sufficient momentum to potentially dominate software served online.

Google really has the advantage of surprise and momentum. Yahoo! was surprised when Google ventured beyond search. Microsoft was still just waking up at this time - unfortunately for them to a nightmare called Google.

USA Today: Google morphs into multifaceted juggernaut

A truly great article summarizing some of the many exciting initiatives from Google!

I am really sorry, that I haven't had time to write more original posts this weekend! I owe some thoughts on Wikipedia, which should be posted next weekend. In the mean time, there has been a lot of great articles out there, on the matter that I have so much passion for: The battle between the online giants for world domination. Why? Well there are two reasons:

1) First of all the strategic game itself is soooo exciting!

2) The "winner" will be the largest revenue generated that the world has ever seen. So if you pick the right horse, you could have a lot of fun as an investor.

Sunday, October 02, 2005

Fortune: Google, Yahoo, and eBay: Next-Generation Conglomerates?

Nothing less than a fantastic article from David Kirkpatrick! To read it click the title on this post.

My thoughts on this article:
I totally agree! I see Google as the company that will prevail, and will eventually reach "World Domination". Yahoo! will be a runner up and MSN has a small outside chance, as they are backed by wealthy Microsoft. Especially if they succeed in getting people to use MSN Search more by integrating it cleverly in Microsoft's other products. But MSN is running out of time, as Google probably eventually will deliver free software products competing against Microsoft's expensive software.

Also if you look at Google's recent offer to free Wi-Fi service in San Francisco. They can do this, because they have a superior ad model with far more clients. Expect the free Wi-Fi to be sponsored by local ads, which probably will generate enormous value for both the local advertiser and Google. Who else can do that?