Google: Can't Stop This Train
Comparisons of Google to a freight train that defies the laws of physics are looking apt right about now. By all rights, such forces as a slowing economy and increased competition from new search engines and social networks should be dragging on the company's growth. That's what they're doing to rival Yahoo! (YHOO). But time and time again Google (GOOG) proves that it is far from running out of steam. In some ways, it may just be getting started.
To some observers, Google CEO Eric Schmidt understated Google's prospects when he described business as "very, very good" on a conference call outlining third-quarter results. Very, very good would have been if Google matched Wall Street's lofty estimates of $1.81 billion in revenue. Google brought in $50 million more than that—$1.86 billion, subtracting the amount paid to advertising partners. Total sales, including the amount paid to Web site owners to which Google supplies ads, grew to $2.69 billion, a 70% increase from last year. The stock leapt 7.68% to $458.80 in extended trading after Google released results.
Right on Target
Judging from the numbers, Google shows few signs of slowing as the fourth quarter gets under way. Google already does a good job targeting ads, ensuring that ads placed alongside its search results are effective at generating sales for advertisers. That ability seems only to be improving. Google says it's making more money off of its Web pages and those in its network, despite weaker traffic growth. "They are just monetizing their destination a lot better," says Piper Jaffray (PJC) analyst Safa Rashtchy. "I should say that the rate of growth should slow down, but it does seem that every quarter Google pulls something from up their sleeve."
With the bump in advertising for the holiday season, analysts agree that Google should have an even more impressive fourth quarter. The real question is how long can Google keep coming up with new tricks?
Currently, Google pulls in about 25% of all online advertising revenue, according to an Oct. 16 report from research firm eMarketer. It has captured that market share almost exclusively from text-based search advertising. During the call, Google executives said the company plans to move beyond text ads to more graphical and video advertising—a medium analysts agree is the new big thing on the Web. By 2009, eMarketer predicts that $1.5 billion of the expected $26.6 billion in Internet advertising will go to video. Google's planned purchase of YouTube for $1.65 billion is a step in this direction (see BusinessWeek.com, 10/10/06, "YouTube's New Deep Pockets").
During the call, Google co-founder Sergey Brin said that video will give Google the ability to provide better search and advertising. "When I perform a search I often find that the best answer is not always a Web page—and I know that sounds like heresy from Google—but often videos are the best way to do these things," said Brin. He added that he could see advertisers wanting video not only for branding, but to show off their products or services in ways that they can't with a short text description.
The company also sees promise in what it calls its "blizzard" of new applications, specifically Google Checkout, its payment competitor to eBay's PayPal (EBAY), and Google's Web-based spreadsheet applications aimed at undermining Microsoft's (MSFT) dominance of computer desktops.
The company is working to incorporate many of its new products into existing ones so search users will find it easier to adopt Google's new offerings. Currently, many of the products seem like entities unrelated to Google's core search technology, which may be keeping them from taking off. Brin said Google is focusing on making them work together and making fewer "one-offs" (see BusinessWeek.com, 7/10/06, "So Much Fanfare, So Few Hits").
Yahoo in Pursuit
But while Google is poised to keep growing, there is potential for some competitors to start giving it a run for its money next year. Yahoo has lagged behind in large part because it has lacked a similarly targeted search advertising platform. That is set to change by the first quarter of next year when Yahoo's Project Panama gets up and running (see BusinessWeek.com, 10/17/06, "Yahoo's Project Panama Back on Track").
Jefferies & Co. analyst Youssef Squali sees Yahoo as a potential threat next year. "At some point the competitive landscape becomes tougher because Yahoo gets its house in order," says Squali. Initially, analysts thought that competition would come in 2006 as Yahoo and Microsoft's MSN became more aggressive in search. Now Squali is thinking Google may see that competition next year.
Google will also have to worry about competition in video search as video becomes more important, says eMarketer senior analyst David Hallerman. Currently, Google's video search relies on tags provided by the content owners. Other video-search engines have more sophisticated means of locating the right video, such as scouring audio and video (see BusinessWeek.com, 10/11/06, "Google's Video-Search Challenge").
For now, though, Google has the advantage. "Remember, they are one of the hugest brands in the world without ever having advertised," says eMarketer's Hallerman. Analysts point out that Google has a market cap of roughly $130 billion and a squadron of smart, high-paid engineers, and it remains the most-used search engine—a combination that makes this train hard to slow indeed.