Saturday, January 20, 2007

Which Google Bubble is bursting?

Some sites are running lotteries for when the Google bubble will burst, but I don’t think it’s that simple.

I think that people mean very different things when they refer to the bubble.

1) That Google's value is not in relation to their stock price.
2) That Google will be replaced
3) That Google will reach the limit of the advertising revenue
4) That Google will blow it.

And now in detail:

1. Dot Com is back, baby!

The tone that many investors and analysts take about Google is very similar to what I used to hear back in the dot com days. Back then there were so many idiots with stars in their eyes that any kind of common sense was in very short supply.

People would run up your stock no matter what the P/E ratio was. Financial reason took a far back seat to dreams of striking it rich. Rich, I say! The value of Google’s stock price is no longer hitched up to the value of Google the company.

But, this doesn’t mean the Google isn’t a good investment. Individual stock buyers may run up the price to twice the current level. Or one day it may crash back to the levels supported by their current business value. This is what some people refer to as the bursting of the Google bubble.

But when this bubble bursts Google’s value will not have really changed at all. Their business and web properties will be the same. Unless they have been very smart, their war chest will be a lot smaller. And they will have a much harder time getting as much good PR and recruiting great employees and rewarding their current ones.

2. Two Slovakian teenagers.

At the very heart of Google's success is the algorithm they use for indexing sites to search. So it just takes one guy to figure out a better way to do 2 + 2 = 4 and things could start to change. And the question here is not really IF such a thing could happen, it’s WHEN it will happen.

Google came out of nowhere. When they showed up they did nothing that was shockingly new. Google's huge key to success was that the results that it returned were a lot better than anybody else’s. The other search engines have caught up a little, but they do not offer enough value over Google for users to leave the tribe. (I guess that would be “The ‘the Google’” tribe)

Google has lots of other properties that are valuable, but none of them are lacking competition. And none of them are that much better. If Google were a luxury brand like Porsche or Apple, there would be more breathing room, but they have marketed themselves as a utility.

Still, Google is a very smart company. They could buy off the teenagers. They could change their brand identity. They could do a lot of things to hold off the wolves for a while, but it’s very, very rare that a utility product holds on to this much market share for long if consumers can easily attain greater value by switching.

Google could be replaced and this would sound more like a bubble deflating rather than bursting.

3. They hit the limit of their advertising revenue. As if!

Lots of people think that there is a limit to the amount of advertising dollars that Google can reach. They say things like “The whole market is 50 billion and Google gets 40% of that now, so they can only get 60% more and not every advertising dollar is going to go to Google.” or something like that. No Way. They are not seeing the big picture. Nobody knows the limits to this brave new world of advertising!

If you bring up Google Maps and type in “New York, NY” or “Seattle, WA” and then zoom in you can now see the brave new world of one kind of Google advertising site. This is the one place on the planet where you should list your business (Well, this and, which is actually better.) This is the Yellow Pages marketing model on steroids. Imagine their revenue if they got a dime for every business on the planet every year?

And that’s just their maps business. Nope, there is no real limit. No bubble bursting from this point.

4, The one in which Google the company blows it.

I saw this happen at Microsoft. (Not that Microsoft has blown it in every single market niche they compete in. And I would certainly NEVER count them out. And I still have a certain amount of fondess for the old blibbet.) The company's stocks go up beyond all expectations, their technology is the best in the world and the money really starts flowing in and around. Then the early people get rich and leave (30% of them are already gone from Google). The next wave of people do not get it as much. The Competition gets close and even passes the company’s current offering. The next hot software slips a little so income that was forecasted shows up late. And everything starts changing very slowly.

I see in Google the thing that IMHO really burst Microsoft's bubble. The core business of a software company has to be about producing killer software. Instead it slowly becomes about making business deals, partnerships and acquisitions. The best software comes from a compromise between the two (but that's a different post). Microsoft keeps telling its self that it's about software development, but the product teams are not the people they listen to. Microsoft's VP's and the guys who report to the VP's are so inbred that they no longer have eyes to see.

Once a company starts really rewarding and trusting the average deal maker over the t-shirts their bubble is going to burst. Notice the Google hasn’t done very much with Google Earth since they purchased them. Google Earth was the most exciting map product but now Microsoft’s has leapfrogged them. Google tried to purchase all the advantages and hasn’t been able to do a darn thing with them.

I don’t think that too many people think of this when the say they Google bubble will burst, but to me this is the real one. This is the one that will make the world a little worse than it used to be.

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