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Tuesday, January 31, 2006

Did Google Miss?

Google's financial report seems to have disappointed Wall Street. Drilling down on the numbers, though, ad revenues on the Google.com sites continue strong. The content network revenues -- looking a little sickly.

As stated by the CFO in the Q&A in the earnings call, "most of the miss was related to tax rates."

In general then, Google's "problems" are the same as they ever were: overreliance on ad revenue, and overreliance on the content network.

It sometimes seems that the analyst community asks about everything but Google's core revenue stream. I suppose that's because they're looking for new growth areas. Hardware, software, rich media, radio... how to monetize Google images, etc. etc. Interesting questions, but with few answers, because Google won't say much.

So let's see if any truly new revenue streams emerge this year.

Again, what Google did this fall was to focus on disincentivizing advertisers from running poorly-targeted ads on the system, or what Sergey just called "investing in quality initiatives." Couple that with continued cleanup of rogue publishers in the content network, and it looks like the stage is set for further, steady -- if unspectacular -- growth.

So did Google "miss"? To me, the nitty gritty is in the details. Given that advertisers were still adjusting to the new quality score regime in Q4, the 24% quarter-over-quarter growth in Google.com sites revenues is on track, if not stellar. The real test will be whether strong growth kicks back in as advertisers adjust to the new system and as new ones come on stream. In essence, the slight softness in Q4 growth on Google.com sites was something of a "planned miss." I'm still unclear on whether the average CPC actually rose in certain verticals, or fell. So was Mary Meeker, when she asked her question on monetization at the end of the call (reminding Google that they had boasted of improved monetization from Q2 to Q3). She received no good answer, and the call wrapped up. Let's hope she can do a little digging and find out more.

Where Google continues to show weakness is internationally (they describe international markets as "underpenetrated") and in the content network. Content simply hasn't had the legs or the profit margins to justify the enormous expectation Google's built around it. Until they break through into offline, or more radical monetization of channels like email, the core of Google remains, well, Google, and the ads shown on it.

So this, to me, is Google in a nutshell:

"Google Sites Revenues - Google-owned sites generated revenues of $1.098 billion, or 57% of total revenues. This represents a 24% increase over the third quarter revenues of $885 million."

Why don't I put much stock in the 42% of revenues generated on partner sites?

Three reasons, basically:
  • Google's share of this revenue is much lower than on sites owned by them.
  • This share could drop, and the size of the network could even drop. Disintermediation, essentially, faces any company that facilitates ad placement on sites they don't own.
  • In mid-term, Google's partners can always de-emphasize the Google ads to highlight better-paying ones.
The company claims to be putting an enormous investment to scaling the current business, and future businesses, globally. For now, "Google.com sites," and the advertisers who show up there, pretty much carry the can for the whole grand experiment. With $8 billion in the bank and 5,600 employees, whatever they do, it's going to get noticed. Still though, the underlying weaknesses in their non-Google.com businesses persist.

Good night, and good luck.

Posted by Andrew Goodman




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