Newsletter Archive - Dollars & Sense
Google Buys Controlling Stake in Yellow Pages Publisher
09/01/2004 - Ok, this is not a real headline. We just made it up to get your attention. But could it ever happen, never mind which major publisher's name you insert?? In this month's Dollars & Sense article we rub the yellow and black crystal ball, consult the tea leaves, and burn some incense on what's next for Google now that they are a publicly traded company flush with cash. Could a major move on a Yellow Pages publisher be on the horizon??
Amid all the hype, the intrigue, delays, repeated SEC filings, stock buy back issues, and the Playboy magazine controversy, finally, its official -- Google is now a publicly traded company on the NASDAQ under the symbol of GOOG. Shares of the company were finally priced at an opening price of $85 (well below the original $135 per share estimates). The Google IPO offered 19.6 million shares, not the 25.7 million as originally planned, raised $1.67 billion. So what's next??
What to do, what to do
First off, from an investment perspective, the biggest question is where the company's stock price is headed. Despite a Price/Earnings (P/E) ratio hovering at an astronomical 145, most of the financial gurus we've seen think the stock seems destined to rise further. Google's stock hit a high of $104.06 on its first day of trading. The stock closed Tuesday at just over $102 per share. That would value the company at around $3.4 billion, putting its market value well below the $38 billion value of Yahoo, a much larger, far more mature Internet company, and eBay, the most valuable Internet company, worth around $57 billion.
But how will the search engine giant catch-up with these bigger, more established company's? There is no doubt that Google has been the top-rated search engine, ahead of Yahoo (YHOO) and Microsoft (MSFT). Google, which had 10 employees in 1999, has grown to be the most widely recognized search brand in the world by 2002. Google's search revenue has grown 7.5 percent in the second quarter from the first quarter. For its part, Yahoo said that its search sales were essentially flat in the same period. But of note is that last year, selling advertising accounted for 97% of the company's revenues, and that figure has edged up to 98% so far this year. So search is a neat product, but not necessarily a revenue generator in and of itself.
Speculation about Google's strategy to expand beyond the search market has led some analysts to suggest its ultimate goal is to compete with Yahoo, MSN and America Online as a general destination portal/content aggregator. In Froogle, the company already has a worthy e-commerce enabler. Through Google News, it's a consolidator of news-driven content.
Some other suggested avenues for Google's expansion already appear to be in the works, including Desktop Search and Desktop GMail. Microsoft has indicated its next operating system will allow users to search their PCs as well as the Internet, and some reports have Google working on a similar project. Meanwhile, Google's e-mail is already in the testing phase.
Other suggestions are that Google launch an instant-messaging client that would also access MSN, AOL, or Yahoo. Google did buy a software company Picasa, which has a utility allowing users to share images and Web sites in IM messages. Or how about adopting technology from Mozilla and combine it with access to Google's various features and develop a new browser.
Last but not least (and most directly impacting the Yellow Pages industry) another suggestion has been to launch a free Internet service access provider, supported by advertisements in a taskbar. A far fetched idea? Maybe. But hasn't Google already done stuff people would have never thought of?
Let the Games Begin
But going back to Google's core business - search, it's unclear how formidable other competitors such as Microsoft will be. Clearly, Microsoft has the money to make a difference and certainly the know-how to be a monopoly. Google has yet to be the formal de facto Web search tool for anyone. As for Google's ability to compete with Yahoo, it's unclear whether Google has the wherewithal to move into what will be the sweet spot in online advertising: Branded advertising.
Those suggesting brand advertising as Google's growth strategy seemed to have missed a key point -- search engines don't appear to have a key characteristic brand marketers want: stickiness. According to comScore, the average time spent on Yahoo is 4.4 hours in a month compared to 22 minutes for Google. Time Warner's AOL seems to keep users on its services for 6 hours in a month, on average.
When Yahoo went public at a market valuation of around $330 million in 1996, it generated sales of $19 million in that year. But sales also rocketed 252 percent to $67 million by the following. Those aren't the type of growth rates a mature company like Google is currently experiencing.
Some have even suggested that the real explosion in search was in 2003. Gazing into the future, what will be the driver in 2005 or 2010?
Feet on the Street
From our crystal ball, tea leaves, and incense here's where we see this whole game going - the key factor is what will it take for Google to maintain its attractiveness to consumers, advertisers, and now investors? Google certainly has the traffic. But we believe it will be content that is complete, accurate, and comprehensive which could be the major differentiator for Google. But definition that requires an ability to develop more robust local content and reach local advertisers.
So why not just buyout a name Yellow Pages publisher? Two important items would support this concept. The first is that existing print publishers are now the leading source for quality, accurate listings information given all of the activity on the telecom side from CLEC telecom providers, cellular, and VOIP providers. They have the best shot in the future for being the ultimate source for collection of all of the core listings information.
The second major factor is that the publisher also has a key asset that Google could never afford to build -- a professional local sales force in place, and existing relationships with local advertisers. To build this capability from scratch would be a long, arduous, expensive process; one that is clearly outside the skill sets of the Google management team.
We will continue to build on this concept in future articles, but now it's your turn. What do you think?? We want to hear your opinions. Send us your thoughts at ken@yptalk.com. The name/company of any responses we receive can be kept confidential upon request. We'll put together a summation in next month's article and move the debate further along.