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Google Under Fire, But Search Is Strong 
By Joseph Pratt (c) 2006

Could the Sports Illustrated Jinx, where teams and athletes
featured on the cover famously flounder soon after publication;
have spread to their fellow Time, Inc. weekly Time Magazine?
This week the boys from Google are gracing Time's cover and
from their easy smiles (and a byline that mentions Internet
domination) you'd think that the transformation is complete:
Google has finally "pwned" (http://www.urbandictionary.com/
define.php?term=pwned) us all! Well, a theory that there is
some kind of jinx fits because Google seems to be getting it
from all angles now. But with all the piling on, it's important
to remember that Google's core business, search advertising, is
still very much a winner.

In regards to lofty stock prices, it's been said that the same
breeze at the bottom of a mountain is a gale at the peak,
meaning it doesn't take much negativity to knock a few dollars
off the price of a stock that's performed well. And Google's
peak so far has been among the loftiest a corporation has ever
experienced to date. Their success stuns - individuals netting
billions, a stock price (NASD: GOOG) skyrocketing to $475 as
influential analysts hint at future valuations of $1,000, $2000.
Runaway success has been associated with Google since even
before their IPO in November, 2004. This aura, however, may have
fostered a false sense of invulnerability for the giant
Mountainside, CA-based search engine.

ICMediaDirect.com, by virtue of being an online advertising
company, has much to thank Google for, particularly the interest
they generated in our field. Their brand recognition alone has
served as advertising for our industry in recent years. Google
was so hot for so long, that just being in a related space may
have opened doors for us that might have otherwise been closed.

There have been some cracks in Google's façade for some time,
but little notice was given to them in the wake of relentless
success. However, the record skipped last month when Google
disappointed the public with their earnings and the stock sold
off about 25% from its high. Still, public scrutiny was more
focused on Google's earnings, not their business.

That is, until Barron's, the influential weekly financial
newspaper, featured Google this past weekend. There was nothing
playful on their cover, just the familiar Google logo being
submerged into water, like the Titanic. The article makes a
compelling case that Google's success is overvalued.

Among the issues discussed was a genuine peril unique to search
based advertising: click-fraud. Barron's wondered how anyone
presently could gauge the depth of this problem when; a) this
problem technically enriches Google, while robbing thousands of
their customers, and b) it's almost impossible to distinguish how
much is committed. If Google knows, they're not saying. So we
see an incalculable problem within online advertising, the very
business that's finally measurable. Go figure. But Barron's
mentioned other problems that are vexing Google, as well. The
very guys on the cover of Time, Google co-founders Sergey Brin
and Larry Page along with CEO Eric Schmidt, are feverishly
selling their stakes in the company as is the rest of top
management. While much of these insider sales registered and
scheduled for execution long ago - what's truly disconcerting is
that no insiders seem to be buying any stock in their company.
It's a spooky one-way street.

Even the puff piece in Time Magazine contained this loaded bon
mot from Schmidt, "The company isn't run for the long-term value
of our shareholders but for the long-term value of our end
users." I had to read the quote twice to make sure I had
actually read it correctly and then again to make sure I could
figure out what he meant by "end users".

This is what the CEO of Google thinks of the people who've made
him worth 10 figures. It made me think of Bill Murray's
character's advice to the students at Rushmore Academy, "Take
dead aim at the rich boys. Get them in the cross hairs, and take
them down." Sorry, Eric, but this Robin Hood approach elicits
this sort of reaction ... especially when it is directed at the
people who made them rich.

I believe that Google was rabidly over-hyped and is still
overpriced, but it's their chosen business, the one they
perfected, and the one that I admire. Now that some Google
bashing is somewhat en vogue, be sure some uninformed opinions
will form. The same minds that assumed all things Internet were
about to be ruled by King Google, they too will be claiming
Internet advertising to be a false business, an unworthy
venture.

This couldn't be more wrong. One of the signatures of the Web
1.0 bubble of 2000-2001 was that these overheated interactive
companies weren't making money. Not only were they unprofitable,
many couldn't even generate revenue. They were drenched with the
promise of new technology and nothing else. Yes, the Internet
was wondrous then, but making money off of it was not possible,
at least not before some of those burn rates contributed to
global warming. (Don't laugh; check out the data, it matches
perfectly.)

Then along comes the search wonder of Google. Google is merely
an overpriced stock, not a collapsing bubble. Their contribution
is both simple and stunning. They came up with little text boxes
to correspond and link properly with searches on their network.
That's all.

99% of Google's revenue comes from search advertising. While
Barron's was right to question whether this technology really
warrants partnership with NASA for space exploration, the
article also boils Google down to a machine that is merely
"hawking ads" in providing contrast to Google's self-billing as
a global technology leader.

Search advertising made Google bigger than Coca-Cola in only a
few short years. If that's the end result of "hawking ads", then
Google is doing something right. Microsoft and Yahoo apparently
want to hawk ads like Google, too, as Barron cites the increased
and inevitable competition.

Google's lesson for us at ICMediaDirect.com, and for anyone in
Internet advertising, is that you cannot separate Google's
success from Google's search. Everything else is a side story.
Stock prices, jet planes, R&D (billions spent for that remaining
1%) - all of it serves to distract from this: 99% of Google's
revenue is derived from search advertising. Search advertising
works.

This isn't the next bubble burst, just a story of a company that
did its job so blindingly well that the public overvalued its
stock. Now it's time for its stock price to cool off. I'm happy
to see the sector grow more competitive. That's terrific. I
think that everyone, even Google's shareholders, view this as a
healthy sign for the search advertising industry, if not a
certified validation.
================================================================
Joseph Pratt Media Analyst ICMediaDirect.com
http://www.icmediadirect.com e: joseph@icmediadirect.com
================================================================

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