Google – friend or froe?
After Microsoft, who is the Dark Star? To some, Google fits the bill. It has a market capitalisation, despite recent volatility, of approximately $110 billion (against a peak of $235 billion), projected 2009 revenues of around $24 billion, approximately 20,000 people and growing, and 67 offices. The stock markets are saying something about Google’s valuation in relation to our own $8 billion valuation, with approximately 60% of the revenues at $15 billion and more than 110,000 people (excluding associates) in over 2,000 offices.
Put together the four largest communications services parent or holding companies – WPP, Omnicom, IPG and Publicis. You will have approximately $41 billion of revenues and a $23 billion market capitalisation – almost twice the revenue of Google, but only a quarter of the market value. To the CFO of Google, the laws of large numbers may start to operate at $5 billion dollars of revenues, but Google’s success is clear and its economic power substantial.
So is Google friend or froe? On the amicable side, we are its largest agency customer, forecast to spend approximately $850 million this year (the Dell and AT&T search accounts are the third and fourth largest after eBay and Amazon).
That tells you a little about the nature of Google’s business. Normally our media market share, according to RECMA, the independent organisation that measures scale and capabilities in the media sector, is around 25-30%. With Google it is around 5%, indicating a long tail and a heavy small- and medium-sized business-to-business connection. In a sense, Google is a mechanical Yellow Pages – opening up advertising to small- and medium-sized companies that did not advertise before.
In any event, Google clearly wants to work with us on building relationships with our biggest clients. We have run joint seminars on both sides of the Atlantic for some of our largest and most important clients to try to nurture mutual relationships and are building joint sales programs with a Google sales team designed specially for us. We have also initiated, with Google, Harvard Business School and MIT, a $5 million yearly research program on the effectiveness of advertising on the internet.
There is no doubt that Google has become friendlier as it has focused its business in the teeth of the recession and withdrawn from radio and print advertising. On the less friendly side, CEO Eric Schmidt says Google is targeting the advertising sector. Google has already taken several initiatives. It has run an experiment: wholesale purchasing of print media and retailing the space in smaller amounts to clients. It has hired creative people to write ads and one of our creative directors to be CMO. It has approached US clients to see if it can set up a direct, electronic media- buying exchange. Google is also looking at electronic media planning and buying models, which can be accessed through the web. It purchased dMarc, a radio internet-based company for $100 million down and a three-year mother-of-all earnouts, possibly worth $1.1 billion, although the principals have now left.
It has recently signed deals with Clear Channel in radio and Echo Star in television that make plain its desire to move into traditional media. Google has also concluded a billion-dollar deal with AOL, and Time-Warner has indicated in internal memos that it plans to co-operate with Google in television, print and other media. The opportunity exists, although it is doubtful if the traditional Time-Warner operating company verticals will be easily persuaded to give up on digital expansion and opportunities to meet their budgets and targets. It also offers, through Google Analytics, a free analytical service.
In 2006, Google made Rupert Murdoch’s purchase of MySpace a stunning success with a $300 million per annum, three-year deal for internet revenues. This against a purchase price of around $680 million. And then it overcame its lack of success with video by buying YouTube for $1.65 billion, despite little or no revenues and a bunch of copyright lawsuits, part of which were solved by making three music companies momentarily YouTube share owners and $50 million richer on the morning of the sale. Finally, it gave Warren Hellman and Hellman & Friedman a return of 800-900% over two years on DoubleClick, paying over $3 billion – 10 times revenues and 30 times EBITDA. Entry to the first round of the auction was 13-14 times EBITDA, which we could not reach.
This last transaction awoke the dragon. Microsoft initiated a heavy response, not only on regulatory fronts, but from transactions, too. Through DoubleClick, Google may control more than 80% of targeted and contextual internet advertising, along with much valuable client and publisher data. 2007’s rumours were confirmed, as Microsoft bid for Yahoo! (and remains interested in its search business), aQuantive and others. Already, Yahoo! has paid an infinite EBITDA multiple for Right Media. Sane strategic moves or irrational exuberance?
All in all, Google is opening up the attack on many fronts. Perhaps too many, particularly when you consider the other theatres it is fighting in, such as book publishing and robots to the moon. One gets the impression it is throwing a lot of mud against the wall to see if any sticks – maybe sticking to mobile search would be best. Yahoo! has a different approach, working through its agency partners and believing in the power of people, rather than Google’s greater focus and belief in technology. Certainly, even now, a combination of Microsoft and Yahoo! in any way will bring greater balance to the markets. Our clients and our agencies will favour a duopoly rather than a monopoly.
Perhaps, the biggest threat to Google is from within. As Warren Buffett pointed out in China a year ago, if Google was worth $250 billion then (more than his own Berkshire Hathaway and in the top three US companies by market capitalisation after only 10 years), it would have to be worth $350-400 billion in two or three years to justify that valuation. Ever since that comment, Google’s market capitalisation has fallen. It may be the frustrations of a 76-year-old (and friend of Bill Gates) fuming that it took him 40 years to build a company to a value of $235 billion – rather than 10 years. What’s more, Sergey Brin and Larry Page were worth $14 billion each and only in their mid-30s. In any event, recent data on click-through rates makes even Google look mortal and declines of market value on this scale threaten internal motivation and loyalty. Bright young computer engineers may be tempted to try venture capital opportunities in Silicon Valley, rather than continue to hold devalued equity.
In summary, Google is probably a frienemy or froe. Short-term friend, long-term foe although, more recently, Google has become a friendlier frienemy. After GoogleClick, the short term got shorter and the long term nearer, Warren Buffett used to say in the 1970s, when he invested directly in IPG and Ogilvy (at three times earnings), that agencies represented a royalty on the international growth of US-based multinationals. Perhaps today, parent company investment also represents a royalty on the growth of new media technologies.