Google’s Awkward Years

Google will turn 13 this month and, like countless teenagers before it, has hit that awkward stage where it’s now agonizing about what it wants to be when it grows up. With this year’s first-quarter earnings report, the company began the painful, pimply transition from “growth” to “value” stock. Public investors use the terms to distinguish the stocks of rapidly growing businesses from those that may not be growing so fast but are “undervalued” because they are believed to be misunderstood. In the middle is a dead zone known as the “value trap”—where stocks look cheap but stay that way. And that’s where Google finds itself. So the Googmeister is frenetically chasing growth wherever it thinks it might find some—with back-to-back acquisitions of Motorola and Zagat, and its aggressive rollouts of Google Deals (anyone not seen the banner on their Gmail or search results yet?) and Google+—that make it look like an ADD patient off his Ritalin. These are all unproven businesses for Google, and each is problematic in its way. Having adopted an open-source model for Android, it won’t be easy to impose a royalty business model on it or compete with other licensees; meanwhile, mobile search revenue is still in its infancy. Google’s online display market (built atop its ’07 DoubleClick acquisition) is also suffering, as it has for most of its existence, from massive oversupply of inventory and perennially falling CPMs. Like real estate in Japan, where there will always be fewer Japanese people tomorrow to buy houses than there were today, online display CPMs are in structural “backwardation,” the commodity-trading term for something that will be cheaper in the future. Facebook, now the largest seller of online display advertising in the world, has exacerbated this problem with its effectively unlimited display inventory, as well as better targeting capabilities than anyone else (Google may, or may not, know what porn I like, but Facebook knows what actual people I like). Enterprise applications, payments, Google+, and the other in-house initiatives that are part of Larry Page’s current spending spree won’t move the needle for years, even assuming they do start producing revenue. And, for a variety of political, cultural, and linguistic reasons, Google has always struggled in the high-growth emerging markets like China and Russia. Worse, the core search business is under attack on several fronts and risks being diminished. In small ways and large, regulators from the U.S. Federal Trade Commission to the European Union are proscribing Google’s activities (requiring that paid-for search results be labeled as such “clearly and conspicuously,” for example) and investigating its market position. In its plodding way, Microsoft has increased Bing’s share of the U.S. search market to almost 14 percent (up 6 percentage points) since it launched as an MSN Search replacement exactly two years ago. Including its white label Yahoo deal, Microsoft now has almost a third of the search market. This is all a natural reaction to Google’s success—as John Malone once said, the objective of a business is to keep growing until the competition or the government stops you. But the world is also moving away from the elegant Web-centric model in which Google monetized connections to more or less static content and toward a social media model where the key to making money is exploiting the connections among actual people. Even in its preteen years, Google was always a bit deal happy, having done over 90 acquisitions in the past decade. But most were tiny (only two were for more than $1 billion—YouTube and DoubleClick). Now with almost $30 billion of cash on its balance sheet even after its most recent conquests, it’s not hard to see it continuing to overpay as it matures—and just about the only thing more dilutive than earning 1 percent on a huge cash balance is spending it on nonearning assets. As one big money manager texted me, “There is no such thing as an ex-cash valuation when they don’t give it back to u.” Maybe the only way Google shareholders are ever going to get their hands on that $100 per share in cash is to buy Twitter stock on SharesPost.

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Google’s Awkward Years

Matthew Doull

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Matthew Doull