Paul Kedrosky's Infectious Greed
Finance & The Money Culture
I was on with a googol of Google guys tonight on CNBC talking about the company’s earnings released today. Watch here.
Didn’t catch you and the Google guys, unfortunately for me; here’s what I would have brought up though: $17B in equity as of yearend 2006 (assets minus liabilities); $152B in market cap as of today; generating $1B per quarter; subtracting equity from market cap, if you were to sell off everything to help pay for your acquisition of the firm, you would be still be needing to come up with another $135B for the company, which would take approx. 34 years at $1B per quarter to pay for itself. And THAT is based on their Dec. ’06 balance sheet, which had looked spectacular to that point but I know would look far worse today after their insane 1st quarter acquisitions. Also, I read someone saying Brin and Page must not have been able to reach their idol Warren Buffet before signing the DCLK deal, presumably since he would have told them they would be crazy to pay that valuation; I believe the opposite, which is that Buffet called THEM and talked them into it, just to give Warren’s old buddy Bill a fighting chance in his own private Iraq…
Quoting Paul from this interview:
“Google gets that they are the advertising operating system, and Yahoo thinks they’re in the business of social media and they’re wrong”
“I get frustrated the more new products I see from them, let investors diversify, this is a great leveraged play on a growing ad market”
Consider that there is a causal relationship between the Google AdSense business (essentially not profitable) and the Google.com web properties business (e.g. search, gmail, etc…, all or essentially all of Google’s profits).
This causal relationship can be described as:
More AdSense partners = more click volume = more competition for adwords = higher PPC = higher margins for Google.com when they’re the publisher of the ad
Therefore, Google can strategically run the AdSense network at break even to ensure the network’s rapid expansion and overall market share, because that will drive higher revenues and margins from ads clicked on from Google.com web properties.
From the 2006 10-K: “The operating margin we realize on revenues generated from ads placed on our Google Network membersâ€™ web sites through our AdSense program is significantly lower than the operating margin we realize from revenues generated from ads placed on our web sites because most of the advertiser fees from ads served on Google Network member web sites are shared with our Google Network members”
A nice as Google is to share so much with their network members, to grow future earnings with the current strategy Google has to drive more use of it’s Google.com apps; which means:
A) new products and more users are a necessary part of the strategy
B) by joining the AdSense network, as a search partner or publisher or otherwise, anyone that competes with Google for user relationships via web delivered content/services is directly funding the erosion of their remaining user relationships (e.g. MySpace, Ask, EarthLink).
Paul Kedrosky‘s Infectious Greed
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