Internet Outsider: Sorry, Google is Not a Technology Company

October 24, 2005

Sorry, Google is Not a Technology Company

Google insists until it is blue in the face that it is NOT a media company, it is a technology company. The stated reasoning appears to be that Google hires a lot of programmers and offers (some) products akin to those offered by (some) technology companies.

Such classifications, of course, are usually in the eye of the beholder, and when the beholder has a $100 billion market cap and Saturn V growth trajectory, most observers tend to nod meekly in agreement: Google is a technology company. And this is fine except that in the only way that really matters--revenue--Google is absolutely not a technology company.

Yes, Google uses technology--boatloads of it. Google's use of technology, moreover, is apparently the key to its competitive differentiation in many product categories (search being by far the most important). But almost every company uses technology in one form or another, and many wouldn't be able to design or provide competitive products without it (car and plane manufacturers, financial-service firms, television and radio broadcasters, cable companies, phone companies, wireless phone companies). The reason these companies are not called technology companies is because they don't sell technology. And with the exception of its microscopic Google Mini business, Google doesn't either.

What does Google sell? Advertising. For better or worse, this makes it a media company (an online media company, but a media company). From a financial forecasting perspective, this also means that the pool of Google's potential revenue, at least in the company's current incarnation, is global advertising and direct marketing spending, not global technology spending. This is important, in part, because global advertising and marketing spending is not growing as quickly as global technology spending.

On the positive side, advertising and marketing spending is less subject to nasty product cycles than technology spending, which means that Google doesn't have to obsess or worry about whether a cool new product will cause its customers to decamp en masse, or whether it can goad them into upgrading to the next release (as, for example, Microsoft does). Also, Google does possess one advantage that is more familiar to most technology companies than most media companies: stickiness. As long as the world's web users think that Google = Search, they'll keep coming back, no matter how poor a job the company's eyeball attractors are doing on any given day.

The coolness factor of the media business is low these days, what with the moguls in Silicon Valley and Seattle worth many multiples of the average dime-a-dozen Hollywood player. But now that Google is the world's largest media company, maybe it will soon get cool again.

Posted by Henry Blodget on October 24, 2005 at 12:14 PM | Permalink

Comments

Viewed as a media company, Google is a far more distinctive presence in its market than it is if viewed as a technology company. Compared with technology companies, Google is in the top decile, say -- a technology leader. Compared with media companies, Google is a couple of orders of magnitudes ahead of the competition. So, Henry, does this mean *buy*?

Posted by: W. Zimmerman | October 24, 2005 at 12:55 PM

I could tell you but then they'd have to kill me... :)

No, actually, in this forum (i.e., acting as a publisher as opposed to an investment adviser), I can offer opinions about stocks, but in the case of Google I really have no idea. The market tends to be pretty efficient (meaning not that prices are correct--they're almost never correct--but that they are rarely so obviously incorrect that "mispricings" can be consistently exploited), and Google is probably one of the most analyzed stocks in the world right now. So I am skeptical that any analyst (except those with inside information) could gain enough of an edge to improve the odds of being "right" on Google beyond 50/50.

I realize this probably sounds like a cop-out, but any other answer would be a guess.

Posted by: Henry Blodget | October 24, 2005 at 04:30 PM

"Google doesn't have to obsess or worry about whether a cool new product will cause its customers to decamp en masse"

Google and the NY Times, two media companies, both have reputation to help persist their users. Despite scandal and bad reporting, NY Times has a very large staff of some of the best reporters in the world. Google has a staff of some of the best computer science minds in the world. But Google depends far move heavily on a single -point-of-failure, a single algorithm. Yes, it's a media company, but it is a media company with a single algorithm that makes most of its money, and thus it does it have to obsess about whether a genius new algorithm will cause its customers to decamp.

Posted by: Sam | October 24, 2005 at 10:51 PM

I'll tell you what's cool. Being a ground floor Google employee laughing all the way to the bank with all those stock options.

Posted by: GTKdoug | October 26, 2005 at 05:08 PM

No argument here! What isn't cool is having actually gotten some stock on the IPO and then flipping it the next morning at $100...

Posted by: Henry Blodget | October 27, 2005 at 09:04 AM

Google is not a media company. Google is an information company.

The correct analogy is not NBC but Nielsen; not Cravath but Lexis; not Nissan by JD Power. They are to media companies what analysts are to banks.

If at some point in the future Google reaches apogee, and all the world's information resides in their index, media companies will still be in business.

Consider that the NY Times fears Google not for their news reporting prowess (they have none beyond their developer blogs), but for the loss of classified advertising revenue. Classifies are a type of information broker. Google is the lowest-cost, widest-net information broker in the world.

If Google makes a lot of money on advertising it is because advertising is an information business too; but only a small sub-set of the information business.

Posted by: Brock | November 25, 2005 at 12:13 PM

Google is not a media nor an information company. It is a classified ad company whose circulation is based on a free service (search) that many people want. Media companies create, publish, or distribute news or advertisements and Google does none of these as its main business. Information companies create information (content) of such value that it can sell it in the form of product or service as their principal source of revenue. Google search creates valuable infomation. But it does not (maybe cannot) sell it. Rather, it simply uses it as a draw to sell ads. We are all so swamp with ads that it is questionable how valuable it is. Nevertheless, a competition to Google can be built given some investment and a year or two. Google power lies not in what it is now, but what the next steps can be. These can include turning search into research, and into a set of scientific and business analysis/planning service and product tools for cyber activities. These, they can sell without ads. I leave the rest of your imagination. If so, it may become a consultation service company.

Posted by: cak | November 27, 2005 at 09:47 PM