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January 10, 2006


Stuart MacDonald

Nicely done, Henry. Any of this is as plausible, if not moreso, than any of the other stuff flying around at this point. Certainly your comments around diminishing ROI, growing cost base, attracting and keeping talent and "I have sooo seen this movie" ring extremely true to me, as one who has lived something similar. Not to say that they can't pull it off - their brand is strong, their service is important. But they are a one trick pony, and unless they are able to ride their core strength into additional markets - IMHO that means catching what I see as the coming wave of brand related advertising online - they may well run into problems. The "Pack" is super-dee-duper and all, but next years' revenues associated with it will equal what, one hour of global PPC sales?

- Stuart


I'm not sure click fraud can cause revenues to implode in the long run. You're a retailer, you pay per click, you get some conversion rate, and your increase in profit is clicks * conversion rate * profit per transaction.

Now click fraud increases and your conversion rate goes down. You would expect the same real visitors to come to the site and buy. But logically, you reduce the amount you pay per click, and you still pay the same total amount.

In the short run there's a problem for the ad buyer due to the increased risk in bidding. Once there's an equilibrium amount of fraud, Google still gets some fraction of the total value add. The fraction is driven by how good they are vs. other media, ie how much high-conversion-rate traffic they drive.

One suspects that as the novelty wears off, the total value add might not grow so fast or even decline. The first time you run a campaign for your Beanie Babie 2k6, you might get a huge conversion rate because it's the first time people have been able to find your site. And people might overbid based on those initial results, setting up for an eventual decline in rates.

On the other hand it's not inconceivable the continued growth in time people spend online, resulting in increasing online ad budgets, and new outlets like targeted Internet TV and radio ads might keep growth high for years.


Some 'scenarios'! Good!

Sure, so far Google has gotten its fantastic revenues essentially just from advertising. Advertising has been a terrible business: In the past, had to pour really good money into the TV "great wasteland". Wasteful bummer.

So, downside point: For how long can the current Google advertising revenue stream really be such a big part of the future of advertising? In more detail, (A) is what Google doing really even close to the most efficient or effective way to do ads and (B) is advertising really going to last? I.e., for (A), couldn't we really think of better ways to do advertising? For (B), in the past, a person with money in their pocket and a need in their gut could see an ad and, in effect, have only two options (i) not buy or (ii) buy the product in the ad, and often enough they took (ii). But, the situation of just two options really shows a terrible lack of information. So, now, even if the person does want the product, some Internet searching, including on Google, can let the person find other sellers. The seller who did NOT spend on ads but was found just from ordinary Google searching has a cost and price advantage. So, sellers, why advertise? Why spend that money? Irony: Did Google advertise?

Upside point: Thank you Google advertisers. Thank you, thank you, many times. Your ad spending lets Google have an altruistic 'mission' of organizing all the world's information, and I get to use that information for free! But, if the ad revenue fell, then what might happen to altruism? Don't want to think about it! I mean, once, before the Internet, I needed to do a search, went to Dialog, and blew off $1500. One search, $1500. Ugly!

So, beyond just ads, Google has some 'assets' that should be counted. Yes, accountants can't count these 'assets', but the last time the accountants could count nearly all the really valuable assets was in the time of Henry Ford. No, advertising people, I'm not talking about the 'brand equity'.

Assets: (1) Billions and billions of Web pages 'served', on disk, nicely indexed! (2) Millions of Web site programmers busily inserting special tags -- just for Google -- in their HTML, tags that greatly ease Google's processing and indexing. (3) Millions of Web sites that keep their Web pages relatively 'static' (uh, the Web pages don't have to be static, not at all) so that the Web page a 'Googlebot' sees, copies, stores, and processes can be relevant to the URL link on a Google search that a Google search user follows. (4) Google has been watching; the big Google eye in the sky sees nearly all, or at least a lot; Santa Claus may not but Google actually does have a relatively good idea if you have been "good or bad"! More to the point, with some applied mathematics processing the clicks, Google stands to have the world's all-time ultimate "file of the GOOD leads"!

These assets constitute a severe barrier to entry. I mean, who wants to go to a search site that has only 10 million Web pages instead of, say, 10 billion? So, to compete with Google, just for 'openers', need to copy a large fraction of all the Web. Hope your investors have deep pockets and lots of patience, guys!

For more on the upside, vague but not easy to dismiss, is the 'mission' -- all the world's 'information'. You mean, Google could have and/or index nearly all the world's information and NOT find a way to get revenue from it?

Uh, we should notice: Since Google indexes nearly all the information, nearly all the people wanting information go to Google. Since Google has nearly all the people searching for information, nearly everyone with Web information they want people to find cooperates with Google to index that information. That is, more briefly, Google gets all the searchers because Google has all the information; Google has all the information because Google has all the searchers. Sounds close to a natural monopoly to me. Again, there might not be a way to make money from that?

To say "No" would sound like a mainframe executive 20 years ago saying that they had all the heavy-duty mission-critical bet-your-business on-line transaction data processing, and microprocessors and end user desktop computing had no solid "business case". I.e., they meant we already know that an operating system based on multiple virtual memory address spaces needs a staff of dozens just for care and feeding so that there's no way a single end user could have such a system. How would an end user even thread the fan-folded printer paper or monitor the system console 24x7? Right. And, like the mainframe executive 20 years ago who looked at digital communications networks for e-mail and on-line fora and concluded no "business case". Right. And the world needs in total a maximum of 50 computers. Right. Ah, such vision! Yup, a vision is the last thing a mainframe executive had!

So, I see Google as having a license to print money via any of several techniques -- the current AdWords being only one. If they keep up their public image of altruism and print only moderately obscene amounts of money, then they will be okay. But if they tarnish their image and print really obscene amounts of money, then Congress and the DoJ will get interested. Basically, moderately obscene amounts of money has a relatively solid basis. For now.

For the future? Who says that have to hold the stock 100 years? As we drive forward in time and the future fog slowly clears just ahead of us, watch carefully and, once the "basis" no longer looks so "solid", then sell, and be among the first to do so.

Sure, the world could be destroyed just any second now by a big asteroid collision. But, the last big one was 65 million years ago. So, I'm not holding my breath waiting for another one. In particular, I don't think the world is about to end, the economy collapse, or 'information technology' flop. Instead, I believe that 'information technology', and Google, will move on, really, will move forward about the fastest of any major effort in civilization. Besides, if a really big asteroid does destroy the world, then what's the difference in investing in Google?

For the CAPM instead of picking stocks, e.g., Google, uh, the CAPM is one of those cases of, if we had some huge volume of data we do not have and likely never will have, if we could make a lot of really tricky assumptions nearly impossible to validate, and if everyone did some huge amount of really tricky calculations with this information, always right up to the latest second, then could just follow the CAPM and relax. Again, right!

Stan Ride

Google's only option of long term (5-10 yrs) survival is to spend some of that cash on real companies. If I was them I would be buying utilities. Seriously, water and nat gas.

Dimitar Vesselinov

Stan, Google has invested in CURRENT Communications Group.

"CURRENT Communications Group, LLC, a privately held company based in Germantown, Maryland, is the nation's leading provider of Broadband over Powerline (BPL) solutions and services to electric distribution companies worldwide."


One contributing scenario not mentioned is shrinking online
ad revenues due to a consumer recession caused by
millions of ARMs resetting this summer and next requiring
households to cutback on spending

Brian Bolan

Your post made me recall this other excellent post....


Nice analysis. But that's the rub - timing. The stock could go to $600 before $100.

The guys at Fucked Google are on to the Google scam.

Randy Charles Morin

Sounds like Henry has never used AdWords. That's the problem with click-fraud. There's too many people writing articles about it, who have no clue.

Robert Keller

Very informative and perceptive. Oh, and also don't forget the giant comet or asteroid that could crash into the earth. It happened before, remember?


The poster 3 posts up from me is correct.

Henry's article about the google doomsday scenario appears to be 100% cut-and-pasted from the site.

(Which, as far as I've found, is the ONLY negative google site on the entire internet. everyone else, with no exceptions, are google cheerleaders. that should tell people something about how far this mania has progressed)

Detlev Johnson

Hello everyone,

Well, it's not that click fraud is going away, but Google can handle it pretty well from their own site. And did you know that 90% of AdWords revenue comes from serving ads at their site? They give away the lion's share of revenue collected from ad serving other sites.


The Bull Trader

awesome writeup! i've been wary of google ever since it was around $280, but im just shocked to see it go up every single day!

im not sure when wall street will wake up and realize this, but im sure that the day will come.

take care


Another dump scheme rehashed by the pump and dump king formerly of Merrill Lynch. Youhave no credibility anymore Henry, no one can trust your motivation, no should trust your judgement when quite frankley you intetnionally manipluated prices with phony fundamental research. Your just like Micheal Leved, just older and a little more educated, well actually, neither of you are that smart. If you were, you have never scammed the public in the first place. Go teach History, that's where History Majors belong. Leave the biz world to Business Majors. HA!!!!!!!!!!


I don't work for Google but I have many clients advertising on the engine.

Google's success was built on the algorithm it designed to provide users with the best search results. They will find a solution to click fraud and users will always use the best product out there.

Google will most likely continue to serve the best organic results while working on the issue of click fraud.

Keep in mind that in a level playing field, all other search engines will be affected by click fraud as well. Again, the best site will prevail.

Most agencies that manage search campaigns use thrid party measurement tools to determine the end ROI - the proof of successful marketing is in the numbers. Click fraud aside, the medium is cost effective for most advertisers. If marketers continue to demand reliable reporting, they are protecting themselves against fraud. Google's move to offer Urchin free of charge was a step in the right direction.

I think Google will be just fine...


Keith Pettersen

Henry's jumped on the "Click Fraud" bandwagon.. Doesn't he realize that's yesterday's news?
As a developer of ROAS (Return On Adspend) analytics technology, tracking the profitability of both Yahoo Search Marketing and Google Adwords advertisers with a combined spend of over 150MM annually, from experience I can say Hentry's so far off course, that his ship will never come in...

1. The 20% of advertisers that generate 80% of the ad revenues flowing through Google Adwords track (ROAS) at the keyword level, and can spot click fraud very quickly.
2. Conversions mean little, It's cost per conversion that tells everything. Competitors driving up bid prices, affect CPR or ROAS far more than click fraud.

Henry, another investment analyst that thinks he understands technology, and how it affects the profitability of major search providers.. LOL (Don't quit your dayjob)....

Keith Pettersen
RedZone Global


While not commenting on your thesis (although a meteor crashing into the Google complex could take the stock to $100 too), I must comment on your declaration that "No one else is writing this piece, so it will have to be me". Simply not true. Risk assessment is part of the equity analysis process. We're RESEARCHING IT, writing about it, and talking about it. Our conclusion is for our clients.


Almost 50% of searchers use two or more search engines, 46% would migrate to a better technology deliver more relevant results (comscore). The click fraud problem is not a hard problem to solve; my bet is some small company will solve it in 06 (this is a problem that Google is not that motivated to solve for the obvious reasons). The search market is white hot (thanks to Google), and no doubt will experience a rapidly changing landscape this year. Keyword is just a baby step in the direction of understanding a user’s sense of what is relevant when they search for something using any search engine. Given the mass popularity of search engines what do you think will happen when the next generation of search (which delivers better results) enters the market? Look for it in 06 – does anyone remember Netscape?

philip letts

Interesting stuff. I'd like to hear more about Googles numerous other initiatives before shooting them down.

Yes, Google Base, Google Video, Gmail, etc etc etc don't add much today, but that can't last forever.

And like people state that Yahoo and AOL suffered ad related slumps, they forget to mention that they have also been successful at finding other products and revenues as well as ad sales.

So will Google, the question is when and what will they all add up to.


Henry, youre a genius - coming to the conclusion that if growth slows there will be multiple contraction... pure, unmitigated brilliance!!
And if that wasnt enough - the other earth shattering observation - google's growth cannot continue forever. Thank god we have the wise keeper-o-multiples because I really thought they Google could grow into infinity and become the entire US economy. You are insightful - because true beauty lies in being able to predict that all companies slow due to product lifecycle and other natural economic phenomenon, not in calling when it will happen. The time element is irrelevant in making money in stocks. In the long run - you will be proven right, not only on Google, but also on Amazon. And that fellow Keynes knows nothing.


Finally, someone said it! People thought I was crazy when I didn't accept a Google job offer, but the whole business felt too volatile for me. What you say is certainly plausible, but what shocks me even more is just how easy it is for a new search technology to come out and wipe away their business. Yes, Google has the best search engine. But investors don't seem to realize how volatile that is. We used to think AltaVista was it for search, then we thought Yahoo! was amazing. What happens when the next technology comes along? Every product Google has produced has been disappointing - from their GoogleTalk messenger to their sidebar to their recent desktop search to their more recent Google Video. They build up press releases, sparking speculation of grandeur; they are always disappointing announcements yet the stock always goes up afterwards. Google has a strong brand for search (google=search), but elsewhere they seem to be getting on people's nerves because there isn't a need or desire for their other services. People are not as loyal to the google brand as google wants you to think; they don't have a strong brand - just a strong search engine.


very interesting writeup. What happened to your gig with Slate? Are you still explore China ventures? Never heard back about your thoughts on China since...

John Brosco

This stock is all about moving it around so that the institutions that are involved with option trading can keep the printing press going. These guys are minting millions of dollars a day playing the options. It is Ironic and so typical Wall Street. They all hated Google when it IPO'd and now they all love it 400% higher. You were in the business Henry, how many of these whores with these sky high upgrades don't dare step on Googles cape in fear of never getting any banking business with them. The first sign of slowing growth and this stock loses 100 points over night.

Mary Meekers

Hey Hen,

Stop being a whore.

Hugs and kisses,


Marvin Gardens

Hey genius. Where was this insight when you were recommending AMZN to me and others in '99? You could have saved me alot of $$$$. You'll always be a crook in my book.

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