Google's Conflict of Interest

In Time magazine's look-at-those-wacky-billionaires blurb "Meet the Google Guys," CEO Eric Schmidt put it this way:

SCHMIDT: The company isn't run for the long-term value of our shareholders but for the long-term value of our end users.

Now, had Schmidt been facing a roomful of portfolio managers instead of a general interest magazine read by millions of those end users, he might have added: "And, not coincidentally, we believe that this also the best way to generate long-term value for our shareholders."  Or maybe he wouldn't have added that.

In any case, this is one of the key issues facing the company.  Because now that its golden age as both an end-user and Wall Street dream is coming to an end, Google is going to have to make some hard choices: Favor the user and disappoint Wall Street, or favor Wall Street and disappoint the user.  The two goals are not mutually exclusive, of course, and, over the long-term, they go hand-in-hand, but it's all a question of emphasis.  As Amazon and other companies have demonstrated, companies that can so confidently state that the "company isn't run for the long-term value of our shareholders but for the long-term value of our end users" can end up being mediocre investments for years.

This, by the way, is where that dual-share-class issue will finally come into play (until now, it has been irrelevant).  If any public company has the financial wherewithal to tell its shareholders to get lost, it's Google.  And if any public company has the structural wherewithal to do this, it's Google.  And now that the founders, senior management, and thousands upon thousands of rank-and-file employees not only have millions (billions) in the bank but free meals, 20% free-think time, free health clubs, and gleaming campuses around which to bike/surf/rollerblade away their work breaks, the incentive to care what those greedy money people think may be, well, less than it once was.

Comments

[Still Inside]

The problem with the "we don't care about stock holders" mantra is that virtually ALL of Google's employees are stock holders (or want to be, if their ESOPs can break free of the strike price).

As such, they are in effect saying that "the party's over for you of you losers that started working for the company after the IPO" (or in some cases, there will never be a party).

As somebody that's been in this situation, I can tell you that this situation is *devastating* to the morale of the company. When you start to see spin-off start-ups that include Google's top people (i.e. people trading thier fame in for their worthless underwater GOOG options), you'll know what happened.

Of course GOOG is a great company with the smartest people in the... uh oh...

SI

[Robert]

henry,

Every comment you write sounds as if you were a lover spurned, or perhaps
an analyst disbarred. How high and mighty and RIGHT you always are.
How do we know that you "diss" Google in your blog, yet are telling your close
friends that it is a BUY, as you did while employed at Merrill Lynch.
Dear Mr Blodgett....you have zero credibility, yet you can write whatever you
like because we in the USA have a free press. In other countries you might be serving a long time in the slammer.

[Javaflash]

Press basically welcome you back, SOMETHING IS WRONG WITH THIS PICTURE. I am sure you have a play in GOOG because Barron's article(which read like a recycled paper) mentioned your RPEDICTION just cut away nearly 5% of the share price this morning.

I also remember you're one of those who are bullish last year at this ratio. And look at your blog, you only chase after the headline stocks, get rich by banner ad that counts by pages viewed, eh? Worse, you can now clip away any legal responsibility...

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"THE WORLD IS FULL OF THOSE WHO ACHIEVE THROUGH NEGATIVITY AND THIEF"

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My last post, and I have no problem being rude here. Go head, censor me.

[Henry Blodget]

I don't mean to "diss" Google. As I hope I've made clear in many previous posts, I think the company's performance thus far in its short history has been nothing short of staggering, and I feel like a moron for not hanging onto the few shares I got in the IPO. I also think, however, that one has to draw a sharp line between the "company" and the "stock," and I did think people were losing sight of the latter's significant potential downside. Schmidt's comment also struck me as un-Warren Buffett-like, and since Larry and Sergey have (admirably) stressed Buffett's belief-system as a model for the company, this seemed strange.

As for the credibility, I'm hoping to rebuild it one tiny step at a time (and I recognize that doing so will take years).

[fgoogle]

Another of Schmidt's stupid PR stunt that will backfire. Who have made you jerks billionaires, besides end users who put their trust in an unworthy company that has now just begun showing its real face?

Wall Street ANALysts who continued to bull this pos must have felt great just about now. You idiots also deserve it.

[Robert]

In response to today's piece on Google, you remain confused. You write that you wish you held on to the IPO stock you purchased at 85 which is now 345 only 18 months later. Then you added that one should not confuse the stock with the company just because Eric Schmidt stated that he is running the company for its users.
If you had ever run a company yourself, you would realize that one must run it first for its customers. Then, and only then, will the shareholders do well. Do well by one's clients and then the money will come (to its owners). I realize that Wall Street analysts and investors want to hear that a company is run for its shareholders in the long term, but unless the customers are happy with the product, the shareholders will not do well.
Google is an amazing company yet only 7 years old. It had net income of over 1 billion dollars last year. Think about that. Name another company which has done that . Of course, the road ahead will not be an easy one. Why don't we give them a chance, some breathing room.
All the negative press, the nervous analysts, the Barron's article the blogs like yours are sad commentaries on all of us. We Americans love to knock our heroes. What a contribution Mr Brin and Mr Page have made to our society. And all we do is talk about how rich they are as if they did not earn it. They did not rob a bank. They created one of the world's great inventions we all use every day.
And you can admire these young Americans for their contributions to humanity as we do George Washington, Abraham Lincoln, Martin Luher King and Bill Gates and many others.

[shinkdew]

I hate to break it to you Robert, but Yahoo was founded in 1994, about five years before Google. So what exactly did Mr. Brin and Mr. Page contribute to society? They took somebody else's idea and made it better (much like MSFT did to Apple). And to be honest, there is not much difference between Yahoo and Google. Henry did not state you should not confuse the stock with the company because of Schmidt's comments. If you own stock in Google, you don't own the company, you own a piece a paper that often times has a value that is different that what the company is worth. If you can't distinguish between the two, you will never make any money in the stock market. Second, you should probably include adverisers in with "users". Google has to balance keeping users and advertisers happy or their product will fail. Losing either will kill them.

I'm guessing you believed the analysts that after their earnings miss said it was a buying opportunity. You should probably sell now, it will more than likely be sub-$200 this time next year. But more importantly you should sell because you are way too emotionally invested in this stock and will more than likely keep buying as it goes down, and end up losing a fortune.

[Henry Blodget]

I think one can agree with everything you say about how deserving Larry, Sergey, and Google are of admiration and still think the stock might have gotten ahead of itself. Also, I do think that the mark of a great senior management team is the ability to strike the right balance between customer, owner, and employee interests. Obviously, companies have to take care of customers: This will always be Job One. At the same time, they also have to take care of their employees and owners, the folks who actually do the work and risk the capital. So for Schmidt to say that the company's focus is "not shareholders but customers" seems a bit of a slap in shareholders' collective face. Perhaps what he meant was:

"We manage the company by focusing on the long-term needs of our users because we believe this will create the most long-term value for our shareholders. We're not going to let the short-term concerns of Wall Street distract us."

[thedude]

Henry, do try and find your news stories from sources other than fuckedgoogle.com, mmmmkay?

[Robert]

Responding to shinkdew, yes I have been emotionally and financially involved in Google since
August 2004. Hopefully you will remember when Wall Street gave me its own BUY signal. DON'T buy the Google IPO. The offering price dropped significantly from a range of 105 to 135 to 85. The two founders sold no stock as they had planned. I bought as much as Schwab would sell me at 85. When the stock opened for trading I bought much much more at 96 and 100 and have held the stock since then. I did sell a lot at 435.
Along the 18 month journey of Google, one read about the founders selling stock, the employees and Eric Schmidt were selling stock,....remember the commotion when the insiders were able to finally sell some stock just last February when the stock was about 185. The negative articles have been endless. Let us not forget the chef at Google describing his meals for the employees, the gym, the one day to develop new ideas.......How dare this company be a place where anyone in the world would love to worl.
Also I do not understand the comparison with Yahoo. That company though much older than Google is less than half its size. Its earnings are no where as large and YHOO is losing market share to GOOG in the most profitable area of advertising as its CFO confessed after its earnings came out. Not only that but Yahoo, the stock, has also lost 25 % in the last month, as has Apple......I think the entire industry is under pressure and the market is simply getting to the biggest and the best as part of what Mr Market always does. Last year I had the same argument with Bill Fleckenstein.......Mr Shortseller. Mr Nasty. Mr Negative. Thus far I have been right. Time will tell.

[anon]

Lots of bulls have been blindsided by a "nice" motto -- look at what they actually do, don't listen to what they talk. No wonder Gates thinks this company resembles his own most closely, and for good reason: MS is not well known for doing nice things!

http://www.awadallah.com/blog/2005/10/07/11/

[Still Inside]

Wow, looks like Henry's struck a nerve with this one.

Let me restate something I've said many, many times before: if GOOG really cared about their customers, building a great company, becoming a long-term player, etc. etc. THEY WOULD NEVER HAVE GONE PUBLIC.

With their cash flow, they certainly did not need any of the money that they raised (the interest on which now accounts for something like 19% of their net for the quarter), and going public adds INCREDIBLE overhead to the operation of a company. The reporting requirements, for instance, open the secrets of your business to your competitors every three months.

Going public was about the management team and early investors making a ton of money on the stock market. Pure and simple. So stop it with the "GOOG has a higher mission in society" bullcrap.

When they went public they were no longer Google the company and they became GOOG the stock. In exchange for the $10 billion they've cashed out, they must suffer the consequences of being judged by the rules of the stock market, just like every public company.

Another thing amateur investors won't understand is a thing called risk profile. If you have no way of knowing if a company is going to do well (for instance, if the management team basically flips stockholders the bird in their stated principles), then you are GAMBLING not investing.

As Warren Buffet once said about the original .bomb stocks, there's nothing wrong with gambling. It can be a lot of fun. However, only morons call it a way to sustainably make money.

SI