Look Out Yahoo: Google Now A 5-Trick Pony

Citigroup's Mark Mahaney has published a report analyzing the competitiveness of Google's non-search products, such as Finance, Gmail, Calendar, News, Froogle, Video, etc. The success of such products is obviously important for Google's long-term outlook, as they should help lock in users and diversify Google's usage patterns.  Eventually, they might even contribute revenue, although this is not a given.  Mark's key conclusions include:

• Several of Google's non-search products are "best-in-class" or at least "in-the-running."  More important, most are continuing to improve and gain traffic share.
• Most of these products have a much stronger competitive position (traffic share) internationally than they do in the U.S.  Put differently, Google's dominance is much greater internationally than it is here (a scary thought).

Mark suggests that the success of non-search products creates "option value" for Google that is not yet factored into the stock price.  My sense is that such products are to some extent factored into the stock price, although Mark's competitive analysis suggests that, on balance, the products are doing better than they are perceived to be.  The analysis suggests that no Microsoft or Yahoo product is safe and that it is way too early to pronounce, say, Gmail, dead simply because it has not yet caught up in user-share.  This conclusion alone should serve as a major kick in the posterior to Yahoo, especially: Not only did the company blow its lead in search; it is now losing market share to Google in almost every other critical vertical.

The one key point that Mark did not address is revenue.  None of Google's non-search products generate revenue.  If the theory is that Google will simply live forever on search revenue, then Google investors will have to get used to the fact that the company's ROI is only going to go one way: Down.  Shareholders will also have to live with the risk that, if anything happens to Google's search dominance--or to search advertising itself--the entire company will be screwed.

The most obvious way for Google to monetize its non-search products is display advertising (I continue to find the idea of inserting AdWords style PPC-ads in Calendar, Spreadsheet, etc. absurd).  One reason Google's products score well in Mark's comparison, however, is that they are un-cluttered and commercial-free, and adding display advertising might bring them more in-line with the competition.  I imagine that Google could add some display advertising--or at least sponsorship buttons--without sacrificing much utility, and I expect this is the way the company will eventually go.

The other option is subscriptions, an option that devotees of Google Spreadsheet, etc., often assume will be a lay-up.  I think subscriptions are a good idea, but they seem antithetical to Google's current philosophy, and, even if successful, they will take years to ramp into a meaningful revenue stream (witness Yahoo!'s revenue mix).  For the next few years, therefore, it would seem foolhardy to expect the company to flick a subscription switch and immediately pay for all of its non-search spending.

Bottom line, Mahaney's analysis suggests that Google is well on its way to becoming less of a one-trick pony. This is good news for Google fans and bad news for Yahoo.  (It's also bad news for Microsoft, but in my opinion, Microsoft has already lost the Internet game).

(Apologies...had to remove link to Mark's report.  If interested, contact Citigroup and beg.)

Comments

[KING TROLL]

Yes Bitches I am FIRST! Of Course

[Dan]

"I continue to find the idea of inserting AdWords style PPC-ads in Calendar, Mail, etc. absurd"

Gmail has contextual ads in it. Surely you remember the privacy hoopla that surrounded that move by google when gmail was introducted.

Anyway, they are implemented well and do not take away from the experience. I have no idea how much revenue they bring in, but they are there. It is not a stretch or "absurd" to believe Google will add similar ad functionality to their other offerings.

[Henry Blodget]

True: Ads in email have been around for a while, and people have gotten used to them. Personally, I would rather pay a modest subscription fee and not have the ads, and I don't understand why anyone would click on them. I also think that, if there are to be ads in email, display would be a less-intrusive and more effective form (the brand message can be transmitted without the user having to leave the email). I also think there is a difference between email and word-processing, spreadsheets, calendar, and other applications. In these, I personally would find PPC ads far more intrusive and annoying.

This said, I have the same issue with contextual PPC ads on blogs and other content sites. As a blog operator, I think PPC is the wrong model. The skyscraper ads on the right side of this page are surely generating some brand value for the advertisers, whether or not you or anyone else clicks on them. And yet Google (and I) get paid only when they are clicked. As a publisher, I would far rather sell the space on an impression/display basis, and I imagine that AdSense will eventually move that way.

[William Penn]

Henry, i have heard that the most effective use of text ads is to integrate them with the rest of the site. (i.e. make the ads just look like text info. on the page.)
I know your likely interested in running a site that looks good rather than maxing ad revenue. However, i feel this does have some implications for google. (i.e. when people get more used to text ads. they will have a more negative view on them and not click on them.)

i do short goog and trade their options so im slightly biased.

[mr fuckedgoogle]

William, you are entirely correct. In fact, the "blurring" between ads and content is the fundamental reason text ads were so much more successful than banner ads- people (especially those who are not very experienced) don't even know those text ads ARE ads.

they just think they're links on a page.

at least google puts "ads by goooooogle" somewhere near their text ads, even if it is in light gray on a white background in 3 point type.

there are dozens of other text ad networks, most completely disreputable, and almost none of them put any market at all to inform a surfer that their ads are actually ads.

and yes, eventually people will catch on and google's clickthroughs will plummet. same thing happened with banner ads back in the late 90s.. they all started out with high clickthroughs and then eventually people realized they were ads and stopped clicking.

[RT]

'Microsoft has already lost the Internet game' - it's on the verge of losing the OS game too.

Break it up and get some new CEOs in.

[Victor]

Henry, have you used gmail? I use it as my main email account (and hotmail as my spam collector). The ads are very useful, that's why people click on them. I was emailing my sister about taking a trip to paris, and all the ads were about hotels in paris and stuff to do over there. Of course that's useful and of course people are going to click on it. I understand not wanting to click on the Victoria's secret ads that MS or Yahoo like showing and which are so irrelevant it's laughable, but surely, if you've used gmail for more than just a few days, you'll see that those ads are actually quite useful (and thankfully, very unobstrusive). I much prefer that model to paying a fee because i get a free service, plus ads that help me out occsionally.

[Henry Blodget]

Interesting. Has been a long while since I used Gmail (thus no feel for the ad relevance). Do you think users will have the same attitude toward Word processing, calendar, and spreadsheet ads?

[Victor]

OH, and please noooo subscriptions!!! If it isn't already obvious why many of yahoo's verticals are bleeding users to Google it's because of their stupid subscription model. There's a simple rule on the internet, if you make a service and it would have gained N users, if you make that service subscription based, it will only get N/10 users. No one likes subscribing. It's a pain in the ass. I certainly wouldn't read your blog Henry, if it were subscription. Perhaps it's an experiment you'd like to try: Make your blog subscription and watch your readership base fizzle

[Victor]

Henry, you have a point, to an extent. Word processing and ads? Hmm sounds unlikely. But Calendar and ads? That should eminently reasonable to me. I schedule a trip to Paris, google shows ads about Paris. I'll click on them, for sure.

[Victor]

One last fillip for you: WHy don't you try the Adsense system on your blog henry? Instead of those dumb revenue pilot ads. That way you could test whether you're getting higher clickthrough/more money. A worth microcosm experiment to confirm you theories that no one clicks on those ads :)

[chircu.com]

All eyes are on Google here but it seems that Yahoo! deserves a line or two as well. Since Semmel's arrival as CEO at Yahoo! the company has become more and more a media play--as if Semmel cannot think in other terms. To this, cotrast please Google's drive to shed the media attributes from its description.

I am also glad Henry is tackling here additional/additive revenue model for Google. That's a worthy goal indeed, to which I have my own contribution: http://chircu.blogspot.com/2006/06/on-advertisingthe-onlylast-business.html

[Get Real]

As a cash-generating engine, GOOG is a one-trick pony. End of story. Search makes all the money - forget about adsense, that borrows from search. I view their investments in new applications simply as traffic acquisition costs. If you normalize their results based on that view, their financial performance is degrading rapidly.

[mr fuckedgoogle]

Maybe, but nobody on wall street is willing to say that. And Google's stock is holding up pretty darn well I'd say.

[Bud B]

Talk about buying traffic? Wait till Goog steps all over themselves to hook up with My Space. Wouldn't surprise me if they pay 600 million to a billion

[Get Real]

I think that is due to two things.

First, it is hard to convert GOOG's application investments into unit TAC costs. It is much easier to look at GOOG organic TAC (zero) and its adsense TAC on a unit basis. Looking below the line at operating income does not tell the correct story because it does not look at unit economics.

Second, the street is assuming and modeling some additinal revenue from that traffic investment. In my opinion, doing so is simply guessing. Looking at GOOG's monetization efforts to date, I would assign a value of zero to same. Again, the only make money from search, and actually would lose money in adsense if they didn't have search to provide a subsidy to float their adsense market.

It is easy for an analyst to ignore the above when they are showing awesome unit economics, while simultaneously they are creating new applications (but really are investing in future traffic). If you believed they could maintain their unit economics pari-pasu on the new traffic, then they are right. If you think that is impossible, or that GOOG doesn't have a clue how to make it happen, then you agree with me.

[Still Inside]

"The one key point that Mark did not address is revenue".

Henry:

Thank you very much for reading through that entire paper and discovering that it was useless garbage so we don't have to waste our time/money on it.

SI

[J. Lasser]

Henry,

I really think that the comment someone made several posts back (in re Google spreadsheet) is key: server-based versions of these tools, that live on the Google box in the corporate datacenter, help both businesses and Google:

For Google, it's obvious: putting boxes in corporate datacenters, for hefty amounts of money, is a good thing; Google's search appliances are a step in that direction. But if they have a shortcoming, it's that they don't always know where to go look for documents. If the documents are on the same box, that problem is solved, and the box's former primary job--search--becomes simpler.

For corporate clients, who need enterprise search anyway, if they can get their office suite for not a whole lot more money, it may prove less expensive than continuing on the Microsoft upgrade gravy chain. It solves lots of document-retention and backup issues, as all mail, spreadsheets, and presumably eventually word-processing documents and presentations will be in one place.

Maybe Google can have a 'back up your enterprise' feature that sends everything on your corporate box to one of those giant Datacenters they're building out, and your company's disaster-recover plan for IT can be "Show up, and replicate all our content down from Google."

Sure, it's the Google Mainframe, but I think that would satisfy a lot of IT departments. And it would put Google closer to all of the information in the world available at users' fingertips... possibly driving a whole lot of revenue besides.