Hi 87 / Lo 72
|Volume 70, Issue 45,
Monday, October 25, 2004
Is Google too inflated for the economy?
Google -- that magical Internet search engine and buzzword, capable of solving any information-related query in less than a second. Need to know how many U.S. presidents were left-handed? Google it. Why do hot dog buns come in packages of eight, but hot dogs come in packages of ten? No problem; google it. Bitten by a poisonous snake and in dire need of a tourniquet, but don't know how to make one? Easy; google it.
Google, Inc., the search company with the motto "don't be evil" went public this summer and became the darling of the technology industry, if it wasn't already.
I admit that I was one of the naysayers who thought the Google IPO was mostly hype and likely to stumble. I was wrong about that, and I can admit it. I do, however, feel that the stock is overvalued and likely to fold at some point, maybe next year. But hey, I'm not a financial analyst. I'm just a little wary of a company posting only $52 million in net income for the third quarter and trading at $170 a share. Of course, plenty of people, including many financial analysts, seem to think this isn't a problem, and who am I to second-guess them?
Nevertheless, where does Google get its money, and what are they doing to continue making money?
Google finds things. That's what the company does, but the act of finding things isn't profitable entirely on its own. Companies pay Google to place text advertisements on the results pages for certain keywords. A dog food company, for example, may sponsor the words "dog" and "verisimilitude," and whenever Google shows results for those words, the dog food company must pay Google if an end user clicks on the text advertisement. Okay, lots of people search the Internet, and lots of people use Google to do it. This is Google's oldest and most reliable method of income.
Google also allows other people to place Google advertisements on their Web pages, which work in a similar fashion, but Google shares some of the click-through profit with the owner of the web page hosting the ad.
Google also sells something called a "Google Search Appliance" to big companies. This is basically Google-in-a-box and is a customized Google server and database designed to search and catalog internal corporate networks. Naturally, this costs a lot of money, and Google makes a fair amount from it.
Google also licenses its search technology to other big sites. Most notable was Yahoo!, which broke off its relationship with Google last year to pursue its own search technology.
Google owns Blogger, an extremely popular free Web log hosting service with hundreds of thousands of users. If this is free, and there is little to no advertising hosted on these sites, how is Google poised to make money from it?
Google also recently acquired a company called Picasa, which makes a program designed to catalog and sort pictures on one's hard drive, much like Google catalogs and searches through the internet. Picasa is also free. The same company also has a program called Hello, which allows people to share photos easily over an instant message program.
For an end user, free is good. Free Web logs and free software to catalog photos are both good things. If I were an investor, however, I'd wonder how Google plans to improve, modify or branch out to increase revenue.
Google recently released Google Desktop Search, which is basically Google for your home computer. This is also free.
Maybe this is Google's branding strategy: to cast a wide net and get its name into as many computers as possible, by any means possible, and then eventually introduce other for-pay or advertising-supported services. Google, Inc. does own the gbrowser.com domain after all. Maybe they are going to enter the Web browser wars?
With Google's stock price continuing to surge, some are heralding it as the savior of the technology industry, an anchor point that marks the potential return of the tech heyday of the late 1990s.
Is this hype? Of course it is, but people buy into it. Perhaps I just don't see it, but Google's current size and business plan do not appear to merit such a high share price. Unless they move aggressively in the near future, I can see this ship sinking and taking many people down with it. I certainly could be wrong, but my pessimism is not without reason, and it almost seems as if the technology industry is placing all of its eggs into Google's basket, which isn't a wise decision no matter how good Google appears to be doing.
Bean, a columnist for The Daily Cougar, can be reached
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