Everyone knows Google (GOOG) is a search engine, but what is its business model? Yes, an advertising agency--that is the literal answer. This is like saying that Solar City's (SCTY) business model is solar panel rentals. The real answer is that Solar City as a business model is a short bet on the price of solar panels, and a long bet on customer service; Google is a short bet on intellectual property, and a long bet on user experience.
Google does not ask for permission from patent holders. It simply builds what it wants, with a better UI/UX than the incumbent. Google does not ask for permission for copyrighted material. It simply finds a "fair use" loophole. Google's real motto is "be less evil". To be evil, in Google's view, is to use patents and copyrights as a defense for an inferior user experience and/or an inferior product.
Google remains inherently evil in the sense of IP. Why? Because Google benefits from IP indirectly. IP law creates a barrier to entry which makes it difficult for smaller players to compete in a vertical. Thus, even as Google opposes IP, Google profits from the proliferation of government-enforced monopolies.
Businesses make money by solving problems. No problem, no business. If software was completely free, Google would not exist. But software is not completely free--will not be any time soon--and thus Google will thrive in its nuanced short position. If anyone is a threat to Google, it is Rackspace (RAX) and its truly open-source virtualization paradigm; however, Google has too many powerful partners to worry about this.
User-experience-reactionary, patent-long incumbents like Microsoft (MSFT), Ebay (EBAY), Yahoo (YHOO), and Nikon (GM:NINOF) should be priced as underdogs in the face of Google Apps, Google Wallet, Google Play, and Google Glass respectively. On the copyright side, Liberty Media (LMCA) holds a portfolio of middleman businesses forseeably supplanted by leaner models like Google's.
It's easy to see why we should be short tech IP: tech is in its "Baroque" phase, ie. the next economic disruption wave will be elsewhere -- in places like biotech and energy. Government is not as dumb as it looks; it knows tech has matured. Patents incentivize an over-allocation of our societal wealth to tech (just look at all the redundant companies in large cap software). To efficiently redirect capitol allocation to growth areas such as biotech and energy, government will deflate the currency of software patents, or fall behind smarter nations.
Investors should watch the appeals case CLS Bank v. Alice Corp as it could deal a sooner-than-expected blow to software patent enforceability. Patent troll investors such as Vringo's (VRNG) should weigh non-software patents more heavily in their upside calculations.
Google trades cheaply at P/E less cash 22 and EV/EBITDA 15. It is a generational engineering blue chip like Tesla (TSLA). In the long term, Google's leadership in reverse-engineering of the human brain defies limits of upside potential. In the short term, having called a top recently, I expect GOOG to break out soon. Post-Jobs patent reconciliation with Apple (AAPL) has not been priced in enough, nor has signs of improvement in Google+; the market was preoccupied with PPC revenue during risk-off but will see the big picture in risk-on. For once, I agree with Cramer: Google will find a solution for mobile monetization.
However, due to Google's end-user pricing strategy, I feel that even more attractive risk/reward exists in shorting Google's incumbent competitors. Google's less-evil strategy poses an existential threat to their business models.
Additional disclosure: While Modernist has no plans to initiate any positions, plans can change in rare occasions. Family, friends, associates, and/or acquaintances of Modernist may or may not have positions related directly or indirectly to the contents of this article. Modernist may have unnamed positions related indirectly to the contents of this article.