The Most Important Quote From Google's Conference Call

Yes, Google blew through estimates for its Q3 profits and revenue growth. Yes, its conference call was full of evidence that its momentum isn't waining. But the most important line in its conference call was this:

First the context. Larry Page is discussing Google's advertiser base. He describes how Google is increasing its penetration of the top 100 advertisers and increasing its focus on smaller advertisers, for example by partnering with Intuit (INTU) and coupon company Valpak.

And then he says this:

Over half of local businesses don't have websites yet, based on the estimates we see, and our local business center helps those businesses easily create a web presence so they can advertise online.

Think about it. Google wants there to be more web sites because more websites means more advertisers and also more sites to search. More advertisers, more websites, more searches -- and Google dominates online advertising and search.

This is proof that Google is the ultimate Internet business, the ultimate long tail business. The more web sites there are, the better for Google. And Google scales with the growth of the Internet, because its customer interactions are automated.

Simple, but more important than anything else when you're thinking about Internet stocks.

Ask yourself if this applies also to Amazon.com, Inc. (AMZN), CNET Networks, Inc. (CNET), IAC/InterActive Corp. (IACI) or Yahoo! (YHOO). I don't think it does.

The transcript of Google's full conference call is here.

Comments

[kkin365:]

As I read the conference-call transcript (thanks to Speaking Alpha), Eric seems to be rather evasive on several key questions. On Google apps, being a small-press publisher, I tried to avail myself of its services. It was rather difficult to use. I left a message, but Google never called back. So, I have to read the conference-call comment with a grain of salt. Perhaps some one knows how to reach Google; if so, kindly advise. omooc

2006 Oct 20 10:42 AM

[Christian Ue.:]

The article doesn't go into detail about Amazon. I'll do. As Google focuses on advertising it can really scale proportionally to the growth of the business side of the net. Amazon cannot.

Tey do not sell advertising but selling space to their merchants. That leads to the situation that their growth is limited by the simple fact that Amazon doesn't earn more when it attracts more sellers. It doesn't matter moneywise if 10 or 50 merchants sell the same item at Amazon.

It does matter for Google as 50 merchants are all going to book slightly different Adwords than 10 would have done allowing Google to deliver more ads. Even if they all sell the same stuff.

<em>So Google's ecosystem looks much healthier to me than Amazon's!</em> They also don't try to press businesses to subordinate unter a standard presentation scheme as the Amazon website. If you want to, you can use Google's very inexpensive and secure payment platform. If you connect that to Adwords, they'll start sending potential customers to what you are offering. That's about all an internet business really willing to be innovative could care about: cheap secure payment and customer leads. It will care for the rest itself.
Amazon in contrast makes all merchants look alike forcing them to be solely competitive on price and leave the innovation to their landlord Ammy. Much less attractive I think.

2006 Oct 20 10:42 AM

[Vishesh Kumar:]

David,

You said: "And Google scales with the growth of the Internet, because its customer interactions are automated." True with their business model so far- but not necessarily the case if they are trying to get Mom and Pop shops to set up Web sites! This is likely to be a high-touch process, labor intensive process- fundamentally different than the automation the Google has relied on so far.

So while their ability to *benefit* from the growth of the Internet may in fact be automated, the process of actually helping people set up Web sites will not. That will require rolling up their sleeves in a way they have not so far.

Also, while Google may think that most of the remaining 50% of these businesses would really benefit from a Web site, there is a good chance that many can do without them. A lot of businesses are much more dependent on word of mouth, referrals, etc. I know independent consultants, for example, who don’t bother with a Web site because there business is totally dependent on introductions and referrals- no one is going to click on search-based add to really get to them.

Still, I agree that this was a very interesting sentence from the conference call- but perhaps for different reasons…


Vishesh

2006 Oct 20 02:12 PM

[David Jackson:]

Vishesh, you're right that my point wasn't really focused on the business of building websites but about the underlying fact that Google wants to promote the growth of the web because it benefits from it. And building web sites may be higher-touch than its interactions with searchers and advertisers.

But it doesn't have to be high-touch -- think of Blogger, which is totally automated and has millions of users. Couldn't that be adapted for more commercially-oriented websites?

2006 Oct 21 06:55 PM

[Christian Ue.:]

There are dozens of very capable open source content management and shop systems out there. Google could take one of them and then rebrand, package and provide it for free - including easy Adsense and Ceckout integration. Maybe time to look out for smaller companies backing open source projects of that kind...

2006 Oct 22 12:04 AM

[Sufiy:]

Just few observations on recent trends in Revenue and Net Margin of google presented in CC slides
investor.google.com/pd...
First of all I dare to say that they have monetised everything from the existing traffic with diminishing growth and they are desperate to buy new traffic in order to monetise it. The biggest problem here that YouTube traffic is not monetisable straight forward if meaningfully monetisable at all. But few figures: Growth in Google.com is in the slowing trend Q3/05 +20%; Q4/05 +24%; Q1/06 +18%; Q2/06 +10.4%; Q3/06 +13.5%. Share of Network Revenue is declining Q2/05 85%; Q3/05 76.3%; Q4/05 72.8%; Q1/06 71.5%; Q2/06 69.6%; Q3/06 63.8% and growth in Network revenue is slowing even more aggressively: Q3/05 +7%; Q4/05 +18%; Q1/06 +16%; Q2/06 +7.4%; Q3/06 +4% (!) What has happen? Partners has figured out how to monetise traffic without Google? Nobody is growing apart from Google (which is slowing down itself)? Click fraud with better audit available to advertisers is taking its cut from "partners" clicks? We can only speculate here, but trend is established and it must be very disturbing to Google management. Cost of this Network traffic is increasing, if you will proper apply TAC to share of Network Revenue you can see following picture: TAC/NetwRev Q2/05 78.4%; Q3/05 60%; Q4/05 78.7%; Q1/06 77.9%; Q2/06 78.7%; Q3/06 79.6%. So total picture is that growth of Revenue on Google.com is slowing to 12-15%; Growth of Network Revenue is slowing dramatically to single digit figures and its cost TAC pushing 80%. Net Network Revenue was Q1/06 205 mil 15.8% of Rev Google.com; Q2/06 212 mil 14.8%; Q3/06 212 mil (!) 13%. Somebody is playing math here? Do you remember how insurance companies like AIG smoothed their earning with "Partner Deals"? Traffic exchange even more easy to regulate or maybe some of the "Partners" in the "Network" in the Family. But no offence Boys - you are hardly pushing any Law here and clear in your intentions: Selling your shares smooth and fast. All written above went straight into the money: Net margin contracted in Q3 vs Q2 from 29.4% to 27.3%. Should I send it to Google? Or they already have these slides for internal use?

2006 Oct 22 01:24 PM