Google: Media Play Or IT Investment?

Eric Schmidt of Google (GOOG) piggybacked presentations 15 hours apart to Morgan Stanley Technology and Bear Stearns Media investment conferences on March 5 and 6. As you would expect, a lot of the same ground was covered at both meetings, most of which keeps me asking “Is Google a media play or an information technology investment?” The continuing challenge is whether to compare Google to Viacom (VIA), Disney (DIS) and McGraw Hill (MHP) or to Oracle (ORCL), IBM (IBM) and Microsoft (MSFT).

As Google’s recent 10K submission says, it is “similar to a newspaper...” and “Our mission is to organize the world’s information…” Ninety-nine percent of its revenue is advertising? But Schmidt described Google as a targeted-advertising-driven high-technology company. He positioned the advertising revenue as an enabler and not an end in and of itself, just as—Schmidt said—in past technology eras the direct sales person was the enabler. (In that “past era,” Schmidt quoted Oracle’s Larry Ellison saying something like “Nobody eats until somebody sells something,” a good rule of thumb for all eras.) Google clearly considered itself an information technology [IT] company originally, licensing its search engine in the traditional fashion. Only later did it move to the advertising-revenue model. And Google adds no content of its own like a more conventional "media" company (but that observation might make me one of those backward looking people Schmidt warned about, describing himself often as one as well).

So hesitatingly taking Schmidt’s word for it, I continue to look at Google's "advertising revenue" as just another way to get consumers and enterprises to pay for IT resources (that is, to "license" Google's search functionality and other emerging capabilities). It is the same as the situation where an enterprise is paying for ADP's or similar payroll service and thereby choosing not to license or maintain an Oracle/PeopleSoft or similar payroll package.

So if Google is a software company, rather than a media company, investors need to ask how Google stacks up in the software market. Search itself is a longtime software category better known as content management. Enterprises are buying search technology from other IT Top 12 suppliers in the more conventional license/maintenance fashion. IBM (pre and post Filenet), EMC Documentum, and so forth offer information storage, indexing and access plus much more sophisticated integral business process management.

Schmidt said extensions to Google applications are the “next big non-search” business for the company, even though such non-click-based revenue streams are still not material from an SEC perspective.

• In my opinion (as well as others’), its office productivity software lacks the breadth and width of the market leader. Schmidt hinted at Google’s preference for open source software [OSS] so maybe it can come up with some better way parlaying Sun’s (SUNW) OpenOffice than last year’s PRware (OpenOffice still falls short of Microsoft’s ubiquitous products).

• Google’s ‘accounting’ software lacks the breadth and width of QuickBooks. Google already has a deal with Intuit (INTU) (or perhaps Google should simply buy it).

After that, where does Google branch to in the enterprise?

• It lacks the industry centricity that is rapidly becoming the ante to compete with midsize enterprise software from Microsoft, Infor (IFR), Oracle JDE, SAP (SAP) and so forth. It can take the time to build it of course (it has the resources) but because of the consolidation that has already taken place in the enterprise software market, it would be hard for Google to buy its way in

• CRM is a possibility but a very crowded field.

• e-Commerce would make sense, especially by extending Google Checkout, which fired up some interest among the analysts present.

Among consumers, Google is clearly a leader in terms of software mindshare (and a fundamental basis of my research is that consumer and enterprise roles are rapidly merging in IT). Google is doing a lot of research on mobile device access to information so tying that back to the enterprise (via Checkout) is a natural next step as well. And Schmidt makes the point that when it comes to consumers (unlike most enterprise software markets in my opinion), it is not yet a zero sum game.

From an IT Investment Research point of view, the question becomes: “What does Google’s also-ran position in so many software market segments mean when considering Google for its investment potential?”

Basically the financial analysts (including most of those at the Bear Stearns and Morgan Stanley conference) are avoiding this question, being more concerned with "advertising revenue" and other such media-industry-type metrics. (To be fair, a few analysts tried to draw him out on this and Schmidt prudently ducked all questions relating to Microsoft.) But in the long run, neither consumers nor enterprises are going to accept second-tier software functionality even if it is “paid for” by advertising rather than via a license or as a service.

By the way, if you are contrarian, consider “What If” Schmidt is wrong. Maybe you should look at Google as a media company highly enabled by technology rather than the other way around. I am not qualified to make that analysis because I don’t follow the media industry but I can frame the key question: Shouldn’t Google then be looked at as just another encyclopedia publisher? Or wouldn’t a better analogy be phone-book publisher? Wow, wouldn’t that characterization hurt up and down the 101.

Disclosure: Author has no position in GOOG.

Comments

[Sufiy:]

Great article! Some more thoughts in that direction "If Schmidt is wrong?"

"Recent developments with Microsoft attack on Google's "cavalier" approach to copyright protection" highlighted more deep and structural problems to the core of Google's Business. In a simple interpretation all this story with copyright issues is similar to open next to Nike Shop a Whorehouse with cheap illegal copycats from Asia. "It will be very good for advertisement of your business" is very weak argument against criminal case. It is plain illegal and will kill Nike Shop. "Companies (Google S.) that create no content of their own, and make money solely on the backs of other people's content, are raking in billions through advertising revenue and IPOs," says Rubin, who oversees copyright and trade secret law at Microsoft." Here Microsoft is right and actually is rising the issue which could save trillions of Dollars to struggling US economy. Even more, until this "too liberal", criminal in nature approach is allowed (I think nobody cares so far and do not understand far reaching complications) it is killing USA economy and eroding the last resource of defence - Intellectual Property Rights. If you are not aware...con'd

sufiy.blogspot.com/200...

2007 Mar 07 08:49 AM

[huangjin:]

I'm waiting for the inevitable plunge in advertising to see what happens at Google.

2007 Mar 07 11:02 AM