Some "What Ifs" For Google Investors In A Down Economy

Jun. 2.07 | About: Alphabet Inc. (GOOG)

Sorry Todd, here’s another Google (NASDAQ:GOOG) opinion. I agree with you that there is a lot of analysis of Google’s rising search share and declining growth rates (for the “law of large numbers” reason you cite). And I agree with your conclusion, “If Google performs, so will the stock; if not, it won’t. Period.”

What I don’t see anywhere is a definition of “perform” and opinions on whether the steps Google is taking to adjust to upcoming changes in the market will meet that definition.

There is no magic Googlenomics at work here. This is a simple: “How will Google perform in a down economy?” Government economists say it is slowing more than they estimated last month. I have no expertise in such macro analysis, but 40 years of working in this economy tells me the chances of it going flat in 2008 are better than 50/50.

So I pose some “what ifs” for Google investors should the U.S economy tank.

Q. Is the company past the stage where it is immune to such outside factors?
A. I think yes. Google is big enough to be hurt by a down economy.

Q. What happens to “advertising revenue” in a down economy?
A. Some online businesses and brick-and-mortar businesses that depend on online marketing will advertise more in bad times. That’s a basic tenet of retailing. But most do not.

Q. Should Google even be analyzed as a company dependent on “advertising revenue?”
A. As I have written here and here, Google itself keeps saying “No” to that question.

Q. If not a media play, has Google done enough fast enough to “diversify” from its advertising-dependent search technology niche into enterprise applications and other types of Software as a Service (SaaS)?
A. Google has made rapid strides but has not reached a level where it can effectively compete for broad enterprise software business against : Intuit (NASDAQ:INTU) at the low end with its years of experience in both technology and the SaaS model; Microsoft (NASDAQ:MSFT) in the middle with years of technology, two years of Live experimentation, and what I’ve heard described as the “mother of all SaaS farms” dead center in the middle of Washington; Oracle (NASDAQ:ORCL) in the high end with broad technology offerings and moving rapidly to SaaS; SAP (NYSE:SAP) at the top, the leading application technologist and “volume ready” for SaaS in 2008.

Additionally, enterprises traditionally cut back IT spending in a down economy although, if a downturn happens, it will be the first of the SaaS era, so the software buying dynamics may be different than tradition dictates.

Again, apologies to Todd, but Google seems to recognize this with its acceleration of participation in the open source software [OSS] culture. The May 30 announcement that it was open sourcing its browser extension technology to enable offline Google Apps is not just about Google Gears. The OSS community prides itself in moving the ball down the field faster than traditional software engineering models. This attempt by Google to harness OSS energy will be an interesting test of the theory.

There is a known problem with the approach however, a problem that was arguably the downfall of Data General, Digital, Wang and others from the minicomputer era. The OSS community is both going to build a lot of software no one in business will want, and it is going to be working with little understanding of business wants and needs. There is some question whether the OSS community is even a good barometer of consumer wants and needs.

A quote in the May 31 Boston Globe typifies the issue (subscription may be required after day of publication). A Google engineer is quoted as saying: “Most companies (meaning technology companies) will tell you engineering is real important but decisions are made by someone else. Here (Google) the decisions are made by engineers, and everybody else has to sell what they develop.” I never even heard Ed de Castro put it that bluntly, and he could be blunt.

I think Google is hoping that the participation of the OSS community will accelerate the usual R&D timetable for enterprise applications. It’s hoping that any U.S. economic downturn gets delayed by political manipulation past the 2008 election. And it’s hoping the result will be having the right technology in the right place in 2009, thus supporting its current market value because the financial markets have anticipated that Google has already accomplished these goals.