Business Week's odd take on GOOG and YHOO

Includes: AABA, GOOG
by: David Jackson

Business Week's Ben Elgin asks whether Google (ticker: GOOG) is "a $50 Billion One-Trick Pony". Here are the five key points from the article followed by some comments that question its conclusion:

Key points from the Business Week article:

  1. Slowing growth: Forrester Research predicts that the search advertising business will slow from 45% to 30% in 2005.
  2. Potential for overseas expansion: Over half of Google searches come from overseas, but only a third of revenue. Google also works with only 227 of the world's largest 1,000 companies.
  3. Weakness in "display ads": Yahoo! gets a third of its revenues from graphical banner ads, but Google gets 98% of its revenue from text ads.
  4. Weakness in subscription services: Yahoo! gets 16% of revenue from subscription services "such as online personals and fantasy football"; Google offers no subscription services.
  5. Odd that Google isn't talking about its banner ad business: Google launched graphical ads in May 2004, but has said almost nothing about that business.

Quick comments:

  • Search is the fastest growing and most profitable part of Yahoo!'s business. Other areas, such  as subscription services, have far lower margins and are growing slowly, as can be seen from Yahoo!'s recent financial results. If search was a slowing and unexciting business, Terry Semel wouldn't be racing to add search features to almost every Yahoo! page.
  • The traditional banner-ad business, far from being an exciting growth area, is broken. Evidence? DoubleClick's recent results and disappointing guidance.
  • Google's graphical ad business is not comparable to Yahoo!'s traditional banner ad business, because the Google graphical ads are placed on content pages (not search pages) using the same contextual positioning technology as its text ads. In fact, it's hard to break out the performance of Google's graphical ad business because its graphical ads are served interchangably with text ads. A better distinction would be between contextual ads and traditional banner ads.
  • Yet there's no discussion of Google's contextual advertising business here, though it's entirely different from its search business and is growing just as fast.
  • Google a "one-trick pony"? Hardly. Google is moving aggressively to compete with Yahoo's most successful and "sticky" services, including Gmail, Google Groups, and Google Maps. And the implications of Google movies are also significant: as search engines become "answer engines", search and content converge.

GOOG chart below.