Google Rumors: Radio M&A, Free Checkout

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Includes: CCU-OLD, GOOG
by: Eric Savitz

David Bank, an analyst with RBC Capital Markets, reports in a research note that Google (NASDAQ:GOOG) has been “dramatically ramping up its radio sales force” for its Google Audio operations, also known as dMarc. He says that Google has hired “high profile” radio sales people in New York, Washington, Baltimore, Atlanta, Chicago and Los Angeles, and given them “lucrative contracts.” Bank says his sources say Google is targeting about 100 sales hires “and has made meaningful progress.” (A check of the jobs site on Google.com finds a variety of radio advertising related jobs available at sites in Chicago, Santa Monica, Atlanta, New York, Dallas and Irvine.)

The odd thing, Bank writes, is that Google doesn’t have much radio advertising inventory to sell right now. “In fact,” he writes, “our sense is thenew hires aren’t finding themselves very busy.”

Bank says he believes there is a “reasonable chance” Google is creating critical mass ahead of a major acquisition of prime radio inventory. The most likely candidate for such a deal, he contends, would be Clear Channel (CCU-OLD), which is the nation’s largest operator of radio stations, controlling by his estimate about 20% of radio advertising revenue. He theorizes that Google could make an investment in Clear Channel - perhaps as part of an LBO or even in its current status as a public company - to help it secure radio advertising inventory.

“With an estimated $15.6 billion in local spot revenue in 2005, we think Google is looking to move in on the very large local radio market both as a complement to its nascent efforts in local search, as well as an extension into a more diversified revenue stream,” he writes. “A deal with CCU would have the potential to be very good for CCU and very bad for everyone else in the near term. We think Google would be willing to purchase inventory from CCU at attractive prices and then essentially drop the floor out from everyone else in the pricing environment…a scenario such as this would have serious negative implications for the rest of the terrestrial broadcasting industry.”

If Google could facilitate 10% of the $20 billion U.S. radio advertising marke tby 2010, and take 15% of revenue, “the market opportunity could represent up to $600 million of cash flow,” the report concludes.

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Scott Devitt, an analyst at Stifel Nicolaus, says “channel checks” indicate that Google (GOOG) plans to offer its Google Checkout service for free over the holiday shopping season. The payment processing system ususally charges retailers 2% of transaction value plus 20 cents, Devitt explains; retailers also get $10 in free sales processing for every $1 they spend on Google Adwords.

Devitt notes that customers of eBay’s (NASDAQ:EBAY) PayPal service pay fees ranging from 1.9% to 2.9% plus 30 cents per transaction.

“Well over 200 mid-to-large sized merchants have signed up to accept Google Checkout and a free promotion could be particularly helpful to adoption rates over the holidays by merchants and consumers (as promotions could be used to drive usage.)” he writes. “Such a promotion would effectively eliminate transaction processing costs for merchants on all Google Checkout transactions in a period that accounts for as much as 35%-40% of their total transactions.”

Devitt says such an offer “presents a headline risk to eBay,” but notes that a Google plan to offer free service “is not confirmed at this point.”