Tim Beyers and I didn't see eye to eye on Google
Tim's upbeat case for the world's leading search engine consists of two key components:
- Google is destined to own the throne in cloud computing.
- Advertisers are ditching old media for new media outlets.
He's right on both counts, though I fear he may be overestimating the relevance of the first point and the velocity of the latter.
Hey, you, get off of my cloud
Cloud computing will be important, but it will be more significant for the models of conventional software consumption that it disrupts than the cutthroat, low-margin opportunities it creates.
Yes, I just called cloud computing a low-margin endpoint. Don't just take it from me. Take a look at today's leaders of cloud computing. Stand-alone players in this seemingly explosive niche, including salesforce.com
In fiscal 2009, salesforce rang up $43.4 million in profits from nearly $1.1 billion in revenue. In other words, net margins at salesforce clocked in at just 4%. NetSuite is even worse, since it didn't turn a profit until its latest quarter. It sports negative net margins over the past year.
Cloud computing gets more problematic for Google when you consider that enterprise software companies have paying customers, at least. How many of you are paying for Google Docs or Gmail? Most of us are coasting on Google's ad-supported dime; salesforce.com, in contrast, has more than 1.5 million paying subscribers to its corporate platform.
I love Gmail, and I like Google Docs. But I'd still caution Google against going down this particular road. Nearly all of its revenue comes from paid-search advertising, a business that entails quickly shooing away site visitors to a sponsored site. Cloud computing isn't like that. It lays out the flypaper, inviting you to lie back and stick around as if you were in some barista-tended coffee bar.
Gee, mail
Gmail is the best example of the limitations of cloud computing. If you don't have a free Gmail account, get one. It's awesome. However, Gmail is only the country's fourth-largest provider.
Let's look over the list that comScore put out earlier this year, detailing the unique visitors that the leading services attracted in December 2008.
Stateside Unique Visitors |
Dec. 2008 |
---|---|
Yahoo! Mail |
91.9 million |
AOL |
46.6 million |
Hotmail |
43.5 million |
Gmail |
29.6 million |
Source: comScore.
Google's service is gaining on the competition. It is growing faster than Yahoo!
"How hard is it to monetize electronic mail," I asked last week. "Well, let's just sum it up by saying that Yahoo! is on its third CEO in as many years, Time Warner can't seem to hand off AOL to anybody, and Microsoft is still posting losses in its online business."
Ad it up
I won't badmouth online advertising, even if Google ultimately marks up its site like a NASCAR race car. Advertisers are migrating online, where accountability is transparent and results are immediate.
But Google remains shackled to the growth of advertising in general. This is a company that is coming off the first sequential net revenue dip in its explosive history.
You can pin the tail on the recession, but what if this doesn't end there? The Web cuts both ways for the leading search engines. Sure, it's a great way to deliver new leads. However, once the advertiser lands the visitor and establishes a direct relationship with a potential customer, hasn't it just cut out the middleman?
Everyone has a theory about why eBay's
Isn't this happening elsewhere on the Web? As companies begin populating Facebook and Twitter, they form direct bonds with their customers. A band or nightclub that builds up its MySpace page may not need to advertise as much, for example.
There will always be room for paid search, because companies still need to establish initial contact, but the actual growth of advertising -- in all forms -- worries me most. If even the mighty Google is declining sequentially, what does it say for the state of the industry as a whole, even when the economy bounces back?
Given the uncertainties, Google isn't as cheap as Tim thinks. I still love the company. I just don't love the stock at this point. It's soared more than 55% since bottoming out five months ago. The fundamentals certainly haven't appreciated that much.
Be careful.
Read up on Google:
- Tim is bullish.
- Yep, he's still bullish.
- I can make you rich in three years.