"Google: In the Drink" Cover of Barron's

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By freethinkerkeywe
February 13, 2006

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This is a must read story on Google, explaining how competition is heating up, advertisers are actually leaving the Google 'pay per click and search' fold, and how Google reminds Barron's of Amazon back when it was selling for $400 per share and Blodgett was making a case for it to be $800. (One of the interesting asides in the story is how Henry Blodgett is now making a case where he could see Google hitting $100 per share.)

Google has runaway expenses, is taking a shotgun approach to too many new indulgent businesses that have nothing to do with their core business, and is issuing too many options to their fast growing employee rolls.

Competitors who are raring to take market share from Google are Yahoo, Microsoft and Amazon.

In fact, Amazon is working on something whereby the person clicking on an ad will get 1.47% off their purchase once they arrive at the sponsoring site.

FTD Group, which sells flowers over the net, said the ad rates at Google, which have been going up, are not worth the hit to their bottom line.

Companies such as eBay, travelocity, Priceline and others are saying that the escalating costs of doing business with Google are "unsustainable".

One analyst who reports on Internet companies has just written that more online companies are rethinking their ad dollars spent on Google paid search.

Many are shifting their ad dollars to newspapers, TV, and other online alternatives. As the article points out about this analyst from Stefan Nichols, he thinks that just as the "smart money" is pulling out of search advertising, dumb money is rushing in.

And then there is click fraud.

From the article . . .

Before search advertising can take hold for the long term, it must candidly face up to click fraud. Each time an Internet user clicks on an advertisement, the advertiser pays Google. But as with any booming industry, an underworld has sprung up: Individuals and large, organized "click farms" have started firing off barrages of clicks, around the clock. Some nefarious clickers are trying to drive up the cost of their competitors' advertising. Others may be Websites that want to boost their own revenue by clicking on the ads on their own sites.

CLICK FRAUD CAN BE ESPECIALLY MENACING if it's conducted through software that can infect and take over a computer without the user's knowledge. The computer then clicks on a specified ad one, two, three times a day without the owner's knowledge. Multiply that by hundreds or thousands of computers, and soon you have robotic, or "bot," armies, controlled by "bot masters." Sadly for Google, this isn't a fantasy video game; it's very real.

Click fraud is something that everyone in the industry knows is out there. By some estimates, up to 25% of all clicks are fraudulent. But companies in the search-advertising business won't quantify how the fraud affects them. Not Google, not Yahoo!, not eBay, which is believed to be the largest search advertiser on the 'Net.

Not surprisingly, there is whole industry that advertisers can hire to analyze the clicks they're paying for. One such firm, Click Defense, is part of a lawsuit that alleges Google hasn't cracked down against click fraud and thus has left advertisers vulnerable.

The article then goes on to punch holes in some of the new areas of Google's interest such as audio and video search.

For instance, if you are interested in CBS 60 minutes, you know to go to the CBS website.

The networks are not going to kiss Google's butt to get into some kind of paid search lineup. And that goes for the other paid search companies.

Again, from the article:

"People who own proprietary content will do anything they can to prevent search engines from becoming the gate keepers to their content," says Leo Hindery, former CEO of AT&T Broadband and TCI and current managing partner of InterMedia Partners. "No one is going to let Google become the next Comcast."

The article then goes on to point out Google's huge jump in capital expenditures, which are up 164% from last year this time, and which have yet to show ad revenue. Research and development costs, meanwhile, climbed 115%; sales and marketing grew 79%. General and administrative expenses jumped 140%

Google has been on an all-out hiring binge. Last year alone, the company's head count soared 88% to 5,680. Perhaps the highest-profile hire was Internet pioneer Vinton Cerf, whose new title is chief Internet evangelist.

Stock based compensation last year was about $200 million.

By 2010 it is expected to run in the range of $500 to $800 million.

This will further dilute Google shares.

Then there is the matter of Google trying to get their software installed on every Dell Computer for the next 3 years. That would cost Google another $1 billion.

And then there is the money being spent on far out stuff in R and D:

ONE PROJECT IN THE WORKS: The company has proposed building a one-million-square-foot research park and collaborating with NASA research. Among the subjects under consideration: large-scale data management, connecting smaller computers for supercomputing, the convergence of nanotechnology and biotechnology. According to the Mercury News of San Jose, Calif., Google and NASA might consider offering commercial tours in orbit, creating an extreme-sports league to play in zero gravity, and building space labs for biotechnology research.

It's far-out stuff, all right. And as any NASA budget officer can attest, the bills for such projects can add up quickly.

Stahlman says there's been speculation Google will use some of the $8 billion of cash sitting on its balance sheet to build as many as 300 data centers around the world, connected with their own fiber cables.

There is more about the content that Google offers to attract eyeballs. Book publishers, newspapers, magazines, and more content providers are looking at ways to charge Google for their hyperlinks to the content provider websites. As it stands now, Google gets paid for this type of endeavor per each click. Content providers want to stand that arrangement in revenue on its head.

And then there are the phone companies, particularly cell phone companies, who want to get paid by Internet companies for linking Internet-enabled cell phone users to their websites. Not only this, but cable TV companies have the same idea.

Finally, there's the fact that Google insiders have sold billions of dollars of shares. None have purchased Google shares on the open market.

All in all, this article is a blaring klaxon call to all Google "holders" that this time it is not different than the "last time" Internet bubbles burst.

To those of us who might be short the stock, don't fold your hand yet. It's really about to get interesting.

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