Online search and advertising used to be a surefire way to make boatloads of money. Then it became a guaranteed ticket to the poorhouse, when the Internet bubble popped six years ago.
These days, the old plethora of startups has been replaced by three giants of varying stature and a mere handful of hopefuls. Let's dig in to see what makes our search masters tick.
If it isn't already patently obvious, I'm talking about Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), and the Web services division of Microsoft (NASDAQ:MSFT), formerly known as MSN.
Cold, hard cash
From a financial perspective, there is no question about the leader and laggard in this sector. In the past two years, Google has grown revenues from $3.2 billion in 2004 to $10.6 billion in 2006. Operating profit more than quintupled in that time frame, from $640 million to $3.6 billion.
Yahoo! snags a solid second place, kicking sales up from $3.6 billion in 2004 to $6.4 billion, and increasing its operating income 37% to $941 million.
Microsoft's Web services can't hold a candle to these numbers. Revenues have remained flat at $2.3 billion for years, and the operating income from this division has jumped all over the place. At the last annual report, web services reported an operating loss of $77 million -- a steep drop from 2005's operating income of $412 million.
The market in a nutshell
Last year, Microsoft launched a revamped line of services under the Live brand, meant to push out the old MSN moniker in time. The Xbox 360 comes with ambitions to connect our living rooms to the Net, and to become a streaming media hub for all our entertainment and information needs. But that's a two-segment strategy that requires teamwork across division lines -- a tricky proposition at best.
Meanwhile, Yahoo! just saw CEO Terry Semel leave his post, taking only the Chairman of the Board seat, while co-founder and Chief Yahoo! Jerry Yang takes up his operational cape and scepter. Longtime CFO Susan Decker stepped up to become President, so there's a trifecta of top dogs now, as opposed to Semel occupying all three spots, as before.
What changes may come from this move is hard to say. Yang speaks of a "joint vision" between himself and Decker, about a company "that executes with speed, clarity and discipline. A Yahoo! that increases its focus on differentiating its products and investing in creativity and innovation. A Yahoo! that better monetizes its audience. A Yahoo! whose great talent is galvanized to address its challenges. And a Yahoo! that is better focused on what's important to its users, customers, and employees."
I hate to be a killjoy, but I don't sense that all-important focus on user relationships in that statement. I have a great deal of respect for Yahoo! as a brand and a pioneer centered around the company's massive and loyal user base, and Jerry has certainly helped shape that perception over the years. But let's hope that he doesn't stray too far from the values that make Yahoo! yodel.
Finally, the Mountain View crew has started to loosen up the grip on its corporate purse strings lately. Spending $1.7 billion on YouTube was a start, followed by a plethora of mid-range acquisitions that added new capabilities and skills to the Google arsenal. A $3.1 billion deal for banner ad specialist DoubleClick (which Microsoft was said to covet, but not at that price) is the latest and largest of the bunch. While Yahoo! and Microsoft have also opened their wallets, Google has outpaced them in terms of acquisition these days.
More importantly, the company is expanding far beyond traditional Internet properties. Radio advertising is just the first step in that process, and it will bring the big G into our lives in ways we never expected -- overtly or not.
I may not notice who placed a beer commercial in a televised football game, for example, but Google wants to be that guy, able to target ads with more precision that anyone else. That's what your Google ID is for, you know.
It's a wrap
One giant is doing well, with the biggest knock against its stock being overvaluation. Another is rebuilding itself once again -- as it seems to do every six years or so. And the third, well, I don't really know why Microsoft even bothers. MSN/Live is a lower-margin business than the bulk of Mr. Softy's portfolio, brings in very little revenue and even less profit, and isn't growing in any useful way.
It's not even a case of needing the exposure, a way to get into the hearts and minds of consumers. Ask a hundred people on the street if they know of any alternative to Windows and Office, and maybe ninety of them might say "Intel (NASDAQ:INTC)?"
Maybe CEO Steve Ballmer has something cool up his sleeve, but it better be a big deal. Nothing short of a revolution will bring this troubled operation to a leadership position -- or even second place. Yes, I've heard rumors of a merger with Yahoo!, but that only makes superficial sense. The culture shock would be too much (could you imagine Bill Gates acting as Chief Softie?), and we'd get another bundle of failed synergies, a la AOL/Time Warner (NYSE:TWX).
All three companies will report earnings within two days of one another, just over a week from today. That'll be a time for competitive updates and future outlooks on all three sides, but frankly, I'd be shocked to see anything besides another blowout quarter from Google, a Microsoft that's all Vista and no Web, and a Yahoo! struggling to make ends meet. But, that's why they play the game ...
There's so much more to read:
Yahoo! is a Motley Fool Stock Advisor pick, and so is Time Warner. Microsoft is a Motley Fool Inside Value recommendation -- and so is Intel.
Fool contributor Anders Bylund is a Google shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and you don't have to go searching for Foolish disclosure. It's right here.
