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If you think Google (Nasdaq: GOOG) shouldn't be talking with Sony (NYSE: SNE) and Intel (Nasdaq: INTC) about creating a set-top box, or that partnering with Logitech (Nasdaq: LOGI) to create a universal remote is stupid, then you should short the stock right now. Or, if you own shares, sell.
The only way Google gets to be a $350 billion company -- roughly a double in market cap from today's levels -- is if it better exploits the world's most lucrative advertising market: television.
171 billion great reasons to love a Gbox
Google's been knocking at Hollywood's door for years, and with good reason. New research from Nielsen shows that 59% of Americans spent 3.5 hours each month online while watching TV during last year's fourth quarter. Consumers want more Web TV.
And yet the box isn't getting any better. Google CEO Eric Schmidt doesn't like that. Here he is last year talking with Charlie Rose about this very topic, courtesy of TechCrunch. The most relevant excerpt:
When I turn on the television, it shows the same shows that I saw yesterday and I watch them and it doesn't know that I watched them yesterday. What a foolish television. Why is it not smarter?
It's a fair question with a simple answer: Because we haven't made one yet. Nor do we need to. Smart networks don't necessarily need smart playback devices. Google knows this better than most; Chrome OS is being built for thin, cheap, and, yeah, not-very-bright netbooks.
So when Schmidt talks TV with Rose, I think he's talking less about the device itself than what the device ought to be able to do, regardless of where the intelligence comes from. His broader point is that television delivery, and consequently television advertising -- a $171.5 billion global business -- is dumb.
Moronic Mad Men
Yep, that's right: D-U-M-B. Dumb. The broadcaster knows nothing about the viewer, and the viewer is choice-limited by what's on, what's saved on the digital video recorder, and what's available through a limited pay-per-view menu. Springsteen's still right: There's 57 channels and nothin' on. Nothing that serves me what I want, when I want it.
Advertisers should be screaming about this. So far, their protests have been confined to a not-too-subtle shift away from TV advertising provided by the likes of Comcast (Nasdaq: CMCSA) and toward Internet advertising. In the U.S., digital display advertising rose 7.3% last year, versus a 9.5% decline for TV ad spending, Kantar Media reports.
Meanwhile, search advertising -- Google's specialty -- has become a massive-growth business for one of the world's biggest ad agencies: WPP. According to paidContent, the firm's clients tripled their investment in search to $540 million last year. Google could make TV advertising better by making it more like search advertising.
We've seen such transformations before. What are Dex One's (Nasdaq: DEXO) yellow and white pages directories if not dumber, printed versions of a local search engine? When Overture introduced search advertising, it marked the beginning of the end for the big books. Google's search algorithm was an accelerant, and could be again.
Pieces to the puzzle
Every move Google makes suggests that it wants to be as much a TV portal as it is a Web portal. For example, The Big G has:
- Built an advertising system for YouTube that could be the basis for a more targeted broadcast TV ad platform. (We already know from documents that the video playback king was profitable years ago.)
- Teamed up with TiVo (Nasdaq: TIVO) for aggregated viewing data it can share with the advertisers using its AdWords system.
- Invested in significant last-mile technologies, including WiMAX, broadband over power lines, and, on an experimental basis, fiber to the home.
There's no sense to any of these initiatives if Google has no intention of taking a bigger slice of the entertainment pie, including a heaping portion of the market for placing TV ads. Think that's a misguided strategy? Money poorly spent? So be it. Sell your shares and move on.
Google is a $180 billion business generating close to $24 billion in revenue annually. To double its market value from here, The Big G has to find at least $24 billion in brand-spanking-new revenue. Google Docs won't supply that. Neither will Nexus One. Advertising is where the money's going to come from. TV advertising, specifically.
Larry, Sergey, and Eric need the Mad Men, and the Mad Men need them just as much.
How should Google infiltrate the living room? Discuss in the comments box below.
