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Google: a friendlier frienemy

Google’s success is clear and its economic power substantial. It has a market capitalisation, despite recent volatility, of $190 billion, projected 2011 revenues of around $27 billion, approximately 24,500 people and growing, and 75 offices. The stock markets are saying something about Google’s valuation in relation to our own $16 billion valuation, with approximately 60% of the revenues at $14 billion and nearly 100,000 people (excluding associates) in over 2,000 offices.

Put together the four largest communications services parent or holding companies – WPP, Omnicom, IPG and Publicis. You will have approximately $41 billion of revenues and a $46 billion market capitalisation – almost twice the revenue of Google, but only a 20% of the market value.

So is Google a frienemy or froe? On the amicable side, we are forecast to spend approximately $1 billion this year. That tells you a little about the nature of Google’s business. Normally our media market share, according to RECMA, the independent organisation that measures scale and capabilities in the media sector, is around 25-30%. With Google it is around 5%, indicating a long tail and a heavy small- and medium-sized business-to-business connection. In a sense, Google is a mechanical Yellow Pages – opening up advertising to small- and medium-sized companies that did not advertise before.

In any event, Google clearly wants to work with us on building relationships with our biggest clients. We have run joint seminars on both sides of the Atlantic for some of our largest and most important clients to try to nurture mutual relationships and are building joint sales programs with a Google sales team designed specially for us. We have also initiated, with Google, Harvard Business School and MIT, a $5 million research program on the effectiveness of advertising on the internet.

There is no doubt that Google has become friendlier as it has focused its business in the teeth of the recession and renewed its efforts on the digital areas, where it draws its strength rather than the traditional media areas, where it had stumbled. Having hired a new CFO and cut $1 billion in costs, its renewed focus on search, digital display and particularly mobile indicates the future, with the stunted launch, for example, of Nexus One (which, by the way, disintermediates both the mobile handset industry and the mobile operator networks at the same time) and the phenomenally and ominously successful launch of the Android operating system (probably the most successful product launch ever, with the exception of Microsoft’s Kinect). On the less friendly side, chairman Eric Schmidt has said Google is targeting the advertising sector. Google experimented in many traditional areas such as print and TV, signing deals with Clear Channel and Echostar, though recently scaling back in some traditional areas. It has hired creative people to write ads and one of our creative directors to head up its creative efforts. It has approached US clients to see if it can set up a direct, electronic media-buying exchange. Google is also looking at electronic media planning and buying models, which can be accessed through the web.

Google has also concluded a billion dollar deal with AOL and Time-Warner has indicated in internal memos that it planned to co-operate with Google in television, print and other media. The opportunity exists, although it is doubtful if the traditional Time-Warner operating company verticals will be easily persuaded to give up on digital expansion and opportunities to meet their budgets and targets. It also offers, through Google Analytics, a free analytical service and 'new' CEO Larry Page is investing heavily.

Top US websites ranked by unique visitors

Rank Domain
As at January 2011
Chart showing unique visitors to social networking sites as facebook UV's, Myspace UV's, and Twitter UV's in millions from Jan 09 to Jan 11
Chart showing Group buying/couponing takes off per million unique visitors and by and

In 2006, Google made Rupert Murdoch’s purchase of MySpace a stunning success with a $300 million per annum, three-year deal for internet revenues. This against a purchase price of around $680 million. And then it overcame its lack of success with video by buying YouTube for $1.65 billion, despite little or no revenues and a bunch of copyright lawsuits, part of which were solved by making three music companies momentarily YouTube share owners and $50 million richer on the morning of the sale. Finally, it gave Warren Hellman and Hellman & Friedman a return of 800-900% over two years on DoubleClick, paying over $3 billion – 10 times revenues and 30 times EBITDA. Entry to the first round of the auction was 13-14 times EBITDA, which we could not reach. Through DoubleClick, Google may control more than 80% of targeted and contextual internet advertising, along with much valuable client and publisher data.

This last transaction awoke the dragon. Microsoft initiated a heavy response, not only on regulatory fronts, but from transactions, too. 2007’s rumours were confirmed, as Microsoft bid for Yahoo! (and then partnered with it in search), aQuantive and others. Already, Yahoo! has paid an infinite EBITDA multiple for Right Media. Sane strategic moves or irrational exuberance?

All in all, Google has opened up an attack on many fronts. Perhaps too many, particularly when you consider the other theatres it is fighting in, such as book publishing and robots to the moon. One gets the impression it was throwing a lot of mud against the wall to see if any sticks – maybe confining itself to search and mobile search would be best, as it now seems to be doing. It also needs to deal with the threat from Facebook which now surpasses Google in usage if not, most importantly, in revenue. Yahoo! has a different approach, working through its agency partners and believing in the power of people, rather than Google’s greater focus on technology. Certainly, the combination of Microsoft and Yahoo! in any way has brought greater balance to the markets. Our clients and our agencies favour a duopoly rather than a monopoly. Google’s poor handling of Chinese government relations and withdrawal from the Chinese market and issues in the EU with business practices, specifically in France, Italy and Germany, do not help, along with Federal Trade Commission issues over the AdMob acquisition in the US. The latter reflects the emerging battle between Google and Apple, highlighted in recent press articles that cover the increasingly fractious relationship between the companies that are both collaborators and competitors –another example where Google has become a frienemy.

Perhaps, one of the biggest threat to Google is from within. As Warren Buffett once pointed out, if Google was worth $250 billion then (more than his own Berkshire Hathaway and in the top three US companies by market capitalisation after only 10 years), it would have to be worth $350-400 billion in two or three years to justify that valuation. After that comment, Google’s market capitalisation fell, although it has now recovered significantly. It may be the frustrations of an 80-year-old (and friend of Bill Gates) fuming that it took him 40 years to build a company to a value of $200 billion – rather than 10 years. What’s more, Sergey Brin and Larry Page were worth $14 billion each and only in their mid-30s.

In any event, recent data on click-through rates makes even Google look mortal and volatility of market value on this scale threatens internal motivation and loyalty. Bright young computer engineers may be tempted to try venture capital opportunities in Silicon Valley, rather than continue to hold vulnerable equity. The answer to the question whether Google is a frienemy or froe, is probably both. Short-term friend, long-term foe although, more recently, Google has become a friendlier frienemy to us while making more frienemies on the way. Finally, the regulatory threat is growing with decisions and reviews on both sides of the Atlantic indicating governmental concerns with monopoly-like market shares and privacy concerns.