Global Trend

A New Internet Boom Epitomized by Google Is Dawning

Very few companies get to a point where their names become both a noun and a verb in everyday parlance. In the 1960s, Xerox achieved that feat. But, the only company to come close to that achievement in recent times is Google.

To Google something, of course, means to perform a search of the Internet for that item. And, the incredible popularity of this activity has made Google, the noun, twice as big as its nearest competitor, Yahoo.

An article in BusinessWeek likens Google to “a new financial planetary system” with “the gravitational pull to draw in a host of institutions.” As such, Google is on the leading edge of the build-out phase of the information revolution. This technology revolution began in the late 1970s with the introduction of personal computers and is now entering its most economically important phase.

Google, Yahoo, and Alta Vista were launched during the “Internet boom” of the 1990s to address the information overload created by the World Wide Web. Google clearly won, with Yahoo! taking second place. Alta Vista is still around as a distant also-ran.

And while hundreds of other Internet business models crashed and burned, Google’s growth and success have been astounding. Its secondary stock offering, introduced September 16th, has raised not only another $4.2 billion but also the curiosity, greed, and fear of a whole host of competitors, potential investors, and companies that would like to be acquired by the giant. And just as Microsoft and Intel created a business eco-system called WinTel, Google appears to be creating its own business eco-system.

This, among other factors, sets the stage for the next major phase of the information age. Let’s review a few of its opportunities and the ways that other players might benefit.

The original dream of Google’s ambitious founders, Sergey Brin and Larry Page, was to organize all the information in the world. According to a recent article in Wired Magazine, the company may be on the verge of doing that and much more.

The key to Google’s competitive advantage is its success-to-date in becoming the preferred pathway from most users to the resources of the Internet. With the world shifting from bricks to clicks, this is an enormously attractive position. Because of this favored position in the minds of consumers and businesses, Google appears to be positioned to compete in some way with nearly every company ? from Amazon to Comcast, and from eBay to Microsoft.

Comcast and Yahoo! are worried, because Google has been compiling a vast database of network television programming. While Google Video is not yet competitive, it could become an entertainment giant. Analysts are watching closely to see if Google will acquire an asset, such as TiVo, that would enable it to turn this potential into big profits.

So far, however, Google has not been involved in big acquisitions. Most of its deals range from $10 million to $30 million.

To date, Google has relied more on strategic partnerships. Comcast, SBC, Verizon, and AOL are all made nervous by Google’s partnership with Feeva, Inc., making it a candidate for a grand entry into the wireless market. In 2005, it created hot zones in San Francisco that allowed any user with a WiFi connection to go on-line. When users connect to the Internet, Google appears as the start page. If Google positions free Wi-Fi hot zones in other major cities, it could dominate the advertising market and target customers with great precision.

Last year, up to $400 billion was spent on advertising, but just $10 billion of that went to on-line ads. The Yellow Pages generates more revenue than that, while newspaper ads rake in five times that amount.

According to BusinessWeek, people are now on-line for 30 percent of the time that they used to spend reading newspapers, watching television, or listening to the radio. Since the Internet is receiving just 2.5 percent of all ad revenues today, this situation represents an enormous discontinuity that is ripe for exploitation. If Google can successfully position itself to garner a significant share of that market, it could dominate the build-out phase of the information revolution, perhaps even more so than Microsoft did in the growth era of personal computers.

In fact, Google may be preparing itself for a head-on battle with Microsoft by turning the Internet into an operating system. It has gone on a recent hiring spree, snapping up the best browser and operating systems engineers. Sources say that Google is creating a Linux-based OS to run on the Internet. It has even hired the designers of Microsoft’s own strategy for a Web operating system.

On the browser side, Google has hired the best developers from Firefox, the most highly regarded competition to Internet Explorer. This is not to say that Google will dislodge Microsoft without a bitter struggle, perhaps one that lasts many decades. But if Google can move in to steal the customer’s desktop, it could certainly shake up the balance of power.

Can Google leverage its remarkable success without destroying or diluting the brand?

It’s certainly trying: It introduced the Google desktop last year so that you can search the entire contents of your PC. The program automatically indexes everything on your hard drive so that you can find files by name or content. In short, it does for your computer what Google did for the Web: makes it far easier to use.

Google also recently ? and quietly ? acquired Android, a start-up that’s developing an operating system for mobile phones. Google subsequently announced its intention to move into VOIP Internet telephony. Google co-founder Larry Page has talked for years about Google moving into mobile phones and using them to access the Web. Its acquisition, last May, of a company called Dodgeball, which lets users create social networks with mobile phones, seems to fit this strategy.

Google also bought into a company that sends broadband through power lines. Since telecom is a $1 trillion industry, the battles to dominate it will clearly be intense ? and lucrative for the winner. And, it looks like Google will be at the center of the fight.

Finally, in a move that has put everyone from eBay to Monster.com on alert, Google Base was introduced in November as a site where anyone can upload anything to become part of a giant searchable database. This sets the stage for Google to take on the classified ad and peer-to-peer selling models of Craigslist, eBay, and others, according to a report by the Associated Press. If people flock to Google Base, it could make everything instantly available, from recipes to DNA profiles, and from used cars to jobs.

Given this trend, we offer the following five forecasts for your consideration:

First, be prepared to see the world of advertising completely revolutionized within the next five years. Print and television are being squeezed, and as more people migrate to the Net, ads will follow. There is no denying that those who can create the best technologies and techniques for ads in that medium will be the big winners of tomorrow’s ad revenues. The advertising world will also evolve away from “mass media” approaches and toward a highly targeted model. Google, with the right partners or acquisitions, will be ideally suited to take advantage of that transition.

Second, in the short term, Google’s sheer size, along with its peculiar style of investing, is going to change the nature of the venture capital business. In the 1990s, VCs would help start-ups grow large enough to cash out with a successful initial public offering. Today, more and more of them are trying to build up small companies that might fit into Google’s portfolio, or the portfolios of companies battling Google. In fact, businesses are actually being founded with a view toward selling them to the giant, and the VCs are receiving more and more pitches that include an exit strategy named Google.

Third, Google probably won’t succeed in dominating all the businesses in which it seems interested today, but this much is certain: Its presence will intensify the competition for everything from peer-to-peer sales models like eBay’s, to telephony and entertainment. But by being the lightning rod at the center of this competitive frenzy over the next five-to-ten years, Google is likely to spread itself too thin. The signs of strain are already showing. As reported in the New York Times, Google Base takes 10 minutes to process data. Craigslist, the popular free classified ad site, takes less than a minute. And Google Analytics, designed to measure and analyze Web traffic, can take up to two days to deliver its stats. Today, Google is teetering on the brink of either stupendous failure or enduring success. Worst case: By attempting to have everything, the company could risk winding up in the dustbin of history.

Fourth, while Google may prove to be the biggest strategic winner in the coming build-out phase of the information revolution, the Trends editors doubt that Google stock is a wise long-term investment, today. With a price-earnings ratio of 70 and a stock price that’s gone from $85 at its August 2004 IPO to $428 in a year and a half, the upside potential we’ve discussed is already built into the stock price. And, while Google stock is likely to go up from here, it’s also likely to plunge at some point; the winners will be those who know when to get out. Our forecast is based on an understanding of economics and history: It’s easy to forget the other giants that have been brought low by miscalculations. In 1999, Yahoo enjoyed a market cap of $115 billion and was pondering an opportunity to buy eBay. It passed on that deal and today has lost more than half its value, while eBay’s value has grown and grown. Similarly, Google recently had the opportunity to buy Skype Technologies, the biggest player in the new telecom world of VOIP. Instead, it sat back and watched as eBay bought Skype for $2.6 billion. If Google continues to exhibit cold feet in such rich areas, it could be heading for the same fate as Doubleclick, once the darling of Internet ads. While Google has enjoyed a stellar business reputation for years, journalists have recently begun noting a “newly arrogant attitude.” It was not a compliment when the New York Times dubbed it “the new Microsoft.” For the best returns, look for companies that are out of favor: in other words, contrarian opportunities. Companies like Google that get all the attention quickly become overvalued. According to Rick Summer, equity analyst for Morningstar Inc., and as reported in The Boston Globe, the “fair value” of Google stock is only $254. “It shouldn’t be trading where it’s trading,” he said. “I don’t think Google is a company that should be approaching the market value of IBM, and that’s what it’s doing. They haven’t had a chance to stumble, but they will stumble.”

Fifth, expect a protracted battle for dominance of the information revolution through 2012. The result will be the emergence of a new mix of dominant companies in their respective fields. It is unlikely that a company with a long history in one field will make the successful transition to a completely unrelated field. For example, don’t expect Google to become the leading phone company, or Microsoft to become the #1 search engine. Most likely, we’ll see telecom companies delivering more and better kinds of services through improved technologies, while entertainment companies learn to provide content to those who can deliver it in new ways. In short, after many expensive trials and errors, the revolution will reach maturity; the companies that survive will retrench to their core businesses, and they will simply battle it out over who can perform each function best and at the most attractive price. The big winners will be consumers who will get more and better products and services at ever-lower prices.

References List :
1. BUSINESSWEEK, December 5, 2005, “Googling for Gold,” by Roben Farzad and Ben Elgin, with Catherine Yang. ⓒ Copyright 2005 by The McGrawHill Companies. All rights reserved. 2. WiIRED, December 2005, “Who’s Afraid of Google? Everyone,” by Kevin Kelleher. ⓒ Copyright 2005 by The Conde Nast Publications, Inc. All rights reserved. 3. BUSINESSWEEK, December 5, 2005, “Googling for Gold,” by Roben Farzad and Ben Elgin, with Catherine Yang. ⓒ Copyright 2005 by The McGrawHill Companies. All rights reserved.4. THE ASSOCLATED PRESS, November 16, 2005, “New Project Expands Google’s Rech ? to Nearly Everything.” ⓒ Copyright 2005 by Massachusetts Institute of Technology. All rights reserved. 5. THE NEW YORK TIMES, November 26, 2005, “Big Google Becomes Big Target,” by Dan Mitchell. ⓒ Copyright 2005 by The York Times Company. All rights reserved.6. THE NEW YORK TIMES, August 24, 2005, “Relax, Bill Gates; Its Googles Turn as the Villain,” by Gary Rivlin. ⓒ Copyright 2005 by The York Times Company. All rights reserved.7. THE BOSTON GLOBE, December 5, 2005, “Fidelity’s Bullish on Google Stock, but Will It Last?” by Robert Weisman. ⓒ Copyright 2005 by The York Times Company. All rights reserved.