Friday, January 27, 2006

Google: “Our Thesis is Still Intact”

"As you know, we're in the middle of a transition in search advertising business, moving from Yahoo's platform to our own proprietary ad platform called MSN adCenter, which we began testing in the US during the quarter."

When you hear somebody start a discussion with the qualifier “As you know,” you brace yourself for news that is not-so-great, and that’s how Microsoft began its discussion of search results at Microsoft Network on last night’s call.

The bad, though not-necessarily-unexpected, news came in the next sentence:

"The ramp-up of a new ad platform requires significant investment from Microsoft, both in development costs as well as in reduced revenues related to fewer numbers of overall advertisers and the resulting lower keyword pricing."

In other words, Microsoft’s online search business, in the midst of the biggest boom in the history of the world, was down year-over-year and flat sequentially. Readers should keep in mind that Google is expected to show 100% year-over-year and 20-25% sequential growth when it reports earnings next week.

After a company like Microsoft, with so many hopeful investors eager for a hint of past glory, drops that kind of news, you should expect some positive spin in order to leave the masses feeling more upbeat—after all, Yahoo! got smashed last week after reporting “only” 13% sequential search growth.

Microsoft obliged as follows:

"The good news is that in response to our platform has been great, and we are ramping up deployment by rapidly on-boarding advertisers and moving more search traffic to the platform."

Microsoft may be ramping up advertisers, but that doesn’t mean it is ramping up the customers that actually use Microsoft Network. I know one individual who has shifted his entire email business away from Microsoft Network to Google’s Mail product; and based on the increasing numbers of emails I receive from “” addresses, it appears I am not alone.

For that reason, and because of the fact that Microsoft's entire reason for existing is not to create the greatest search product but to drive people to buy Microsoft operating system software, I doubt Microsoft will win the search war, no matter how much money it throws at the business.

Now, Google may or may not be a good investment, stock-wise. I have been a fan of the company for some time, but reasonable people can disagree on the company’s prospects and the stock’s valuation. In any case, much ink, both real and digital, will be spilled in the next few days trying to game the company’s fourth quarter earnings report, due out next Tuesday after the close.

A few weeks ago I highlighted a press release (“The Most Interesting Press Release You Didn’t See”) from FTD Group, the flower-delivery organization that utilizes internet search advertising to generating a significant portion of its business.

In the release, FTD said that online search costs had “increased significantly,” causing the company to curtail its use of the medium and ponder “a more diversified marketing portfolio.”
It looked like search—for FTD, at least—had reached the limits of its marginal utility.

In response, I received a number of comments, some agreeing with the FTD experience and others disagreeing entirely. Feedback from friends whose businesses utilize search for a significant portion of their customer acquisition were likewise mixed, although more indicated that the bills they paid to Google were still increasing than not.

Just yesterday, however, another data point emerged in the search-cost conundrum, squarely on the side of Google.

1-800 (yes, that’s the actual name of the company) reported 21% revenue growth, as well as continued dependence on, and effectiveness of, search-based advertising:

"During the quarter we attracted more than 1.3 million new customers with 57% of them coming to us online, up from approximately 1.2 million and 54% in the second quarter of last year….

"Certainly search is an expensive yet effective marketing vehicle for us, one of our overall marketing channels. We did not see any spike in costs this holiday season. Actually, this past holiday season, search costs were comparable to last year's holiday season."

I hesitate to extrapolate from this any firm conclusion about next Tuesday’s earnings report from Google.

However, I suspect—to use one of Wall Street’s Finests' favorite, most clichéd, and least informative old sayings, “Our thesis is still intact.”

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


DaleW said...

However, I suspect—to use one of Wall Street’s Finest favorite, most clichéd, and least informative old sayings, “Our thesis is still intact.

Blech. Wall Street's finest have never been the most literate lot, but this is one of the poorer cliches used. A thesis is proven ex post facto while a hypothesis is still a theory about the future.

Another problem I have: The adjective "upbeat." Why is a management presentation never anything but "upbeat?"

hundredyearstorm said...

Interesting take on GOOG from a Yahoo! search employee. Obviously one must take his comments with a grain of salt, given that he is in direct competition, but some of his points are salient.

Its_strange said...

Doesn't MSN run CNBC's website ? Either way i have never found that a interesrting site. It amazes me how MSFT has just blown this internet stuff .

Want Wall Street's finest ? How about CSFB's H Terry's call on TTWO . Can't file the 10K so he starts in about TTWO going up forsale..Good work Herb

rvb1977 said...

Good read. I cannot fathom how people continue to hold onto MSFT as this super-company. It's stuck in their minds. In operating systems - it rules. One day it won't, and we won't see it coming...just like Wal-Mart vs. Sears years ago. What we can't fathom ultimately happens. Google is killing Microsoft, and MSFT cannot win the game (although CNBC's website is pretty useful -IMO - for a few things like the super-fast earnings calendar). I am still confused how Yahoo sticks. Who uses it? Yahoo to me is a clear #2, and there's alot of distance. Maybe they should adopt the Avis marketing strategy - We're #2! (thereby creating an association that they're close to google?)

Aaron Koral said...

Hi Jeff - watching GOOG's earnings estimates ratchet upward to around $1.75 this quarter (12-2005) over the last 30 days is interesting to note. If GOOG's reported EPS is above analyst estimates, GOOG's share price should "pop" upward yet again.

One other interesting factor will be to see how GOOG's revenue growth breaks out (i.e., what percent is from GOOG's web sites as opposed to GOOG's network web sites). IMHO, I think revenue growth is "slowing" just a tad with GOOG's web sites while the Y/Y revenue growth rate is up significantly for GOOG's network web sites...I could be wrong, though.

Jeff Matthews said...

Aaron: on the other hand, the fact that estimates are moving up in front of the quarter makes it harder for the sort of "Beat and Raise" quarter the so-called analyst as Citibank is now expecting.

Its_strange said...

I just got back from Manhattan . I was checking out the fire at TTWO's place at 575 Broadway ...You guys realize TTWO moved most of thier office people across the street to 622 Broadway a few years back and claimed the bill was over $4 million . 10 men could have moved the entire building at 575 to 622 Broadway in a few days. And all they would have needed was a dolly . The stink coming out of TTWO is just amazing...

SiamTwin said...

We remain constructive on the company after management provided more color and greater granularity to the investment community in its latest conference call.

Its_strange said...

Maybe you pros at this stuff can help ....Steven Tisch ( NY Giants , film producer and general fancy pants ) is on TTWO's board and has been for years now. He also owns a ton of Oppenheimer and Fidelity funds ..Now i'm to dumb to list all the issues surounding TTWO but what is Fidelity and Oppenheimer doing owning some 40% of TTWO ? Two funds that TTWO director Steven Tisch owns big time own 40% of a stock who's " Rap Sheet " ( that was Roddy Boyd in Saturdays NY Post ) include hidden porn scense , late filings , accounting scandals and earning restatements ? And there are more issues.......Why is Peter Brant ( another fancy pants ) and Tisch getting a free ride here ? Something is so wrong here yet these smoothies just walk ...I don't get it ....Question for anyone ...Was Oppen and Fido trying to squeeze the shorts at Tisch's request ? Did Tisch just ignore his job as a director so he might benefit by Oppen and Fido playing games with others people's money ? This story has been around along time but i think it really has just started

Its_strange said...

I was in the Navy and the number one concern is fire. Most weren't trained to use a gun but ALL were trained to put out fire. I know alittle about fire and the cause of the fire at TTWO should have been identified and announced 1/23 or 1/24 yet we still haven't heard a thing