Just How Powerful Is Google As A Benchmark For the Technology Sector? Its CFO Casually Remarks That Organic Growth Is Slowing Down And Before You Know It Stock Markets Around The World Head Seriously South

Philip M. Stone March 1, 2006

After giving a fairly bullish presentation on Google’s future financial prospects the words that came next from the company’s chief financial officer at an investor’s conference almost seemed like throwaway lines: “Clearly our growth rates are slowing,” George Reyes said. “We are going to have to find new ways to monetize the business.”

And quicker than you could have gone to the bathroom and back some $15.3 billion (yes billion) got knocked off Google’s stock market valuation before recovering somewhat. And those stock markets around the world still open, particularly the Europeans, took a nosedive. What a good day’s work for the chief financial officer of the technology sector’s benchmark company!

It’s the second time this year that investors took flight when they thought Google news was not good. The first time was in January when no sooner had its shares hit a record $475.11 than Google announced 4th quarter earnings that did not exceed expectations and projections for future growth, while good, that were not at levels seen in the past. The result -- a one-day 8% sell-off -- and by the time the Merrill Lynch conference started in New York a month later the shares were down about 20% for February. And then Reyes merely reinforced the January outlook.

With a share that was still selling at around $390, and with the experience just a month earlier how quickly a sell-off can occur on what is interpreted, rightly or wrongly as more bad news, only the very strong of heart could sit on their hands. Reyes had not really said anything that wasn’t out there anyway, and its future earnings projections were already factored into the share price with its resultant February 20% drop, but it seems hearing Reyes say it again put the question in some minds whether the share price was still too optimistic. 

Many investment houses went out of their way after Reyes’ comments to try and calm investors and say this was really nothing new and that helped to bring the share price back although it still closed down on the day 7.11% at $362.62 – down $27.76 and some $113 off its January high. It takes the very strong to get involved in that share!

And one shouldn’t forget the projections flowing as Google his its January high that it would eventually hit $2,000 a share. What a roller coaster ride that’s going to be!

But since Reyes has reinforced that organic growth is slowing for its search-linked web advertising business that currently provides about 99% of its revenues  -- $1.4 billion earnings in 2005 -- and that the past’s growth in the core business probably cannot be repeated, then it’s a fair question to ask how else is Google going to increase revenues at the pace investors are banking on seeing?

The immediate answer seems to be that Google has its eyes firmly focused on the mobile industry – phone suppliers and phone operators – and also on traditional media (no. not a misprint, Google is getting involved with advertising on radio, television, newspapers and magazines).

On the very day Reyes sent the markets reeling, Google in London announced a deal with Sony-Ericsson (S-E) to incorporate its Web search and blog features into three S-E mobile phone models.

The phones will be able to launch Google web search options and also users can post blogs to the Google-owned Blogger site.

That deal followed a revenue-share deal announced two weeks earlier with Vodaphone, the world’s largest multi-country mobile phone operator. Google will supply search services to Vodaphone’s 3G services and although Google won’t be the home page – it is in its similar deal with T-Mobile -- it will take just a few clicks to get there.

And again on the very day that Reyes shocked investors, Google announced a new Google News service designed specifically for mobile phones. Available in the US to start, only news sources that have actually designed viewing for a mobile phone will be listed, according to Google’s mobile web site. Bedsides general news, its categories will include business, science and technology, sports, health and entertainment.

And Google has several innovative deals cooking with traditional media. 

The Federal Trade Commission has just approved by far its largest traditional media investment --Dmarc Broadcasting. The company’s software connects advertisers directly with some 5,000 radio stations through an automated platform, simplifying the ad-sales process and placing ads in what would otherwise be unsold inventory. Dmarc cost Google $102 million, but if revenues approach what some people in the business believe they could, then there would be further payments to Dmarc’s former owners that might approach $1 billion.

It has gone to entrepreneurial basics with print, having made deals with several magazines to buy directly advertising space at the best negotiated rate it could obtain, and Google in turn auctions that space directly to its clients. If those clients pay more than Google paid, then Google wins, if they pay less …

With newspapers it is experimenting in buying small advertising blocks in the Chicago Sun Times that look similar to Google Web-based search ads and, again, is auctioning that space.

For television Google has opened an online video store that sells repeats of shows that appeared on CBS and PBS.  But the company is more interested on the set-top boxes that are more prevalent for digital delivery. If those boxes could provide demographics about individual households then advertisements could be targeted to individual households. Those with babies and young children, for instance, would see toy ads while senior citizens will learn about the benefits of prune juice; those who enjoy the sporting life will see lots of sporting equipment whereas the stay-at-homes will learn about home improvement, and each house on a block will get a different mix.

But almost all of this is new marketing and it will take some time for any of it to really catch on in a big way as search advertising did on the web. But the company at least is showing that traditional media and mobiles are additional new markets for spreading its advertising umbrella.

The question is how patient will investors be to find out if those new markets will really pay off at expected levels?

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