For the past nine months the financial and Internet world has been watching Google in anticipation of what could be the largest Initial Public Offering of stock in history. If you are reading this column and have not been living on Mars for the past year, you know that Google is about to go public, and soon. The stock options are being offered to investors using an unorthodox method known as a Dutch Auction. The site taking registrations and bids is scheduled to close tomorrow at 5:00PM, Eastern Daylight Time.
Google has faced unprecedented observation as interest in this offering is reminiscent of the hype of the early dot-com era. Dispite a week of setbacks which included revelations that Google illegally issued stock-options in previous years and a multi-million dollar patent settlement with rival Yahoo, the IPO appears to be going forward. The bidding, which is limited to citizens of the United States, is expected to range between $108 and $135 a share. If shares trade in that price range, Google and its current shareholders could see as much as $3.4Biliion, placing the overall value of the company around $32Billion – $35Billion. Google recently added 1.1Million shares to its offering but has allotted them to Yahoo in order to pay for a technology licence to continue displaying AdWords in a settlement of a long-standing patent suit.
With so much energy focused on all things Google, perhaps this is a good time to review a few questions investors and search engine marketers should be asking themselves. What is this IPO really about? Why is Google issuing this IPO at this time? Why is the world so focused on one search tool? What are the repercussions for Google and/or its investors if the stock goes south? Might this move signify a major change in the operations of Google?
It’s All in the Context
Let’s get an important point out of the way quickly. At the Search Engine Strategies Conference held last week in San Jose, journalist and search engine guru Danny Sullivan stated that paid, contextual advertising through Overture or Google AdWords cannot be thought of as “search”. These are the ads that appear beside the organic (free) results under specific keyword phrases, or are delivered to another website or newspaper based on keywords found in the displayer’s content. I believe Sullivan is quite correct in his pronouncement. Information delivered through a contextual advertising program is not the same as a reference from a search engine. Interest in Google’s IPO is driven by the financial growth supplied by paid-advertising programs, not because Google produces strong and relevant organic search results. Google may have a better organic algorithm or a worse organic algorithm than its competitors but it’s the advertising dollars that are being counted by potential investors. Pure search is merely a loss-leader in the eyes of both the investors and the executives at Google.
Get Big or Get Beat
Google is inviting investment money at this time in order to bulk up for a fight for dominance against Yahoo and MSN. The paid-advertising market is projected to be valued between $6Billion to $12Billion annually by 2009. With revenues falling in other areas of the tech marketplace, search engines and paid advertising are seen as one of few bright spots in an otherwise overstocked sector. The old adage stating “you have to spend money to make money” only works if you have as much money as your nearest competitors. Google is trying to grow as large as Yahoo, at least on paper, in order to defend their #1 status amongst search engines. Industry watchers expect MSN to release its proprietary search tool sometime this autumn though Microsoft is notorious for its delayed delivery dates. When it is released, MSN Search is expected to have a major impact on the sector.
Everyone Loves Google
Due to loyalty amongst North American users, Google continues to be the most used search tool on the Internet though it is losing ground to Yahoo and MSN. Last week, Neilson NetRatings published user numbers for the major search engines for Search Engine Watch. According to the June 2004 survey, Google produced results for about 41.6% of searches either through Google itself or another engine purchasing results from Google. Yahoo accounted for 31.5% of results with MSN responsible for 27.4%. Last year, the numbers were very different with Google accounting for almost 76% of all search results. At that time, Google was serving results to Yahoo in a deal that expired at the end of the first quarter of this year. While Google may not have lost any direct users, it has lost a great deal of influence over the distribution of search results. Even as Google loses market share, the hype surrounding all things Google remains. The word “Google” is a culturally accepted noun, verb, adjective, and pronoun, depending on how it is being used in a sentence. I am hard pressed to think of any other business name that has ever archived such linguistic status.
When Bad Things Happen to Good Search Engines
The greatest question in my mind is what happens to the tech sector if Google’s stock faces a major downswing in share prices? Many are watching this IPO in the hopes it will spark investment in other facets of the technology sector. Unfortunately, those watching from the sidelines hoping for a bit of financial action in the future may be terribly disappointed with the results of this auction. There have been a number of factors in the past month that make the larger investors wary of Google’s stock.
The first is the settlement with Yahoo regarding the Overture/AdWords patent dispute. While this matter was settled this week, investors were still faced with an ugly scenario that may have sapped a massive portion of Google’s annual revenue.
Last week the world was treated to the revelation that Google had illegally distributed millions of shares to employees and contractors over the past three years. The issuance of these shares was illegal as they were not properly declared with the Securities Exchange Commission. Google has offered to purchase these shares back at the value they were bought at, but given the hype about the IPO, there doesn’t seem to be a lot of takers.
Google has faced derision from Wall Street types who speak a different corporate and cultural language than Googlites do. From the day Larry and Sergey filed their IPO documents to the most recent Investors’ roadshow, Google presentations have disappointed representatives of the major investment houses. Individual investors have been made wary by the lack of information provided regarding growth strategies and long-term financial projections. All investors, regardless of size or scope are wary of a multi-faceted company where the vast majority of revenues come from only one source. The investors Google is looking for are not responding as the hype suggested they would.
The last reason I believe this stock will go south sooner than later is the method of receiving bids through the Dutch Auction format. With more hype will come stronger speculation, likely driving the price above realistic values for shares of Google. Many investment analysts have stated that Google is more likely worth $50 – $75 per share, almost two to three times today’s share-value of chief rival Yahoo (YHOO: $27.42/share on Nasdaq). If share prices for Google are forced upwards by hype-fueled bidding, the cost per share is likely going to drop over the coming months.
California Culture Shock
Finally, will this issuance spark a different culture or tone from Google? I believe that has already happened, though I think a change of culture at Google was inevitable. The nature of the search industry is changing as larger advertising and public relations firms move into the field. A few years ago, Google represented the greater culture of the Internet by being creative, playful and extremely intelligent. The #1 line in Google’s corporate ethics policy states “Don’t Be Evil”. While I highly doubt Larry Page and Sergey Brin have “evil” intent in their hearts, both are more than intelligent enough to not only see the future of “search” but to exercise some control of the direction that future will take. Once Google committed itself to contextual advertising revenues, the dye was cast and the color of that dye is green.
I would like to close this section with two well known quotes. The first comes from the English author Samuel Butler, “It has been said that the love of money is the root of all evil. The want of money is so quite as truly.” The final quote is from the American poet, Ralph Waldo Emerson, “Every sweet has its sour; every evil its good.” Regardless of what happens behind closed doors at the Googleplex, Google will continue to provide strong, free results as long as Internet users want them to. What we are seeing is akin to the maturing of a good friend from high school. It’s funny how we look at our old buddies and think they have sold out just before we go home, fire up the BBQ and check our own portfolios.