Archive | GOOG RSS feed for this section

Google’s Management Presents at dbAccess Media & Telecom Conference (Transcript)

6 Mar

Executives

Nikesh Arora – Senior Vice President and Chief Business Officer

Analysts

Ross A. Sandler – Deutsche Bank Securities, Inc.

Google Inc. (GOOG) dbAccess Media & Telecom Conference Call March 5, 2013 1:10 PM ET

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay, we’re going to get started. If everybody can take your seats and quite down a little bit, that’d be great. So we’re very excited to have Google here with us today for the keynote. For those of you that I haven’t met, I’m Ross Sandler, Head of the Internet Research team here at Deutsche Bank and we’ve got Nikesh Arora, SVP and Chief Business Officer, basically, the guy in charge of all the revenue that Google is generating globally here to talk about trends.

So before we get started, Jane is going to give some of the legal disclaimers and then we will hop in.

Jane C. Penner

Hi, everyone. I am Jane Penner, Director of Google’s Investor Relations team. Just wanted to read the safe harbor statement.

Before we begin, I would like to note that our comments and answers to questions may contain forward-looking statements regarding Google’s business outlook. Our actual results may differ from those made in any forward-looking statements due to a number of risks and uncertainties. These risks are detailed in our public filings with the SEC. Also please note that a webcast replay of this session will be available on our IR website in a few hours. We routinely post important information on our investor relations website located at investor.google.com. We encourage you to make use of the three charts.

With that, I will turn it back to Ross.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Thanks Jane. Okay, so Nikesh thanks for coming. I thought what we’ll start with is, what we would like to start with is all of the company, just can you characterize what you guys are seeing right now in terms of macro trends, advertising demand globally across your course of the business, are things any different, better, worse than where we were three, six months ago?

Nikesh Arora

I can talk about what happened in the last quarter. I don’t think I can talk about this quarter.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Sure.

Nikesh Arora

I think it’s fair to say that there are two effects that happened in our business. One is the cyclicality of the advertising markets, usually the fourth quarter is where a lot of advertisers are trying to attract users into their systems because of Christmas, because of retail et cetera, but also the second effect is obviously the shift that we continue to see from the offline advertising world into the online advertising world, because the online audiences continue to grow around the world whether it’s in emerging markets or in existing markets. So I think we’ll see both of those combinations and I feel we did see a dampened effect of economic events that are on the road. So various parts of Europe end up being weak, what’s going on economically over there, so a reasonably robust response in the United States, reasonably robust response in various – sort of larger parts of Europe. So it’s mix buy, but I’d say it’s pretty much days locked up with the economic impacts that we’ve seen around the world.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay. And you talked to a lot of the agencies and advertisers directly all the time, have any of the more recent kind of European issues or the tax policy changes in the U.S. had any impact in your revenue with their decision-making, they’re thinking about 2013, can you comment to this?

Nikesh Arora

I think what’s fair to say is that if you and I were sitting here two years ago, to add to this point of view that, things go from a nice-to-have to a must-have. And when things go from a nice-to-have to a must-have, you usually see good business and good acceleration. And it works both in the consumer side and the commercial side. And you can trace this back to digital cameras, you can trace this back to mobile phones, you can trace this back to Google search. When things are nice to have, most people can make a choice, saying that’s interesting, I’m sitting in the room. It’s nice to have a mobile phone, but I don’t need it, it’s not a must-have, it’s nice-to-have Wi-Fi but I don’t need it. It’s nice-to-have digital camera, but I don’t need it. But then comes the point, an inflection point, or we say, wait a minute I can’t live without Wi-Fi connectivity. I can’t live without having a mobile phone. I can’t live without it. And I think the big trend from an advertiser perspective that has happened in the last two years is, it’s very hard to talk to a rationale advertiser or a rationale business person, and have them say, I don’t need to be on the web. I don’t need to be in digital advertising. So I think the turning point is that, where most advertisers say they understand that most of that are in the web, most business is on the web. And within that category, I think it’s fair to say that more recently talking on the end of Q4 of course, more recently video has become one of those things where people are beginning to understand the value of advertising on the webs as video or in mobile. And two years ago, you could not say that about video and mobile, so although some of the formats, some of the opportunities are still nascent, but clearly you can talk to CMOs, you talk to advertisers, and they are beginning to say, yes I want to be online, but I also want to understand the video phenomenon, I want to understand this mobile phenomena, which is good.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay. Let’s talk about mobile since you brought that up. We are hearing mixed data points or seeing mixed data points about the traction that publishers are getting from the mobile web versus the mobile app and this pendulum has swung several times back and forth in the last two years, what are you guys seeing, I mean Larry made some comments in the last call that, he wished the advertisers wouldn’t build mobile specific websites, because you can basically see a regular PC website on these newer devices. So is the pendulum swinging back from app to mobile web or what’s kind of the state of mobile as you guys see it today?

Nikesh Arora

I think it’s fair to say that we’re still very early in this mobile revolution. And I don’t want to get philosophical in this conversation, because you guys like hard facts and hard numbers in these kinds of events, but it’s very hard to characterize mobile. I mean, many of you are sitting, I can see some people with tablets, some people with computers, some people with their phones. How do I distinguish the fact that you are travelling with your laptop, or is that mobile, or is the person next to you using the same thing, you are doing in the laptop, is that mobile. So it’s very hard to start distinguishing what is mobile, what is not mobile.

The way we would like to think about it is that we think of the long-term people are going to interact with a set of services of multiple screens. Some screens will give you context, some screens will not give you context, i.e. if you are interacting with your tablets right now, there is a reasonable probability the service that you’re interacting with notes, you’re in Palm Beach or at the Breakers. Therefore your experience on that device becomes different. Now what you are seeing from an advertising point of view, what you are seeing from an apps versus web site point of view, I think our interim steps in that evolution as people are building products with specific instances. Our point of view is that over the long-term from a user point of view, we want to make sure that services work seamlessly across various screens.

So if you’re using Goggle service the search should work across any screen and if I have context about you I should be able to provide you better experience. If I know where you are I should be able to give you a better experience because location becomes another filter and may be able to provide the service for you. I’m pretty sure social becomes another filter that allows you to cut down all the different optionality you’re having. Also point in time, I think it’s fair to say if you think of the services like Google Now, we should be able to within recent try and take some of the things that you do constantly on the pattern basis and Triumph prompt to you before hand and give you that answer before you ask that question so that’s sort of the long-term point of view from a user perspective.

I think similarly in the advertising side, we just launch the enhanced campaigns, but the idea is that as an advertiser you really are not that keen in trying to understand whether I want to target for us, one is mobile phone, and then app, on a web site, on a tablet, on the screen which is a laptop or is TV what we want to say is did advertisers looking for. We understand computed. What we’d like to do is give you the best aura as possible and therefore we’d like to give you the opportunity to engage with Ross in the most optimal scenario that we think Ross is going to react to is going to react to your ad, whether that’s just browsed on a tablet, whether that’s browsed on a phone, whether that’s browsed with the app, whether that’s browsed on a PC and part of this effort is to try and take the individual screens out of it, try and take that individual product aspect out of it and see how to connect the advertisers and the end-user. Does that a vague enough?

Ross A. Sandler – Deutsche Bank Securities, Inc.

No, it’s helpful. We’ll talk about enhance campaigns as you brought it up. So from people we’ve talked about on this subject on the industry, one of the biggest overhaul that you guys have done to adverse ever potentially. So where would you rank order it in terms of magnitude and for those that unaware of what enhanced campaigns, can you just give me a quick 30 second on what you’re doing with that?

Nikesh Arora

Yeah, sure, I think it sort of ties into what I just said, but I think it’s fair to say in the evolution of our company in the last 10 years on the revenue side. It gone from being a search advertising business, we’ve added display advertising to that, we’ve added mobile, we’ve added video. So we have been doing substantial enhancements to advertising platforms over the years. I think the big thing from enhanced campaigns I think it’s the beginning of the shift in the industry from selling impressions to selling audiences in the long-term, because so far in the past, all of our advertising has been sold.

In the industry, generally speaking on impression, I want to buy click, I want to buy the one DFD website, I want to buy them on Google, I want to buy them on Yahoo!, I’m buying clicks, and clicks are interesting is like I’m buying an impression of an ad in the newspaper or what’s most interesting in the advertiser is who is the person on the other end of that click, because a click where, we’re also trying to buy a Ferrari and then trying to buy a Tesla. It is very important to understand that he is the person who can afford a Ferrari and I can afford a Tesla, but if somebody else clicks, that’s not as useful. So you have to be able to understand the audience, did I get that right.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Yeah except for the Ferrari part…

Nikesh Arora

So the audience becomes very important and what we’re doing is we’re trying to take away the notion of devices, screens and products and clicks away from the advertiser, we’re trying to create that shift as we go in the future to get it more and more closer to audience, then this is one of the steps that allows us to get there, also it takes away tremendous amounts of complexity, because it’s getting more and more complicated, what format should I use or should I target iOS, should I target Android, should I target NAPP, should I target a mobile website, should I target a desktop. And all those decisions where advertisers have to figure out how to figure out the best ROI for themselves. They shouldn’t have to. We have all the data underlined that we should be able to figure out the ROI, and say actually you better off giving $1 in from this system and we should give you the best ROI we can irrespective of screen content device that you have, and that’s a journey we are sort of undertaken this enhanced campaign, those are what do you think is good for the users, is good for the advertisers and good for the market.

Ross A. Sandler – Deutsche Bank Securities, Inc.

And if you look at, say the Ad Age 100 or your biggest advertisers, most of these guys are already, they have got lots of resources, they have got teams of people figuring this stuff out, and they are bidding on smartphones and tablets and then PCs, but when you get into the chunks of revenue for you guys that come from the local business, the smaller business that may not have those resources, so are they actually in mobile today, this smaller advertisers and when they just tell Google any current advert system, sure I’ll take all these devices, do you by default put them in mobile or is that going to change within enhanced campaigns?

Nikesh Arora

I think it’s fair to say that the local or small business revolution in advertising hasn’t happened as quickly as the larger guys. Larger guys get lower volumes, they get lot of in-trade, we have a lot of smaller advertisers in our system. We would like to have a lot more. But I think just taking the same point and trying to sort of think about it, imagine if an off to use example let’s use a pizza example. Right, there is a pizza store down here and the guy is trying to buy a click trying to get somebody to buy pizza, he is more interested in a click which is at 6 pm or just somebody locally whose in a mobile phone, who is within two miles of his store as opposed to a click of somebody 10 miles away or 20 miles away who is sitting at home.

So if you can provide that filter, it’s more likely to create a higher ROI for him, if I can target the ad he wants to those specific people within his vicinity. Now there is two ways to it, either he can develop the expertise to go into our systems and get a very sophisticated about trying to find those clicks or we can say that, I understand based on all the clicks that have happened in the past with the ROI has been and the conversion has been for a click of a guy sitting on the laptop at his house 20 miles away, for this pizza guy there is no point showing his ad to that guy, it’s more relevant if I show this ad to somebody within a mile of him, at 6 pm as opposed to 12 p.m.

So all those decisions, which individual advertisers have to make, have to be taken away from their concepts that they should be able to put $1 amount of this end, and get an ROI at the other end. If you can do that, we’d take a lot of complexity out of the system. Is it all out? No, it’s the first step to getting there, I hope so.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay. That will make sense. And so from our standpoint, if we kind of bring it back up to a high level, we like numbers, we’d like to talk about things this way?

Nikesh Arora

I’m trying to stay away from, see this is the nice attention we have in here.

Ross A. Sandler – Deutsche Bank Securities, Inc.

And not on these specifics, but if you look at the gap, we always talk about the gap, what’s the monetization gap between call it smartphone and PC.

Nikesh Arora

We’d like to call it the opportunity.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Yeah, opportunity.

Nikesh Arora

That implies.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay.

Nikesh Arora

You’re not working hard enough, when opportunity implies that I have tremendous future.

Ross A. Sandler – Deutsche Bank Securities, Inc.

So how big is that opportunity and maybe, if you look back 12, 24 months, you’ve already kind of closed some of that opportunity. How would you characterize the improvements that you’ve seen before going into enhanced campaigns?

Nikesh Arora

So I think you now have a horizon gap to use your word.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay.

Nikesh Arora

I think in the long-term, there’s tremendous opportunity. At today, I think less than 10% of global advertising is online. I think most people who have discretionary income are now online. So the fact is, all the people you want to advertise are on the web, are interacting with online mechanisms of various devices, so I think there is a gap to use your word between what the potential of online advertising can be versus what it is today. I think that on one level we’re waiting for I think the biggest screen that doesn’t have IP connector user TV on global basis. The day the televisions have IP connector that becomes an addressable platform from online perspective; it just opens the door phenomenally for people like us, who are trying to get ready for that day to come.

So I think that gap gets bridged, that’s one way of bridging the gap. The other way of bridging the gap is also continuing to improve the targetability, the efficiency of advertising, so you don’t have to have clicks, serve to people who don’t need to see them and as we see technology, as we see context, as we see various filter showing up, it allows us to get more and more efficient in advertising with those people. And the more efficient you can be the higher the opportunity to use my word. Did that answered your question or not?

Ross A. Sandler – Deutsche Bank Securities, Inc.

No, it did

Nikesh Arora

I did, is that good. I just looking at my IR President making sure I’m doing well.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Now, it’s good. The opportunity I like that, and if we talk about mobile not in terms of the opportunity or the revenue piece of it, but the cost piece of it, so there is some debate out there as to whether because you have gatekeepers like OEMs and carriers and theses types of folks in mobile that you don’t have in an IP-based PC world as those clicks transition from PC to tablet or smartphone that is just west to go around for Google, some of your numbers would suggest that even if that’s happening it’s getting less ad, but how do you think about the profitability of mobile today versus where that was call it 2-3 years ago when you started this journey?

Nikesh Arora

I think it’s fair to say that every profitable dollar of revenue is a good dollar of revenue, right? In terms of this specific aspects of how that shift happens between desktop versus mobile, I think we are fairly comfortable with where our tack is, we understand what our traffic acquisition costs are on the distribution side, on the advertising side, and at the end of the day, we believe we have built this phenomenal advertising ecosystem, which allows us to monetize not just our own traffic, but other people’s traffic. We think in certain cases much better than somebody else can, and that allows us to sort of defray the cost of this large, ad sales force in that business that you have created. So it’s a good thing for us to have a mix of our own traffic and other people’s traffic. I don’t share your point of view in terms of the economics being drastically different between the desktop world and the mobile world.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Good to know. If you look at the amount of well on this mobile profitability subject, the amount of searches that are happening where Google doesn’t pay any tax, whether it would be a consumer that downloads the app themselves or they go navigate in any of these browsers directly to google.com is the incidence of that increasing as you kind of put more Chrome browsers out there?

Nikesh Arora

That question is where I end up in trouble based (inaudible).

Ross A. Sandler – Deutsche Bank Securities, Inc.

Fair enough.

Nikesh Arora

But I appreciate your attempt.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay, on the Android side, so there has been some discussion in the press release recently about OEM relationships, and you kind of got, you got Samsung out there with the tremendous amount of market share, you have Nexus phones being launched with a bunch of different partners, Samsung hasn’t had a Nexus device from what we can tell…

Nikesh Arora

Although current one is an LG device, the one before that was a Samsung device….

Ross A. Sandler – Deutsche Bank Securities, Inc.

How would you characterize the Samsung relationship, and/or your Android relationships, are they healthy today, is there friction?

Nikesh Arora

Well, I like this because a few years ago, when I was sitting at one of these conferences, people ask me, why are we doing Android, and there were perfectly good alternatives out there. So I’m glad, we’re no longer talking about, whether Android is going to be successful or not, so thank you for that.

In terms of the ecosystem, I think part of what Android has done very, very successfully; it has increased the pace of innovation, because most common denominator at a piece of software that most OEMs are using that allows them to innovate them hardware, that allows them to innovate in marketing, allows them to innovate on just execution of distribution, and I think Samsung has done a phenomenally good job, and so have other people in the industry. We have very good relationship with all OEMs, because we have this in biotic relationship right. They like the fact that we innovate on Android. They like the fact that we’re creating an innovation ecosystem where they can all collaborate with us as a third-party, and we also work with each of them individually or at different periods of time to create leading out the experiences in the market.

So we can keep setting the bar a bit higher for everybody else to try and compete with that bar. And we’ve done that successfully with Samsung in the past, we’re doing right now with LG. We have done that with Motorola in the past, so there are different people out there, who we worked with to create a higher bar for innovation in the Android ecosystem, and I think it creates healthy competition, it creates innovation, and generally we’re very happy with the relationships we have with OEM partners.

Ross A. Sandler – Deutsche Bank Securities, Inc.

And you guys have recently launched more products with Chrome operating system.

Nikesh Arora

Yes.

Ross A. Sandler – Deutsche Bank Securities, Inc.

So this is with conjunction…

Nikesh Arora

And also Samsung Chromebook.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Yeah. A different operating system and different set of folks working on that inside of Google. So can you just talk about the different strategies for each and the one thing we hear from various partners with the Android ecosystem is decreasing the fragmentation in the complex, that is something that we’d want Google to help this with over time, does this increase the level of complexity or is this just totally separate? Can you just talk about Chrome and Android together?

Nikesh Arora

I think it’s fair to say that at least in our mind, we have two successful platforms. One is the Android platform and the other is the Chrome platform. I don’t think in the history of browsers there has been such a situation where browsers have come from nowhere and actually created a significant market share for itself over a long period of time, and that’s translating into an operating system that is sort of built for the Internet, it’s build for security et cetera.

So I think it’s fair to say from our point of view, it’s better to have two successful platforms than none, which would have been the case a few years ago if you have not embarked in both of these journeys. We’re still committed to both the platforms; we think they are exciting because they provide once again for innovation in the hardware space that allows us to create better user experiences out there.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay. If we shift gears a little bit, we’re at the Internet Media Telecom Conference here. Can you talk about YouTube and….?

Nikesh Arora

Sure, whatever you want to talk about.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Sure, so YouTube the strategy thus far in the content side has been kind of want have made for Internet approach, and you have full stream videos that are available on a card basis, you haven’t really gone down that path of a subscription or you can [eat] products. What is the content strategy at YouTube today and how could that evolve?

Nikesh Arora

I think it’s fair to say, sort of goes back to our conversation about nice to have a month – in the way I think about it is that, if I ask my 15 year old to look up to find a video, her instinct is just to go search in YouTube first, because she believes that if the video exists out there in the online space, it must be on YouTube, that’s a good thing because that makes you YouTube one of the top three search engines in the world in addition to Google because people believe that if entertainment content is out there, you’re going to go find them on YouTube, so in a way for us, it already is an entertainment platform that people go looking for content and therefore it provides a window to distribution for video content.

As I said the one big tipping point to arrive in the world of online video is going to be when it is going to be very simple for me to watch that video on my large screen at home. Right now I can do it. It requires a little more sort of manipulation in my part to make sure that my Android devices talk to my TV, but I think that becomes very simple as every device out there has a broadband connection behind it. As that happens so let’s keep that on one side, on the other side, if you look at the evolution of content, YouTube in the early days people thought it was majority of videos in YouTube had an audience of one, which is the person uploading it, but now it has changed. We have people who become huge music stars, huge pilot for various television content of today because of YouTube being a huge distribution platform.

There are brands out there, who are using it for promoting the videos et cetera. So we think it’s has become a reasonably robust platform, and we’re seeing that in speed because now advertisers want to advertise on it, not just on the home page of it, but on various videos that are out there.

What we’re beginning to see is that is professional content, which is making its way to YouTube. There is lots of interesting professional content that is out there whether its clips from various majors out there, whether it’s short form content out there, and you’re beginning to see long form content arriving, so you are seeing content happen now.

On our side, we are also trying to stimulate that by getting people to create content for the Internet. That has two purposes; one is to show that it can be successful, but also it is so much easier to do with the right issues with content that is created exclusively for this platform than deal with the rights issues that is for content created for TV because typically a great show is sold 100 times in 100 different countries, with 100 legal contracts with 100 different providers, so it becomes extremely owner of just try and disentangle the rights associated with content that was made in the past for television, but I think as we get more distributions online video, the more you’re getting incentive in the content ecosystem to create product for that distribution, and you’re beginning to see examples of that already and in parallel you get entrepreneurs who believe that they can go achieve fame, achieve critical mass by being on a more global open platform, so that’s a better sense of our content…

Facts About Google

Did You Know?

Ross A. Sandler – Deutsche Bank Securities, Inc.

That definitely helps and where does music streaming fit into this, then there is, you have investment in vivo there has been some discussion of launching a subscription music service, does that?

Nikesh Arora

Question.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Some press reports, not from you guys.

Nikesh Arora

Trying to clarify.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Some media reports have talked about a streaming subscription service in music, is that how does that fit into the content strategy and separate.

Nikesh Arora

Look, I think it’s fair to say a majority of time people spend is on entertainment. Whether it’s video, whether it’s music, whether it’s social networking, whether it’s communicating and what do you want to ensure in the long term is that every one of these services is available on various Google platforms across multiple streams and we are building a partner that have their own apps and sort of we’ll just make sure we look at the market and see what’s the most optimal way of delivering innovation in various expense spend users.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay, on the monetization side, for YouTube you guys have had a real home run with true view ads. It has been a real winner, so can you talk about what those are and then what are doing to increase advertise read options of that ad format.

Nikesh Arora

Yeah, I think it’s fair to say, I’m not sure how many people are familiar with TrueView but basically if you think about advertising, I’m going to tell you straight the problem is I’ve told this story before so if you ever go see a video of anything I’ve done publicly you will find this before so, that’s a disclaimer, if you’ve already seen it I apologize, but I like to use this as example because it’s something I can relate to. So what was your question? True View?

Ross A. Sandler – Deutsche Bank Securities, Inc.

TrueView.

Nikesh Arora

TrueView, yes sorry I know the example, I forgot your question. So I went back and did some research, because there is selection points and media where a new medium shows up, and people sit there and you can find skeptic, you can find enthusiast, and that’s what makes the market, right. When television came out in 1949, the first ad which I found was in 1959 and is a Barbie ad. So I am sure many of you remember Barbie, I still think just from around. So the first ad was a man hand moving the Barbie doll to a radio jingle and that was the first TV ad and as you and I said, that’s crazy, why would you ever created that, we are using a radio jingle and using somebody’s hand to move a Barbie doll, right that’s kind of pervert.

However, if you look at today and you look at ads, video ads on the web, it’s actually a 15 second re-cut of a television ad in front of the video that you watch on the web and if you watch the video on the web, I am sure everyone of you have, you will see the first 15 seconds of an ad, which looks very much like a an add made for television. Now I am pretty sure 20 years or 20 years later when somebody is going to sit in this conference, they are going to use that example as the Barbie example, seeing how silly of them to take a re-cut of TV ad and use it because it’s not interactive, it’s not personalized, everybody watches the same damn ad and that’s so stupid of those guys to do it.

So what we tried to do is, we tried to figure out a way, how do you innovate in the online video space, right? First of all, it’s an ad you can interact with, second you can make that ad personalized, so we work in the back to the see if we can get multiple creative on the screen advertiser to say, let’s try and target the ad a little more to the audience. Now that’s not part of TrueView, but that’s generally what we do, trying to get more targeting. But TrueView is a way, where we can actually skip the ads, because I don’t watch the ad, right because you know it’s very hard to tell on TV when the ad is playing in your living room, I think most people have programmed themselves to take their breaks in the middle of the ad and all of us actually know when the ad is about to run.

So, I think we are getting programmed that way. So TrueView is a way for us to use the interactive features of the web and allow you to interact and say, I don’t want to watch the ad, and then if you go to the advertiser and say look, you don’t have to pay me, somebody skipped the ad, because I must have been silly in trying to personalize the ad for that person and believe that that person would like to watch the ad.

It’s a case of very interesting efficiency requirements on advertising as it relates to online video advertising. But good news is, we’re starting from zero. So if you can get most effective ads at the end, in the eyes of the user and we can get the advertisers to only pay for the ads, it actually slowly revolutionizing the notion of efficient video advertising, so that’s why TrueView has been extremely successful for us and it also gives us, – if you notice certain users keep skipping ads or certain ads keep getting skipped, we understand how to go back and change our ability to predict who’d wish to see the add. And also work with the advertisers saying, Think Read is something more interesting, because people don’t seem to like it.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay, that’s well met on that wok in mobile and software…

Nikesh Arora

It already odes, so if you watch videos in YouTube, on your favorite smartphone, you can’t see TrueView adds, which play against videos on mobile as well.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay. And then speaking with some of the kind of display like topics, so you guys recently signed an agreement to sort of where it looks likes just continually just contractually targeted ads, text ads on to the Yahoo! Properties. Is this something that we think could evolve into a graphical relationship at some point or something bigger.

Nikesh Arora

I’d like it to.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay.

Nikesh Arora

But I mean for all of you, we announced a recent dealer where we’re serving at all properties, and part of sort of go back to our notion, we believe that in certain markets around the world and certain products, we provide the best monetization alternative for people who want monetize ads. So it’s a way to separate your user facing business and your advertising business. We believe in some cases, we provide a better advertising solution, sometimes then various type of publishers who have smaller footprints under that people or smaller footprints globally generally in countries they are operating.

So we’ve announced a deal with the – we are taking the other properties and putting out something. It’s defined ROI and there is opportunities I hope and I wish that expands to furthering a better relationship with advertising more, but that depends on a specific circumstance.

Ross A. Sandler – Deutsche Bank Securities, Inc.

And when we start talking about this search opportunity at Yahoo! I mean we’ve tried this before back in 2008, you guys were talking to each other, could there be a scenario where an arrangement whether it would be a backfill arrangement or certain geographies you guys could work together again one day in search?

Nikesh Arora

Anything is possible. Could there be a scenario, it’s hard for me to say.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Is that there is both likely in the next…

Nikesh Arora

You’re asking now about a likely scenario. That’s different type of scenario. Both things are likely…

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay.

Nikesh Arora

Probably you won’t get a specific percentage than we get.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Shifting over to vertical search for a sec, so where are you guys today with the vertical initiative, I mean there is we’ve heard Larry and Patrick characterize, but it’s still very early, and there is certain verticals that like travel for instance, where you have ITA flight search and hotel finder, but we’re not seeing a lot of it yet.

Nikesh Arora

Actually you’re seeing a lot of it, so let me try and explain it. I think the way to think about it is, I think most of us relate from a user perspective, for those of you who hopefully have been searching from the early days of Google, I used to be happy getting an answer in Google, when I started working there, as long as the answer was findable in the web.

And I remember clicking to page two and clicking to page 3. I think it’s fair to say that majority of our users don’t click to page 2, or page 3 anymore in Google, unless they are searching for themselves, because then they want to see everything that’s about them out there. But usually if you don’t find the answer on page 1, you believe one or two things, that either you haven’t searched for it properly or Google doesn’t have anything interesting about it. So what you notice is that people search for the first page, they don’t find the research, they go back and rewrite the search, and do it in a much better way, thinking I must not have crafted my search well enough than click on page two and page three to find the answers.

And if you take that evolution what’s happened is overtime, I use search for specific things, your aspirations of what should come back is more specific. So if I type the name, if I type the breakers, I did it in phone last night of (inaudible) I will expect to see a map to get me to the breaker, I expect to see a phone number and other information about it, but actually don’t want the blue link saying click here, and read about the breakers in the website. So my needs are getting more and more specific and the way we think about it as, we call it going from 10 blue links to entity level search.

And what we mean by entity is that there is a finite number of entities that are on the road, there is hundreds of millions of them, maybe billions of them and every individual is an entity, every location is an entity, every product is an entity, and what we are trying to do is, trying to figure out, how to create an understanding of all the entities out there. So when you are searching for something, we can in the reasonable likelihood, predict what that entity you are looking for is, right.

To give you example, if there is a restaurant in three miles from here called the Taj Mahal and there is a Taj Mahal in India, if I was searching for Taj Mahal at 6 pm, what is the probability that I am looking to find out more geographical information about the Taj Mahal in Agra, India or I am looking for the Taj Mahal restaurant over here. So it’s the same name, different entities, which entity should I surface depending on as much I know about the attributes of the entity and when people within that location search of the entity, I should give you that different answer.

So this thing is extremely complicated, right. Every answer could change, depending on different context that you get. So what we have been working on is, trying to solve the entity problem. The entity problem is a different solution in hotels; entity problem has a different solution in products. If I type D800, I am looking for a Nikon camera, actually don’t want to go to the Nikon website now, I want to know more, more about the Nikon camera, I may actually want to buy it.

So we have efforts going on around products type, the name of the person now you’ll notice that some of you have that you produce a knowledge card that right tells you about that person, because within reasonably likelihood we can tell you that when you type that name, you’re looking for that person. If there’s more news about that person, we know that you should showcase the news about the person, because that’s what most people want.

So we’re taking that intelligence from website understanding to entity-level understanding, and we’re driving entities. And that’s the big shift, because when you go from there, you increase the probability that you’re giving the answer to the user what they’re looking for, but then you have to go to entity-level advertising. But if I type Taj Mahal and I found that restaurants, I want to advertise against restaurants as opposed to against the historical monument in India. And I don’t want anymore Googling, I actually want to find an entity-level ad, if I type D800, I want to see camera advertising against it, I don’t want to see websites of cameras, because you have to keep lock in lockstep between the user ask and the advertising result. We don’t have websites advertised with entities being asked for. We have to take the advertising to the next level, with the entity-level.

So a lot of our efforts you have seen our most recent efforts and product listing ads, our most recent efforts sort of the light search stuff that you sees about, we are trying to take out advertising to the entity level, because that’s where the user expectation is.

Ross A. Sandler – Deutsche Bank Securities, Inc.

That makes sense.

Nikesh Arora

So we don’t think about things and verticals anymore. We don’t think what about the real estate vertical, what about this other vertical, because sometimes it’s hard to disintegrate what vertical that entity falls in. And then I don’t have it at the top off my head, but you could find an entity, which sits in multiple verticals, and should I go as a user to a different vertical search to find the answer.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Sure. That makes sense, all right. I am going to add two more and then we’ll open it up to the audience for questions. So Google Fiber, a lot of folks here very interested in what you guys are doing there. Do you see a real economic model for Google Fiber and is this something with a high percentage probability that we could see in other cities this year or is this just a trial that’s designed to kind of get the rest of the ecosystem to kind of speed up the level of service that we’re providing in order to make the user experience better for folks in Kansas City or New York or wherever?

Nikesh Arora

I’m not going to answer this specific question as it relates to more cities, and look at see or not, in terms of generally Google Fiber I think it’s fair to say, we come from a technological upbringing, we come from a technological background which is we believe in Moore’s law, we believe in (inaudible) law. We believe in the fact that if you create capacity if you create memory, if you create bandwidth there will be services that would be created to use up that bandwidth. Right, with none of us could have anticipated the aspiration that all of us would have, to sit in a room and stream video on our smartphone but we can today. And if somebody has said that nobody is there going to do that, it reminds you of the famous study, which is not many years ago, which says only 2% of the people in the world are going to use mobile phones because it’s a phone and on the corner from everybody in their home and around I people sitting at their desks, sue mobile phone not willing to go the extra foot to grab that phone on the desk to pick it up, so it’s kind of hard to say that we are not as society going to consume all the technological ambition that’s creative.

So we come from that upbringing. So we believe that a radically disruptive idea of providing 1 gigabyte of service is going to be interesting because why do incremental things when you can do radical thing. Right, so we believe in 10x as opposed to 10%. With that in mind, I think it’s fair to say this to any concern that you have, we don’t wake up in the morning, and say let’s do something we’re going to lose money.

I don’t do it personally, I don’t do it professionally. So I think it’s fair to say anything we do in Google Fiber will be done rationally by us, part of what’s going is, we’re trying to test what’s going on, we’re trying to see how it works. We’re very happy with the results that we have in the Kansas. So I think it’s phenomenal that if you haven’t had the opportunity to build these guys to go in particular. It’s actually very revolutionary. How that translates from here on, it’s too early for me to see anything about, but I think it’s fair to say that whatever we do will be rationale.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Most fastening thing I read was that there’s actually companies being formed inside of houses that our Google Fiber helps us.

Nikesh Arora

I heard that.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Incubators…

Nikesh Arora

That too, that’s festinating, right?

Ross A. Sandler – Deutsche Bank Securities, Inc.

Yeah.

Nikesh Arora

I mean we didn’t think that was going to happen. Houses are being sold there saying, if you lent over here, you get Google Fiber, if you lent over there, you don’t. Does that help?

Ross A. Sandler – Deutsche Bank Securities, Inc.

Yeah. All right, well of course last question from me and then I’ll do questions from the crowd, Facebook. So what are you generally, and this is just from the cash orders opinion. What do you generally think…

Nikesh Arora

Yes.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Generally think of what they’re doing, you talked to a lot of advertisers, what do you think of the efficacy of the ads that are showing up on Facebook and then last part of my question is this most recent initiative in search, do you see that as something like a traction on how do you think we can’t potentially monetize. These are a lot of folks that used to work for you guys that are over there doing this. So I’m guessing you think a like on a lot of these concepts?

Nikesh Arora

Your question is.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Is your advertising working, what do you think about they’re doing in search?

Nikesh Arora

I think it’s fair to say that Facebook is an interesting phenomenon, a lot of people use in the world, lots and lots of people. I think they have as a consequence some great assets, they have great assets in the terms of all the people who are on Facebook, people go there very often. I think they’re doing some interesting things in advertising. I mean the good news is that I think as we go from 10% of the world online advertising to hopefully 70%, 80%, 90% of the world being online advertising, there will be main players in that ecosystem, they’re lot just be out. I hope there are many players, because that creates a piece of innovation that creates that competition allow things to happen. So what they are able to do with all the assets they have is up to their imagination and the quality of people they have. They are good people. That’s how that great things happen.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay. Questions, anyone? Just got to be a couple. All right, right, sure right in front here. We have got another mic over here in case. Why don’t you guys raise your hand and I’ll redirect.

Question-and-Answer Session

Unidentified Analyst

Well, maybe I will phrase that question in a different way, you had mentioned social graph is a filter to provide context, do you wish you had the social graph as a filter to the right context or again in terms of your priorities, is the entity level more important or the connectivity that entity to other extraneous factors via that map more important as well?

Nikesh Arora

Well, I think it’s fair to say with a lot of resource and a lot of great people, we would like to have everything, not just one thing, so I don’t think there is need to run. We understand the value of social. I think it’s fair to say that our Google+ effort was designed to make sure that it works for us. We have seen great amount of success in Google+. We have hundreds of millions of users in each of our services, about billions in certain cases. So we think the work we have been doing in the last two years are pulling that together, trying to get commonality in the way we understand the user and how to use that services, we have made great strides there.

So we think we probably will have hopefully as good as understanding of our users in the medium term as of the people outside. Sometimes, it’s not important to be the first, it’s important to get it right. So I think it’s fair to say we are not the first search company in the world.

Ross A. Sandler – Deutsche Bank Securities, Inc.

We will go over here.

Unidentified Analyst

Yes. Could you explain little more on why TrueView is working, I know one of the satellite companies tried to have the DBR skips there, which offended some of the advertisers, I am just trying to wonder why you have a growing business and some people don’t?

Nikesh Arora

Well, our advertisers like it because they only pay for what people see. I’m not aware of the specific instance with the DVR story whether advertisers will still think or people just want seeing them because we provide metrics to show how many people saw the add, and we provided CPM based on has viewed not ad served. That’s one is I think the reason it’s working is that lot of people not are skipping them, in this case a reasonable number of people are not skipping them and watching the ad. And the good news is that the advertisers only pay for what is viewed so they have a budget with us, if you are able to serve the ads and our users are watching the ad and the advertiser pay if they don’t serve anything they don’t loose anything. And I think it’s fair to say that a significant proportion of our advertising is TrueView as it relates to video.

Unidentified Analyst

Questions on mobile, what do you think the effects at since you guys bought Motorola Mobility to be one of the separate unit because of your friction with the other OEM’s, I’m just wondering how that’s going to affect you now that Firefox, Mozilla foundation is going to release its OS anyway friendly carrier space and there is a lot of adoption what we see from the mobile congress in Barcelona went we get your thoughts off.

Unidentified Analyst

Take your subscriptions.

Nikesh Arora

I think there’s two different comments we made one was it on Motorola and the other was around the perceived threat of new and new operating systems which is going to be friendly, is that fair? So, I think on a Motorola topic, I think Motorola has been part of Google for the last nine months and I had the personal pressure of working with Dennis for the last eight years I’ve been in Google. He is a phenomenal leader, he has built a great team and I think if you look hard you’ll see how cutely they’ve streamlined the business the last nine months. We’re already focusing on what’s important, we divestitures to own business, focusing on how to run the company in a streamlined way, because we believe it’s important to be nimble in that space of smartphones, because there were a lot of people out there who are trying to innovate. So we have lots of positive hopes on Motorola. And we think the leadership team hopefully will deliver the expectations we have.

Switching that notion to the more friendly, operator friendly OS like somebody out there, I think that’s not just a mode of our specific question, that’s a question about the Android ecosystem, because it has the possibility even packing up just Motorola, but every other flow out there. But more part it I hope they’re successful, but I used to be the mobile phone industry before I was in Google, and I cannot imagine, and I cannot tell you how many mobile operating systems I’ve heard of or seen which are developed out there. So I think having a mobile operating system is just one part of the equation, working with the ecosystem to get them to adoptive to create success out of it, to get users to adopt those phones is hard. The fact that somebody have plans amongst a friendly OS was all that took and they should be another third very successful operating system which has been out there for many, many, many years that tells them the interaction. So a more part of it, I hope we get traction. If we get traction, we’ll do with that. But for now, I think our key is to focus on continuing to innovative with Android, continue to create a great OS, which OEMs love in getting used to adopt as well. .

Ross A. Sandler – Deutsche Bank Securities, Inc.

Okay. I think we’re going to wrap up there. Nikesh, thank you very much.

Nikesh Arora

Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to http://www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

Originally Published at : SeekingAlpha

Google’s Chromebook Pixel Proves A Point

23 Feb

Disclosure: I am long INTC, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (Ashraf Eassa)

I don’t expect Google’s (GOOG) Chromebook Pixel to sell particularly well. I’m of the camp that Microsoft’s (MSFT) OS and ecosystem are far too entrenched in the PC space for Google’s Chromebook line to really make a dent at the high end. Sure, the low end Chromebooks are selling like hotcakes; they’re cheap and “good enough” for what most people are probably buying them for (secondary systems), but paying $1,300 for a Chromebook that won’t run the wide variety of applications available on the Windows platform seems a little bit of a stretch. It’ll be a niche product that gets Google some spotlight, but until the Chrome OS is more firmly entrenched in the computing landscape (and the low end Chromebooks are the way to do this), a high end Chromebook is perhaps the right device at the very wrong time.

That being said, Google’s management has historically shown itself to be very capable of doing things the “right” way. In particular, the newly announced Chromebook Pixel does a lot of things just so right that the PC vendors keep getting wrong generation after generation that I’m almost sad that this new Chromebook likely won’t be a particularly big commercial hit. However, putting away my inner geek’s emotional state and putting on my industry observer cap, I want to just show everyone just why Google clearly “gets” it, but the majority of the Windows PC space doesn’t.

The Screen: It’s What Users Look At

The PC industry’s screen selection represents quite a sad state of affairs. Today, I can go buy a $499 Apple (AAPL) iPad 4 with a 2048×1536 display that will have a better display than any notebook PC on the planet. Heck, Google’s Nexus 10 tablet sports a pretty nice 2560×1600 display (although the quality of the Google display isn’t quite there with the Apple). But what about the typical PC? Or, let’s do one better — let’s look at the Intel (INTC) sanctioned Ultrabooks (which are supposed to bring back the excitement to the PC). A quick trip to Newegg.com gave me the following options for displays on Ultrabooks:


Do you see the problem? The majority of these devices sport a crap 1366×768 display with awful contrast, terrible brightness, and questionable colors. A few have solid screens like the Lenovo (LNVGY.PK) Yoga (but are stuck in 1600×900 land), and then fewer still have truly quality 1920×1080 screens. Oh, and nothing above 1920×1080.

So, why is it that I can buy tablets with better screens than what I can get on an Ultrabook? Well, a big part of it is that these notebooks sport much more RAM, storage space, and processing power than their tablet brethren, so less of the BOM costs can be allocated to the display. Further, the displays on notebooks are simply bigger, so the raw materials cost is likely much higher.

But see, that’s not my problem. By all means, offer lower end products at a lower price point; not everyone can afford to drop $2,000 on a top-notch, no-compromises notebook. The problem is that there is precisely zero ultra-high-end display representation in the Windows PC space. This blatant omission further fuels the perception that Windows PCs are “cheap” and for those who “can’t afford a Mac”.

Let’s Fix The PC, Guys

It’s time to fix the PC. Microsoft did a commendable job with its “Surface Pro”, as most reviews point out that it has a gorgeous, well-calibrated display (and for a 10.6″ device, 1920×1080 is plenty of pixels per inch), but there are a few nagging limitations that keep it from being a general purpose laptop replacement at this point. Lenovo’s doing a good job, too, with its “Yoga” and upcoming “Helix” lines, although I’m quite frankly surprised that the company hasn’t put out a super high resolution display laptop just for bragging rights. I would like to specifically praise Acer for releasing its “S7” line of laptops; they’re expensive, but for the limited time that I had to play with one, I couldn’t help but be blown away by the screen quality. The only problem is that it’s $1,600. Dang.

But really, the PC industry will start to grow again if the PC vendors get their acts together and start making compelling devices. Intel’s “Haswell” should enable some nice new form factors and significantly improve battery life (a big tablet advantage), but beyond that there needs to be a focus on build quality (ala Apple and apparently Google), as well as ease of usability (please stop cluttering the PC with useless pre-loaded applications).

I think the PC/hybrid categories can be truly exciting, but the OEMs need to put out devices that people truly want. Google’s got the right idea with the Chromebook Pixel, but the Chrome OS immediately strips the value proposition. Could someone in the Windows camp please get it right? Apple and Google have already illuminated the path, but the PC vendors need to be gutsy enough to walk it.

Originally Posted at : Seekingalpha.com

Google: Analyzing The Downside Risks

22 Feb

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

chart-GOOG

Introduction

Google (GOOG) is the world’s second biggest technology company by value and has a dominant position in some key technology markets such as search, internet advertising and mobile operating system. The company is a colossus of the Internet world and can make or break many enterprises in the world today through its sheer power and reach. In fact most of the Internet revenue models are becoming increasingly dependent on Google’s network. Most Internet companies and websites would give an arm and a leg for a top listing on Google search results for popular keywords. Unlike other big technology companies such as Microsoft (MSFT), Google has not stagnated but has continued to innovate and bring out great new products and services (Gmail, Android, Google Maps etc.). While there has been criticism about Google’s excess dependence on search for revenues and profits, the market is giving a high valuation to Google because the company’s new products have a lot of potential. While Google’s stock is currently trading at a higher valuation compared to other mega cap tech companies such as Apple (AAPL), Intel (INTC), Cisco (CSCO), we remain convinced of Google’s long term growth potential.

1. Competition

Microsoft – Google’s biggest competitor in the technology industry is the Seattle behemoth Microsoft. The company fights with MSFT in a number of areas such as search, operating systems, email, office productivity software etc. Google has a stranglehold in the tablet and mobile operating system market with Android. To counter this, MSFT has made the latest Window 8 operating system more mobile and tablet friendly. Microsoft is also making a strong effort to retrieve its numero uno position in email by introducing features that gmail does not have, such as ability to send large file sizes. MSFT has spent billions of dollars to improve Bing’s technology and acceptability, but the company has not managed to significantly slow down Google’s strong double digit growth.

Apple – The company has become a bitter rival from a partner in the last few years. Google’s Android operating system directly threatens Apple’s iPhone smartphone ecosystem by giving a well supported decent operating system for free to hardware vendors. The erstwhile CEO Steve Jobs spoke of a “thermonuclear war” against Google. Apple recently introduced its own maps application replacing the popular Google Maps. Apple is also trying to reduce Google’s search dominance through the Siri application.

Nokia – Nokia has become another strong competitor to Google after the company joined the MSFT camp ditching its own Symbian operating system. The biggest risk that Nokia faces in regaining its lost market share is from Android mobile phone makers.

Samsung – While Samsung is a partner to Google currently, we think that Samsung will become a strong competitor soon. The reason is Google’s acquisition of mobile hardware vendor Motorola. Google has already become both a partner and a competitor. Samsung being the No.1 mobile phone supplier will have to reduce its Android dependence either by selling more Windows handsets or by making its own O/S (Tizen).

Facebook – Facebook is Google’s biggest threat in the Internet advertising space. Facebook gets a huge amount of Internet traffic and is desperately trying to monetize this traffic through various means. The company recently introduced an internet search product which competes with Google Search.

Yahoo – Yahoo is no longer one of Google’s major competitors given its reduced size and ability. Yahoo search and internet properties are not much of a threat to Google. In fact Yahoo recently signed a display advertising agreement with Google to better monetize its existing display properties.

Blackberry – The iconic Canadian smartphone company has been massacred by Android and Apple in its core smartphone market. The company is trying to make a comeback with a revamped operating system BB 10. We are not sure how much BB 10 and the new smartphones will succeed. We think it will be difficult for BBRY to regain its lost market share without the help of a stronger company. BBRY can pose a big threat to Google if it is bought and leveraged by one of the big technology companies such as Samsung.

Google also has many more competitors such as Baidu (BIDU) etc. In summary, Google faces formidable competitors in almost all areas. However, Google has a history of fighting strong competition against all odds.

2. Regulatory Pressures – As Google becomes a bigger information power, it is colliding with global governments on how information is collected and disseminated. The company was recently forced to succumb to French government pressure on posting of links of French newspaper articles on its Google News. The company was also driven from China, as the government there likes to be in total control over information flow. The company has been subject of an FTC investigation over unduly favoring its own products when displaying Google search results. Microsoft used to be the target of strong government regulation in the past because of the power of its Windows operating system. Google is now facing the same situation due to the dominance of its search product.

3. Don’t be Evil – Google has always advocated that it won’t become a large big “evil” corporation however in recent days the company is not exactly living up to its stated principles. The company has come under attack for revealing information to the government agencies. The company has also attracted heavy fines for breaking into Wi-fi networks during collection of data for Street View. The company has become too strong in the Internet advertising market and its difficult to find decent alternatives to Google’s adsense network. Google recently stopped sharing private search referral data with external websites, though the company’s own Adword network has access to this private search data. The company has the power of death over small businesses and websites. Google’s new algorithm changes (Panda and Penguin) have led to a huge traffic loss for many websites which used to follow SEO techniques. While these initiatives are not wrong as they have helped in reducing SEO spam, this shows the power that Google has over others. Google is also promoting its own social network Google Plus by giving higher rankings to search results which are linked to Google Plus authors. Small players in the Internet world have no redressal mechanism against undue display of Google power.

4. Privacy Issues – Facebook has faced huge attacks from users whenever it has introduced monetization measures based on the private user data. I have found that a number of Google users have also started getting irritated by targeted ads based on personal data. The aggressive promotion of Google Plus and other Google products is also not very customer friendly in my view.

5. Motorola – Google bought Motorola for more than $12 billion in order to protect its Android operating system from patent lawsuits by other telecom companies. Despite restructuring, Motorola is still showing operating losses. Also Motorola will make other Android users such as LG and Samsung doubt Google’s impartiality.

Valuation

Google’s valuation is not expensive if you use traditional metrics with a forward P/E of ~16x. The P/S of 5.1x and P/B of 3.6x is also not exorbitant. However if you compare Google’s valuation with that of mega cap technology plays then it is quite expensive. You can buy most of the other technology companies at a P/E of ~10x. The reason for the higher valuation is that the market is factoring in Google’s higher future growth rate.

Summary

Google has a great portfolio of new products and services which has led to the stock touching all time new highs. The market has started to recognize the strong earnings potential of Youtube, Android etc. Also despite numerous attempts by competitors to break Google’s stranglehold on Internet search, the company has managed to grow earnings and revenue in the high double digits. The competition for Google remains high across all product segments and the company faces increased challenges due to its greater size. However, Google has managed to overcome competition quite effectively in the past and we believe it will do in the future as well. As the stock has run up quite a bit in recent days, we would look to buy on dips.

Originally Posted at : Seekingalpha.com