March 24, 2006

Google Sets Double Standards: Does Not Support Free Speech

posted by MR WAVETHEORY at 3/24/2006 06:17:00 PM
Do Not Be Evil is the motto of Google. I got this email from Google thanking me for applying for AdSense but denying me the ability to participate because Mr Wave Theory "does not meet our program criteria". Google, where do you publish your program criteria? What are your program criteria if I may be so bold as to question you or ask? If there is a standard for these program criteria, I would like to know. Step out from behind your veil of secrecy and double standards, because as far as I can tell, Google appears to be more like a dictatorship rather than a democracy.

Google, why are you so evil? Yahoo, I would love to join your Yahoo Publisher program. If anyone knows how, please comment.

Thank you for your interest in Google AdSense. After reviewing yourapplication, our specialists have found that it does not meet ourprogram criteria. Therefore, we are unable to accept you into ourprogram.We have certain policies in place that we believe will help ensure theeffectiveness of Google ads for our publishers as well as for ouradvertisers.

We review all publishers, and we reserve the right todecline any application. As we grow, we may find that we are able toexpand our program to more web publishers with a wider variety of webcontent.Please note that we may not be able to respond to inquiries regardingthe specific reasons for our decision. Thank you for your understanding.

Sincerely,The Google AdSense Team

Mr Wave Theory

March 23, 2006

Will Google Earn $1.99 Per Share in Q1 2006?

posted by MR WAVETHEORY at 3/23/2006 01:20:00 PM
Most analysts are estimating Google will earn $1.99 per share in Q1 2006. I was curious to see if it was reasonable so I looked at their earnings history.

Earnings History Mar-05 Jun-05 Sep-05 Dec-05
EPS Est 0.92 1.21 1.36 1.76
EPS Actual 1.29 1.36 1.51 1.54
Difference 0.37 0.15 0.15 -0.22
Surprise % 40.2% 12.4% 11.0% -12.5%


Google earned $1.54 per share in Q4. In order to earn $1.99, it needs to add 45 cents sequentially to the bottom line. Has Google historically been able to achieve this type of growth in EPS?

Below, I calculated the sequential EPS increase from quarter to quarter.

Q2 = +7 cents from Q1
Q3 = +15 cents from Q2
Q4 = + 3 cents from Q3

In the past 3 quarters, Google has never added more than 15 cents sequentially to its EPS.

To assume a 45 cent increase seems like wishful thinking. Is it possible? Sure. But going by the numbers, t
hey've never added 45 cents sequentially to the bottom line from one quarter to the next. Also, look at the amount by which Google has surprised the Street and you see a trend developing. The amount Google has surprised the Street by was 40.2% in Q1. It proceeded to decline sequentially to 12.4% in Q2, 11.0% in Q3, and -12.5% in Q4. Do you see a trend?

EPS is suffering from poor expense control, high levels of hiring to fight Microsoft, and dilution from stock options exercise

I think the lack of EPS growth has to do several factors including poor expense control, high levels of hiring, and all the stock options management exercises - none of which appear to be slowing down. Take stock options. It is not rare to see around 250,000 shares of insider shares being sold any given day. That annualizes to 60 million shares in a year or $18 billion of stock. If you round the numbers, that implies 18% dilution. Or take the hiring that is happening which is necessary because of the threat from Microsoft. Or finally, the lack of expense control or financial control which really reared its head in Q4.

Judging from these factors, my conclusion is that it will be difficult for Google to meet its EPS target.

Love the product. Dump the stock.

Mr Wave Theory

Microsoft Announces Major Restructuring to Compete Against Google: Redmond Giant Awakes from Slumber

posted by MR WAVETHEORY at 3/23/2006 10:10:00 AM



As I mentioned yesterday, the delay of Windows Vista is a major negative for Google because Microsoft will be integrating Windows Vista more tighly with Live.com and MSN.

Today Microsoft officially announced at 1 pm ET that it will be realigning its Platforms & Services Division under Kevin Johnson and Jim Allchin. Steve Sinofsky will be running Windows and Windows Live. Brian Valentine will be leading Windows Vista. Blake Irving will be running Live.


Microsoft announced the following:

Microsoft Corp. today announced a broad restructuring of its Platforms & Services Division (PSD) to better align existing Windows® and MSN® assets with Microsoft's overall Live strategy, and to ensure the company delivers a full range of software- based services to consumers and businesses around the world.

The realignment speaks to what I discussed yesterday, which is that Windows Vista will marry the desktop and the online strategy of Microsoft.

"Expect Vista to be tightly integrated with Live.com and MSN and strike Google where it is weakest, which is in the productivity application space. Unlike Google, which has focused on building light weight Internet applications with low barriers to entry, Microsoft will be focused on building rich, Internet productivity applications with significant lead times and high barriers to entry."

Mr Wave Theory

Would You Have Turned Down An Offer to Buy Google?

posted by MR WAVETHEORY at 3/23/2006 05:39:00 AM
Matt Marshall from SiliconBeat writes that these guys did. Jeff Ullman, a Stanford professor and adviser to both Google and Junglee, told Junglee to acquire Google. Junglee passed on the offer to buy Google.

What is interesting is Jeff Ullman's quote on Sergei. (For context, Junglee was a comparison shopping engine.)

Two of the other Junglee guys had studied or otherwise worked with the Google co-founders. "Perhaps we could take a look at merging with Google," Rakesh recalls Ullman advising the Junglee team. Rakesh passed on having a serious conversation about this, he said, because the two companies seemed to be headed in separate directions, and besides "it wasn't clear that the team would integrate well with Sergey." Rakesh called him "headstrong."

Of course, a year or so later, after Junglee had been scooped up by Amazon.com, Rakesh found himself on the plane with colleague Anand (now at Kosmix) flying from Seattle down to Silicon Valley to have a meeting with Sergey -- namely to see if he'd be willing to sell Google to Amazon. That's when Sergey responded, outrageously at the time, but humbly in retrospect: "The only kind of price we'd accept would be something with ten digits." In other words, billions.

Mr Wave Theory

Why Most Analysts Are Overestimating the Size of Google's Total Addressable Market for Internet Advertising

posted by MR WAVETHEORY at 3/23/2006 04:25:00 AM
I am sick and tired of hearing analysts make wild projections about Google's growth prospects based on wild projections about the size of Google's total addressable market. I call it Bubble 2.0, while some call it Web 2.0.

The logic goes like this:


"The offline advertising market is $300 billion and only $30 billion of it is online. Therefore, we (a very respectable and highly paid investment bank) argue that if only 10% more of it went online, Google's addressable market would double and go to $60 billion. Therefore, the stock is worth mega $$$,$$$,$$$,$$$ (billions)."

I made up the $300 billion number for sake of argument. But this argument (from the very respectable investment bank) is fundamentally flawed for several reasons.

1) The investment bank has failed to segment the offline advertising market properly and market segmentation is crucial when it comes to projecting Google's ad revenues.

The offline advertising market is 80% brand advertising spend and 20% direct marketing spend. What is the difference between brand advertising and direct marketing and why does it matter for investors in Google?

The distinction is important because Google's customers are primarily direct marketers (which is the smaller peace of the pie) - they are the annoying people who in the offline world would send you junk mail and call you at dinner, and who in the online world get you to click on their ads on Google. Direct marketers spend money to sell you a product immediately. They care that when you click on their ad, you also make a purchase. More importantly, they care that the amount they spent to get you to click on their Google ad is less than their gross margin. They know exactly how much they are paying to get you to their website and they won't pay a nickel more - because they are highly price sensitive and they stop spending if they know they can't get you there for cheap. For instance, if an online shoe company knew that their gross margin were 15% and that their average order size is $100, then they know their gross margin per customer is $15. That means they will not spend more than $15 to acquire a customer on Google. (In marketing parlance, a $15 CPA is the max they can spend. If CPAs go out of control on Google or Yahoo or MSN, they kill the spend.) This might sound complex, but you just need to leave with one thought


2) Direct marketers are math geeks and direct marketers are very price sensitive to their customer acquisition costs and they make up the bulk of Google's Customers. They love Google.

Brand marketers (who form the larger piece of the advertising pie) on the other hand couldn't care less about cost acquisition costs because they are not there to sell you a product immediately. Examples include TV spots by Budweiser or sponorship advertising by Coca Cola. Brand marketers spend money for creating liking or familiarity with their product - Kraft, Pepsi, Coke. The ROI of brand marketing spend is very very difficult to quantify. In fact, it is nearly impossible to quantify how much money it costs to make you like Kraft Cheese or Coca Cola. If you can figure that out, you'll be the next Bill Gates. And that is why you don't see Kraft spending big bucks on Google. For instance, if you typed in a query for "Kraft Cheese" on Google, there is no Kraft ad because buying the Google keyword for Kraft Cheese will not enable them to make you like Kraft Cheese more. Type in "Coca-Cola" and you see an occasional ad by "Coca-Cola" - but the clicks are minimal because people don't go online to buy Coca Cola. If you are confused, just leave with one thought

3) Brand marketers are liberal arts majors who can't do math. Brand marketers don't know the meaning of customer acquisition costs and they don't care. They don't know what to do with Google.

So, why does the distinction between brand marketers and direct marketers matter so much for Google?


Google is a direct marketer's wet dream because customer acquisition costs can be calculated in real time. But it is a brand marketers nightmare because they don't know what to do with it or how to use it.

Google was popular and grew tremendously fast because it offered a "MORE EFFECTIVE" source of ad spending for direct marketers. Unfortunately, even though Google was an effective form of direct marketing 3 years ago, today, direct marketers are running for the hills. Google's golden days are over because spending ad dollars on Google keywords is no longer cost effective. Listen to the e-commerce conference calls from the big shops like Amazon, Overstock, and ProFlowers, and you will hear repeatedly that the biggest headwind to their growth in revenue is increasing CPAs (cost per acquisition for those who don't know advertising). This is alarming especially when CPAs are rising 10-20% per quarter for some of Google's largest customers. There is no golden goose or "MORE EFFECTIVE" ad spend - at least no longer on Google. I will grant you that initially it was "MORE EFFECTIVE" - but when everyone has figured out that buying Google keywords is cheap, the no-arbitrage condition is being proved correct again right in your face.

4) Google's biggest customers (direct marketers) are no longer finding it cost effective to spend on Google and its smallest customers (brand marketers) have no need for it

If we take $300 billion as the total size of the offline advertising market, then direct marketers will comprise $60 billion of it and brand marketers will comprise $240 billion. Brand marketers (who comprise 80% of the offline advertising market) have no use for Google and will never use Google. You ask why? I ask you this - Tell me how you would convert a searcher for Kraft cheese into a paying customer and I will rest my case. I typed in "kraft cheese" into Google and I saw no ads for Kraft. Know why? Because no body clicks and buys cheese online. Brand advertising is incredibly ineffective on Google. Only direct marketing works on Google. I will repeat again - Google is a direct marketer's wet dream and a brand marketer's nightmare.

5) $240 billion of the $300 billion opportunity will never go online

This means that the $300 billion market opportunity is actually a $60 billion opportunity and our young analyst at the venerable investment bank has made an order of magnitude rounding error in sizing up the market opportunity in front of Google. He (or she) has also nonchalantly forgotten to mention that not all of that $60 billion will go online and that the part that does go online will be split among the top 5 players - Yahoo, MSN, AOL, Interactive, Google.

After reading the rubbish published by the venerable investment bank, I respectfully called and encouraged our analyst in question to go back to the drawing board and correct the $240 billion mistake. By the way, the picture at the top of this post is not meant to be the likeness or name of the firm that made this multi-billion dollar rounding error. It is only meant to represent a venerable investment bank. I apologize that I am not particularly good with computers.

Mr Wave Theory

Bubble 2.0: Why Most Analysts Are Overestimating the Size of Google's Total Addressable Market for Internet Advertising

posted by MR WAVETHEORY at 3/23/2006 01:00:00 AM
I am sick and tired of hearing analysts make wild projections about Google's growth prospects based on wild projections about the size of Google's total addressable market. I call it Bubble 2.0, while some call it Web 2.0.

The logic goes like this:


"The offline advertising market is $300 billion and only $30 billion of it is online. Therefore, we (a very respectable and highly paid investment bank) argue that if only 10% more of it went online, Google's addressable market would double and go to $60 billion. Therefore, the stock is worth mega $$$,$$$,$$$,$$$ (billions)."

I made up the $300 billion number for sake of argument. But this argument (from the very respectable investment bank) is fundamentally flawed for several reasons.

1) The investment bank has failed to segment the offline advertising market properly and market segmentation is crucial when it comes to projecting Google's ad revenues.

The offline advertising market is 80% brand advertising spend and 20% direct marketing spend. What is the difference between brand advertising and direct marketing and why does it matter for investors in Google?

The distinction is important because Google's customers are primarily direct marketers (which is the smaller peace of the pie) - they are the annoying people who in the offline world would send you junk mail and call you at dinner, and who in the online world get you to click on their ads on Google. Direct marketers spend money to sell you a product immediately. They care that when you click on their ad, you also make a purchase. More importantly, they care that the amount they spent to get you to click on their Google ad is less than their gross margin. They know exactly how much they are paying to get you to their website and they won't pay a nickel more - because they are highly price sensitive and they stop spending if they know they can't get you there for cheap. For instance, if an online shoe company knew that their gross margin were 15% and that their average order size is $100, then they know their gross margin per customer is $15. That means they will not spend more than $15 to acquire a customer on Google. (In marketing parlance, a $15 CPA is the max they can spend. If CPAs go out of control on Google or Yahoo or MSN, they kill the spend.) This might sound complex, but you just need to leave with one thought


2) Direct marketers are math geeks and direct marketers are very price sensitive to their customer acquisition costs and they make up the bulk of Google's Customers. They love Google.

Brand marketers (who form the larger piece of the advertising pie) on the other hand couldn't care less about cost acquisition costs because they are not there to sell you a product immediately. Examples include TV spots by Budweiser or sponorship advertising by Coca Cola. Brand marketers spend money for creating liking or familiarity with their product - Kraft, Pepsi, Coke. The ROI of brand marketing spend is very very difficult to quantify. In fact, it is nearly impossible to quantify how much money it costs to make you like Kraft Cheese or Coca Cola. If you can figure that out, you'll be the next Bill Gates. And that is why you don't see Kraft spending big bucks on Google. For instance, if you typed in a query for "Kraft Cheese" on Google, there is no Kraft ad because buying the Google keyword for Kraft Cheese will not enable them to make you like Kraft Cheese more. Type in "Coca-Cola" and you see an occasional ad by "Coca-Cola" - but the clicks are minimal because people don't go online to buy Coca Cola. If you are confused, just leave with one thought

3) Brand marketers are liberal arts majors who can't do math. Brand marketers don't know the meaning of customer acquisition costs and they don't care. They don't know what to do with Google.

So, why does the distinction between brand marketers and direct marketers matter so much for Google?


Google is a direct marketer's wet dream because customer acquisition costs can be calculated in real time. But it is a brand marketers nightmare because they don't know what to do with it or how to use it.

Google was popular and grew tremendously fast because it offered a "MORE EFFECTIVE" source of ad spending for direct marketers. Unfortunately, even though Google was an effective form of direct marketing 3 years ago, today, direct marketers are running for the hills. Google's golden days are over because spending ad dollars on Google keywords is no longer cost effective. Listen to the e-commerce conference calls from the big shops like Amazon, Overstock, and ProFlowers, and you will hear repeatedly that the biggest headwind to their growth in revenue is increasing CPAs (cost per acquisition for those who don't know advertising). This is alarming especially when CPAs are rising 10-20% per quarter for some of Google's largest customers. There is no golden goose or "MORE EFFECTIVE" ad spend - at least no longer on Google. I will grant you that initially it was "MORE EFFECTIVE" - but when everyone has figured out that buying Google keywords is cheap, the no-arbitrage condition is being proved correct again right in your face.

4) Google's biggest customers (direct marketers) are no longer finding it cost effective to spend on Google and its smallest customers (brand marketers) have no need for it

If we take $300 billion as the total size of the offline advertising market, then direct marketers will comprise $60 billion of it and brand marketers will comprise $240 billion. Brand marketers (who comprise 80% of the offline advertising market) have no use for Google and will never use Google. You ask why? I ask you this - Tell me how you would convert a searcher for Kraft cheese into a paying customer and I will rest my case. I typed in "kraft cheese" into Google and I saw no ads for Kraft. Know why? Because no body clicks and buys cheese online. Brand advertising is incredibly ineffective on Google. Only direct marketing works on Google. I will repeat again - Google is a direct marketer's wet dream and a brand marketer's nightmare.

5) $240 billion of the $300 billion opportunity will never go online

This means that the $300 billion market opportunity is actually a $60 billion opportunity and our young analyst at the venerable investment bank has made an order of magnitude rounding error in sizing up the market opportunity in front of Google. He (or she) has also nonchalantly forgetten to mention that not all of that $60 billion will go online and that the part that does go online will be split among the top 5 players - Yahoo, MSN, AOL, Interactive, Google.

After reading the rubbish published by the venerable investment bank, I respectfully called and encouraged our analyst in question to go back to the drawing board and correct the $240 billion mistake. By the way, the picture at the top of this post is not meant to be the likeness or name of the firm that made this multi-billion dollar rounding error. It is only meant to represent a venerable investment bank. I apologize that I am not particularly good with computers.

Mr Wave Theory

March 22, 2006

Motley Fools Says Google is Worth $154

posted by MR WAVETHEORY at 3/22/2006 01:08:00 PM
Seth Jayson of Motley Fools says Google is worth $154 - "Yuck" is the word he describes Google, the stock. A brilliant investor once remarked, "A great product doesn't necessarily make a great stock."

Followup: I have posted my own reasoning on why the consensus on Google may be wrong.

Mr Wave Theory

Why French ruling hurts Apple, iTunes and the iPod

posted by MR WAVETHEORY at 3/22/2006 02:07:00 AM
The French National Assembly passed a bill which according to CNN "would force Apple, Sony and Microsoft to share proprietary anti-copy technologies so that rivals can offer compatible services and players." Doing so would enable consumers to download iTunes songs onto devices other than iPods which consumers cannot do today. You can only download songs from iTunes onto iPods.

While the French rulling is bad news for Apple whose iTunes service operates in a closed ecosystems, it is great news for consumers. The philosophical question at hand is simple:

Does a Government Have the Right to Force Interoperability Upon Closed Proprietary Technologies?

The French government clearly thinks so. I believe it wants to break Apple's dominance in online music which frankly Apple has earned due to the superiority of its hardware design. Philosophical questions are impossible to answer, so enough said. The question investors need to ask is this:

How sustainable is Apple's leading marketshare in the online music space?

Simply looking at the competing products on the market, one can easily tell that 1) competitors are copying Apple's hardware design (Sandisk, Creative Labs, and let's not forget the almighty Dell perenially late, but always a force to be reckoned with) 2) competitors are copying iTunes (Sony Connect, Microsoft Music Store, Yahoo Music) and 3) prices are dropping ferociously.

It is often said that in order for a consumer product to be successful, it needs to break below the $100 barrier. Apple broke that barrier with the iPod Shuffle. While some would call it success, I would argue that breaking below the $100 barrier is the beginning of the end - and the beginning of rapidly diminishing margins.

Why Windows Vista Delay is Bad News for Google and Apple

posted by MR WAVETHEORY at 3/22/2006 01:56:00 AM



Many pundits argue that the delay of Windows Vista will allow Apple to sell more Macs and Google to gain more marketshare while the giant from Redmond sleeps. I would argue that the delayed launch of Windows Vista is bad news for Google and Apple. Unlike previous versions of Windows, Vista is not about selling a desktop OS. It is about selling a rich Internet experience positioned to compete directly against Apple and Google. While Apple and Google have built their businesses around vertically integrated Internet platforms such as iTunes and Google Search, Microsoft is taking a step back and delaying its launch so that it can integrate more tightly with its Internet content partners and distribution partners. Unlike Google and Apple, which operate closed ecosystems, Microsoft is launching Vista with more of a partner approach. First, Vista's core functionality is being revamped to strike Apple at the heart of the broadband Internet experience. Unlike Apple, which is notorious for strongarming content partners, Microsoft is playing nicer with content owners. Second, expect Vista to be tightly integrated with Live.com and MSN and strike Google where it is weakest, which is in the productivity application space. Unlike Google, which has focused on building light weight Internet applications with low barriers to entry, Microsoft will be focused on building rich, Internet productivity applications with significant lead times and high barriers to entry.


Windows Vista Is Being Re-Shaped as an Apple Killer
To fully appreciate Vista's threat to Apple, look no further than the Windows Vista launch page. Vista is first and foremost about making the PC the center of your rich media experience focused around your pictures, your music, and your movies. These are the three things that Apple has built its business around via its iLife strategy and the three core products supporting this strategy are iPhoto, iPod, and iMovie. Microsoft knows that in order to beat Apple, it must attack Apple where it is weakest. Apple's biggest weakness is that it works very poorly with third parties. In the PC world, Apple was terrible at working with PC manufacturers because it wanted to own the whole food chain. In the online music world, Apple has effectively created a closed ecosystem boxing out content owners from the distribution chain. Microsoft understood several decades ago that in order to win its PC battle against Apple, it needed to ally with PC manufacturers. Today, Microsoft is doing the same with content partners. Microsoft is going to empower rather than hinder content owners who have been held captive by Apple's lock on the music hardware business.

If there is one thing that Microsoft does better than Apple, it is enabling third parties to build products and businesses on its software platform (and collecting its share of the winnings toll via licenses) rather than encroaching on the businesses of its partners. In the PC business, Microsoft focused just on the software - enabling PC manufacturers to make money off hardware. Microsoft won. Its partners also made money. In the content business, Microsoft is doing the same thing. It is making Windows Media Player a platform for enabling content owners to make money off their music and movies, while Microsoft makes money off the platform.

In the music space, you can see that Microsoft Music Experience for Vista is built around partnering with the premier names in music - it has already announced partnerships with MTV, VH1, and CMT. In the TV and movie space, you can bet Microsoft is doing the same.

Vista Delay May Lead to More MSN and Live.com Integration and Make Google Irrelevant

Microsoft understands that the PC experience is now an Internet experience. It is not about selling licenses or owning desktops. It is about owning the webtop. Bill Gates commented at MIX 06 that Microsoft is already working on the next two versions after Internet Explorer 7, which is due later this year with Windows Vista and that Microsoft intends to build deeper RSS support in Windows Vista and Internet Explorer 7, allowing people to subscribe to Web pages as well as podcasts and photos.

The Vista delay will allow Microsoft to integrate Vista more tightly with Live.com which is frankly a Google killer. Unlike Google, Live.com is open, meaning that users can customize their experience with any content they like just by clicking "Add Stuff". Live.com is user generated meaning each Live.com experience is different. Finally, Live.com is familiar and the interface handles like a PC quality software experience. That said, Live.com is a real work in progress, so it is unsuprising that Vista is being delayed. This is Microsoft's third try at building an Internet presence after Start.com, MSN and I would bet that, as always for Microsoft, the third time's the charm.


Mr Wave Theory

March 21, 2006

Google Finance Shows that Google is No Longer An Innovator

posted by MR WAVETHEORY at 3/21/2006 01:08:00 AM
The last two major product launches from Google have been Google Maps and Google Finance. While Google Maps redefined mapping and I am a fan of the product, Google Finance is merely a cheap knock off of Yahoo Finance done in Flash. While everyone is blogging about Google Finance, I believe the relevant question for investors is this:

Have Google's new product launches created new revenue streams for the company?

The answer is firmly no. In fact, Google Maps does not generate significant revenue and judging from Google Finance, the product will not either. In fact, what is incredible is that Google has taken its serendipidous approach to product management (that was perfectly fine for a 10 person startup) and now hope to make it work for a $100 billion company. Frankly, I don't know any $100 billion companies that run product like Google. I believe it is because the ones that did (including Excite, Lycos, @Home) have all perished because the strategy simply didn't scale. In fact, several well-respected tech executives who have visited Google have said to me, "Google is run like a zoo. There is no adult supervision." While conventional wisdom should usually be taken with a grain of salt, it should be taken seriously when some of the smartest folks in the tech industry are uttering those words.

Google's Product Management Strategy Is Flawed

A successful product management strategy is based on the creation of a well-defined set of functions that serve the unmet needs of users while creating value for the entrepreneur. Google's product strategy has been firmly focused on serving the unmet needs of users. With Google Maps, Google created a new way of visualizing data. With Google Finance, it is hoping to do the same. But in both cases, Google failed to create value for itself and for shareholders.

Google's New Product Launches Have Largely Been Business Failures

Good product management marries technical superiority with a keen understanding of what customers are and are not willing to pay for. Google's search product was not good product management. It was a technology looking for a business model that ended up finding one due to sheer luck. Google's new product launches have largely been failures because it has been unlucky this time around. Investors need to be mindful that while it is better to be lucky than smart, a product strategy based on knocking off existing products of competitors will not be successful in the long run particularly when there is no business model attached to these products.

March 20, 2006

Are mutual fund managers taking the lifeboat on Google?

posted by MR WAVETHEORY at 3/20/2006 09:11:00 PM
Four times every year, fund managers must report their holdings in their quarterly filings. And this quarter is the same. With Google underperforming the market for the first time this quarter, and also exhibiting negative returns, one blogger speculated that fund managers quietly unloading before the end of the quarter when grades are due. Managers are taking the lifeboat on this name. Google is the largest position in several of the largest funds in this country. One of the largest funds (Fidelity, American Century) apparently is doing the dumping according to this post. I have included the post below because there is no direct link to the article.

20-March-2006The Google Factor, from Ross Miller
While some members of the list are resorting to numerology to divine the future of Google, it is worth noting that key players in the mutual fund industry (including Fidelity and American Century) loaded up on Google several months ago. My own quick and dirty statistical analysis of one of the largest of these funds indicates that their Google holdings have been so great that Google is more significant in explaining the fund's pattern of returns that the entire NASDAQ 100 is. This is even more impressive when one considers that Google itself is a fair-sized chunk of the NASDAQ 100. The Google factor continued through last week to exert a major pull on certain funds -- enough to turn what would otherwise be an up day for them into a down day.
1Q2006 is the first quarter since Google arrived on the scene where Google is down big-time from where it started the quarter, and still with two weeks left to go. It has only had one down quarter before, 1Q2005, and that decline was modest. Mutual fund managers may be loathe to exhibit large chunks of Google in their quarterly reports. While the efficient market hypothesis indicates that window dressing is already "baked into the pie," there is also a lot of academic evidence that end-of-quarter anomalies are real. While I am certain that Google is keeping announcements of nifty new things in its silo to spring on the market over the next two weeks, the question is whether those goodies will be enough to offset the tide of fund managers taking to the lifeboats.

http://www.dailyspeculations.com/

The Key Metric at Google : Revenue per Query

posted by MR WAVETHEORY at 3/20/2006 11:46:00 AM
If there is one metric at Google that should be looked upon, it is revenue per query (RPQ). It is also the metric that Google no longer releases. Google only released its RPQ in Q4 2004.

Why do I think RPQ is declining?

Eric described that Google's revenue equation is simple. It is:

Number of queries X Click through rate X Cost per click = Revenue

Eric also described during analyst day and in the 10-K that primarily, revenues grew in Q3 and Q4 2005 due to increases in traffic (You can find the post in my prior post.) This is the first term in the equation. He also said that monetization improved which means the second term. What Eric did not talk about improving is the third term. So, by process of elimination, I conclude that RPQ is declining. That is the process of elimination, My Dear Watson.

Mary Meeker caught on to the declining cost per click

Below is an excerpt from the Q4 2005 conference call. Mary Meeker hit the nail on the head when she asked Eric - Is cost per click declining? You can see that Eric avoided answering the question since he was "running out of time." Eric dodged the issue.

Mary Meeker
Thank you. If we compare the 3rd quarter sequential results with the 4th quarter results, I think you said on your last call your query growth was kind of flatish, I don’t want to put words in your mouth, so please correct me if need be. And the revenue growth was pretty powerful so the monetization increase sequentially in the September quarter was very high. In this quarter, you in your press release and on the call you talked about seasonal strength in traffic and also in monetization. Could you give us a little more color on the differences in the degree of incremental monetization you had in the 4th quarter versus the degree of incremental positive monetization you had in the 3rd quarter? Thanks.

Eric Schmidt, Chief Executive Officer
This is Eric. We saw both strong user traffic in the December quarter as well as continued improvement in the monetization. I wouldn’t characterize them as being on the monetization side as being materially different than the rate of improvement that we saw in Q3. We are continuing to invest heavily in improvements in quality; those improvements in quality and many other enhancements that we offered in our product line, result in continuous improvement every quarter in monetization on a constant flow of traffic. In addition to that, traffic grew quite strongly, perhaps because of seasonality, perhaps because of gains in market share, perhaps because of all the new products, or perhaps because of a combination of all three. But we know that both are working and when both are working well, we see very, very strong resonant growth, which is of course wonderful.


What I’d like to do now since we’re run out of time is go ahead and wrap up by saying that to all of you first, thank you for taking the time to be on the call. We’re very, very pleased with our performance on every level.



Most analysts estimate the Google will earn $12 per share in 2007. I find it hard to believe. Google cited in its own 10-K filed last week that earnings growth is slowing and no longer accelerating. If earnings growth was 55% last year, then I expect it to be less than that this year. But the question remains
...

What is a reasonable rate of growth for Google?

A good proxy for estimating growth are comps - the largest comps like Amazon and Yahoo. Long term growth estimates at Yahoo are 25% over the next 5 years and at Amazon they are 20%. Give Google the benefit of the doubt, and let's say it is 35%, that is still substantially lower than the 55% consensus estimate.

Is growth becoming a problem? Yes, there are signs of trouble.

The biggest sign of trouble for a search engine arrives when they are trying to grow using "monetization improvements." Eric cited that term at least 3 times during the Q4 call. Recently, I came across this post on how Google is testing new UIs. As someone who knows search, I can tell you that you test new UIs to accelerate click throughs. Amr Awadallah, an engineer at Yahoo, has a post on Google revenue accelerators. Amr insightfully predicted Google's Q4 miss.

March 19, 2006

Google - Why are you so sexist and racist?

posted by MR WAVETHEORY at 3/19/2006 07:18:00 PM
I recently looked up the executive management group of Google and discovered that the company practices an unspoken type of discrimination and racism. Of the 13 top executives at Google forming the executive management, there is only 1 woman and 3 non-whites (an African, an Asian, and a Hispanic American). Does Google represent America? And more importantly, does it represent Silicon Valley?

Google Executive Management Distribution by Race
10 Caucasian (79%)
1 African (7%)
1 Asian (7%)
1 Hispanic (7%)

Google Executive Management Distribution by Gender
12 Males (93%)
1 Female (7%)

Contrast this with America.

America Distribution by Race
201 million Caucasian (68.4%)
41 million Hispanics (14%)
39 million African (12.7%)
13 million Asian (4.6%)

Look at the disparity. Caucasians are overpresented by 10%. Hispanics are underrepresented by 7%. African Americans are underrepresented by 5.7%. What is interesting is that Asian Americans, while seemingly overrepresented, are actually significantly underrepresented. Does Google represent America? No. Not even close.

Contrast this with Silicon Valley.

Silicon Valley by some estimates has townships which are 30-50% Asian American. It is common knowledge that the bulk of the blood and sweat equity in Silicon Valley is provided by this group of hard working individuals. Asians are probably the largest group of engineers. Within Google, Asians probably represent 20-30% of employees. Yet, within the executive management, there is only 1 Asian American. Some of the hardest working, most creative, and inspiring people I know are Asian, and I find it hard to believe that they are not worthy of being represented. Not only does Google not represent America, but also the executives at Google don't even represent their employees. Google, why are you so racist?

The disparity doesn't end there. Look no further than the gender distribution.

America Distribution by Gender
144 million Males (49.2%)
149 million Females (50.8%)

I find it alarming that there is 1 woman who is part of Google's executive management team (7%) when in America 50.8% of Americans are women. Eric, please help me understand why. At Stanford, the number of women engineers is probably between 20-40%. Why is it that only 1 woman sits on the executive management group Eric? Google, why are you so sexist?

I live only a few minutes from the Googleplex and there are plenty of co-eds Eric. I can attest to that personally. And some of the smartest and most accomplished people I know, managers and engineers, are women. They are of my generation. The Internet generation. If you read this post, Eric, I urge to defend your actions to the rest of America when the numbers clearly show that the hiring practices at Google box out women and minorities from leadership roles and are clearly tilted in the favor of Caucasian males.

Mr Wave Theory