Google is about to issue 14 159 265 more shares (the number chosen is derived from the decimal expansion of pi) aiming to raise about $4 billion at an average price of about $250 a share. Given that I argued that Google was overvalued at the initial offer price of around $80, it might be time to take another look, both at Google as an investment and at the issues raised by its position in the Internet. In this post, I’ll stick to the first issue.
First, up I should concede that I underestimated Google’s starting level of profits (which wasn’t public before the IPO) and also the rate at which it could increase profits in the short term. Google looks like a better investment than I suggested (though I still think $80, let alone $250 is too high).
On the other hand, the problems with Google’s core business have, I think, become more apparent over the last year or so. Last year I made the point that “thereâ€™s no strong reason to suppose that Google will be around in, say, 20 years time,” but this was based more on general principles than on observation of any particular threat to Google’s dominance.
Now, however, I find myself using Google less and alternative methods of finding information on the Internet more. For the kind of search where you simply want to find out a specific fact (such as “when was Gough Whitlam first elected to Parliament”) it’s more efficient to go to Wikipedia. In any case, it is increasingly true that Google searches of this kind will point to Wikipedia, so you might as well go there directly.
The rise of blogs also makes a big difference. For current information, the main Google search engine is pretty much useless. Google News is good for mainstream media sites, but, since blogs have better coverage of many issues, it’s often more effective to use Blogpulse or Technorati.
Finally, and most significantly, there’s RSS. Rather than searching around a range of websites, I can identify in advance the places that are likely to have interesting new stuff, and scan them rapidly in an aggregator like NetNewsWire.
These things are probably not much of a problem for Google in the short run. The number of users moving to Google from older portal sites is probably greater than those moving away from Google to RSS and similar. Nevertheless, there is a fundamental problem in the long run. Ever since the Web began, there have been two alternative ways of finding things. One has relied on known structures and metadata explicitly included in web pages – call this the “conscious design” model. The other has been the “search engine” model of indexing everything and making inferences about structure from links.
The conscious design model was dominant early on. People found things by following links. Yahoo and others made efforts at a hierarchical classification of the entire web. But as the Internet grew and changed at incredible speed during the 1990s, this approach broke down. At the same time, technical innovations yielded improvements in web crawling so that search engines became much more efficient and up to date. In addition, the first attempt at using metadata was rendered useless by spammers. The stage was set for Google, which had a much better algorithm than any of its predecessors, and was also careful not to alienate users by such practices as selling high rankings.
It seems now that the wheel is turning again. Things like tags and RSS feeds are bringing us closer to what’s been called the Semantic Web. This opens up the possibility of using known structure to get information, rather than seeking random matches for search phrases. In these circumstances, Google searches become a backstop, to be used when other methods fail, rather than a first port of call.
Blogs are already pretty much like this. If I want to find out what blogs have to say on topic X, I will do a bunch of different things, including scanning my RSS feeds, putting tags into Blogpulse and Technorati or looking for trackbacks to existing post. Typing X+blog into Google is one option, but not my first preference.
As far as revenue goes, what really matters is searches relating to goods and services. At this stage, there’s not much in the way of useful metadata here. But that’s not surprising. The corporate sector has consistently been a follower rather than a leader in the development of the Internet. Once bloggers and wikipedians have blazed the trail, online merchants will follow sooner or later.
Of course, Google can see all of this. It seems likely that the money being raised now will be used to fund acquisitions like the earlier purchase of Blogger. But it’s harder to see how a revenue model can be built around things like RSS. It seems unlikely that people will subscribe to RSS feeds that include ads, and therefore unlikely that too many sites will use them.
Coming back to share valuations, I can see a few more years of solid growth for Google’s existing core business, followed by a gradual decline. The big question is whether new sources of revenue can be obtained either through acquisitions or through internal developments like Google Earth.
One important question is whether Google can maintain the high levels of goodwill its earned so far (especially by comparison with their obvious competitor, Microsoft). I’ll talk a bit more about this next time.