Tag Archives: Google

Google: The March to a Trillion Dollars

13 Feb

google vs microsoft

The appointment last week of Satya Nadella to lead Microsoft got me thinking about another company: Google.  There are many points of similarity between the two companies, but the differences are key.

Both companies are effectively monopoly businesses.  Microsoft was and on the desktop perhaps still is an OS software monopoly.  Until recently with the rise of tablets and smartphones, Microsoft never faced real competition in its market.  Similarly, Google possesses roughly 2/3 market share in the online search industry and its share of online search profits are higher.  Like the Microsoft of yore, Google faces few credible threats to its core search monopoly.  Bing and Yahoo’s efforts have largely failed, and the worry of Facebook challenging Google through social search  is much more benign than once thought.

Microsoft and Google’s monopolies in their respective core businesses leads to two of the biggest cash machines the business world has ever seen: Windows and AdWords/AdSense.  Both businesses are high margin and throw off tons of cash.  This has given both companies incredible leeway to do three things: #1. Enter new lines of business; #2. Be highly acquisitive in support of #1; and #3. Retain talent.

I think this is where the comparisons between the two companies largely ends.  The main difference I see is that Google is ambitious in a way that Microsoft never was and no other company is, and Google is much smarter at building around its core search business.  These are two sides of the same coin.

On the one hand, Google is expanding into new areas far afield from core search.  Take Google’s well publicized self-driving cars initiative.  This requires a huge level of technical talent and investment that very few companies can make.  It’s also incredibly audacious and a potentially huge new  business for Google.  Compare this to say Microsoft’s Xbox effort.  Xbox has been Microsoft’s most successful consumer business and its a great product (I own one).  Having said that, I’d argue that it’s a less ambitious effort than something like self-driving cars and the potential size of the business is more limited.  Google is tackling huge, unsolved technology problems with much larger market opportunities.

Aside from more ambitious efforts to expand beyond its core business, Google is also much better at and more strategic about defending and growing its core.  Microsoft is limited in some ways because it’s much harder to introduce new products that monetize off of the Windows monopoly, whereas Google has plenty of options to introduce new products that monetize off of core search and its ad platforms.

For example, Microsoft’s efforts at building an online business – Bing, MSNBC, etc. – have a completely different monetization model than Windows.  Ditto for Windows Mobile.  You could argue that Windows Mobile makes it easier for Microsoft to retain its desktop users and therefore defends their  OS monopoly, but the only way they’ve made new revenue off of Windows Mobile is by selling licenses to smartphone OEMs and now by selling Nokia hardware bundled with Windows.

Contrast this with Google where much of what it does not only defends its search monopoly, but also grows it and creates revenue.  Whereas Microsoft started off by licensing its Windows Mobile platform to OEMs, Android is free.  Google did this because Google is able to earn money off of mobile search ads.  It’s a way for Google to protect its core business as user’s spend more of their online time on mobile devices.  Similarly, Google Glass and self-driving cars may very well end up monetizing primarily through serving ads off of Google’s existing platform.

To summarize it all, I think Google is far more ambitious in entering potential new businesses than any large tech company today, and its in a much better position to defend and grows it search monopoly than Microsoft was with Windows.  AI have no doubt that Google will be the world’s most valuable company in the not-so-distant future, and that it will be the first company in history to reach $1 trillion of market cap.

Wall St’s too short term? Look in the mirror.

11 Aug

A friend sent me a link today to Jeff Bezos’ letter to shareholders from Amazon’s 1997 Annual Report.  It’s a great read.  Bezos lays out his long-term operating principles and basically cautions investors that Amazon will (a) focus on long-term strategy and dominance; and (b) this will mean that it will sacrifice short-term profitability.  Amazon continues to follow this strategy today as it invests heavily in long-term bets (AWS, Kindle, logistics infrastructure, etc.) and runs a low-margin business.  And investors continue to reward the company.  The stock is at an all-time high and it’s market cap is approaching that of traditional software giants like Oracle.  The latter fact is pretty astounding when you realize that Oracle had $5b of operating income quarter, whereas Amazon had <$100m.

I say all of this because one of the big debates in Silicon Valley over the last 4 years has been over the merits of going public versus staying private.  And one of the most often cited reasons for staying private is the ability to “innovate” outside the quarterly earnings pressure of public markets (other reasons are the distraction of the IPO process itself, cost of filings and ongoing SOX compliance, etc.)  In most cases, I don’t think the idea that Wall St is too short-term is a valid reason to stay private, though there may be other reasons.

wall st bull

There are two related arguments people make.  One is that the market is too focused on short-term earnings.  The other is that public companies can’t innovate because of this.  So I ask: what’s the evidence for this?  Some of the most innovative companies in tech – Google, Apple, Amazon, VMWare, eBay, Tesla, Netflix, Linkedin – are public.  These companies don’t have any trouble pursuing new initiatives, speculative ventures, interesting M&A, high R&D spend, etc. under the glare of the public market.  And every company on this list has been richly rewarded by the market.

In fact, some of these companies actively shun Wall St’s supposedly myopic focus on short-term earnings.  Amazon continues to be an incredibly low margin business and continues to invest heavily in growth and new businesses.  Similarly, Google doesn’t even provide quarterly guidance to investors.

The reality is that the public companies that face supposed Wall St “short termism” are the ones that have flawed business models.  Would Zynga and Dell (to name two troubled companies) rather be private right now?  Of course, well at least we know for sure in the latter company’s case.  It would take the heat off.  But the reason there’s heat to begin with is they’re flawed companies.  People don’t want to play expense-to-produce Zynga style social games on their desktop, and PCs are rapidly losing favor to the tablet revolution.  Public markets are very efficient at recognizing this.

If Dell and Zynga laid out a credible, long-term story to investors then I public markets could be receptive.  But they haven’t.  Dell has been trying to transform itself in to an IBM style enterprise software and services company for years.  It has spent billions of dollars in the process, which incidentally it may not have had access to as a private company.  Similarly, Zynga hasn’t laid out a credible story for where it goes from here, for example backtracking on earlier talk of exploring the online gambling market.  Zynga might even be in a worse position right now if private because they wouldn’t have access to the $1.1b of cash they currently have on their balance sheet.  Ditto all of this for other companies like RIM, which is also reportedly thinking of going private to “refocus with less scrutiny.”

Maybe the point of all of this is that a few exceptions withstanding, the best companies go public and they have no problem doing so.  They’re able to think about the long-term and invest in innovation without difficulty.

If you can’t compete effectively under the lights of the public market, don’t blame Wall St.  Look in the mirror instead.

Google Glass: half empty or half full?

12 May

ImageLots of discussion of Google Glass recently.  Overall, I think it’s way too early to try to prognosticate one way or the other whether this new technology is the next iPhone, or it’s more akin to something like the Segway.  I certainly wouldn’t outright dismiss it as stupid or silly – that’s been done before too many times with technologies that ended up being transformational, whether it’s Twitter or the internet and computers themselves.  

To a lot of people who aren’t technophiles, the idea of walking around with computerized eyeglasses is silly.  In the case of Google Glass, the initial aesthetics exacerbate the problem.  Let’s be honest, they look a little ridiculous.  At this point, you do have to be a huge dork to walk around with these things.  Having said that, let’s not be so quick to dismiss this product because of it’s aesthetics.  Anyone remember what early cell phones looked like?  time, Glass’ component parts will get smaller and there’s potential for Google to partner with a design house to make these things look more fashionable.  Image

Another clear barrier to adoption of Glass right now is price.  Taking the cell phone analogy further, the first cell phones were insanely expensive.  Any new technology, especially when it involves hardware, starts out extremely expensive and follows a natural cost reduction curve over time.  PCs, storage, cloud computing, solar panels, digital cameras, etc. are all examples.  Glass will of course follow this curve.  There will come a point in time when price isn’t a factor in people’s purchase decision.  

If the aesthetics and price are fixed, I really think consumer adoption will come down to the applications that are built for Glass and their usability/utility.  Right now, cost and everything else aside, for most people there isn’t a compelling reason to buy this device.  This could change.  Third party developers are starting to build for the Glass platform and there will no doubt be some interesting applications that come out of this.  Look at what developers have done with smartphone applications, and then add in the visual eyeglass element and there’s a lot to play with here.  

It’s too early to tell whether there will be broad consumer adoption of Glass or not.  Having said that, I think there’s a much clearer argument for Glass to get business/workplace adoption.  In areas like medicine, law enforcement, warehouse management, etc. there are countless uses you could see for Glass.  Google at its heart though is a consumer technology company and this is meant to be a consumer device.  I don’t know how far they will continue to push Glass if it ends up not resonating with consumers.  Time will tell.  

Innovation Debate: Take Two

7 May

Yesterday I posted the video of a recent debate between Marc Andresseen and Peter Thiel regarding the state of “innovation.”  One of Thiel’s contentions is that breakout innovation leads to big ideas which in turn ends up creating huge companies.  To support his thesis that levels of innovation have declined, he points to the fact that the total market cap of tech companies founded in the 1990s is significantly larger than the combined market cap of companies created in the 2000s.

A couple thoughts and questions on this:

  1. There is a time effect here that needs to be adjusted for.  There’s natural market/GDP growth that older companies will have benefited from.  Salesforce has a $25b market cap today, it’s completely plausible it will be 2-4x that in a decade. Ditto for Facebook, Workday, etc. etc.  This effect, however, probably isn’t large enough  to explain the variance on its own.
  2. How much of this effect is one company – Google?   Google’s market cap today stands at around $285b, dwarfing the next largest company in the analysis set (Amazon at $116b).  Google is a special company that’s going to skew any comparison like this.  Google was also incorporated in September 1998.  Move that forward 16 months and suddenly Thiel’s comparison reverses.
  3. While the aggregate public market cap dollars created might have declined between the 1990s and the 2000s, my sense is the the absolute number of tech companies reaching a $1b valuation has definitely increased (anyone have the analysis to back this up?).  It certainly wouldn’t be any surprise given the lowering of startup capital requirements, huge increase in internet users and IT spend, etc.
  4. Fewer companies are going public today, which Andresseen noted in his comments.  A proper analysis would need to adjust for M&A transactions and valuations of well-established private companies like SurveyMonkey.

My point here isn’t to argue that Thiel’s comments are necessarily wrong.  I just don’t know that looking at public company market caps leads to the easy conclusion he’s trying to make.

His overall question still stands though.  Are the big, low hanging opportunities in tech already taken?  Are there still $100, 200, 300 billion opportunities available?

Note: spoke to a friend after this.  He made a great point, which is that it would be interesting to do Thiel’s analysis for other sectors.  Which sectors show the opposite effect?  My guess would be Healthcare, Biomed, and maybe Energy/Commodities?

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