Above all, Google is a data processing company. Early on, its founders realized that traditional IT was inadequate for indexing the internet, and committed to radically re-engineering data center technology. Today, Google operates the biggest, fastest, most efficient, distributed data processing network there is, with profound performance, reach, and cost advantages over its next-best rivals, Microsoft, Amazon and Facebook. This is the engine of the dominant search franchise, successful initiatives like maps, streaming video, and messaging, and work in progress like social networking and e-commerce. The huge, growing Android community, the quality and performance of Google’s cloud apps, and that extraordinary data processing infrastructure yield a trove of monetization options, of which, only a handful have been pursued … so far. Although financial results have been choppy with the economy and the shift to mobile, the user experience paradigm is shifting off of the device and toward integrated cloud applications, overwhelmingly favoring Google and driving future growth. The biggest risk for Google is government intervention. We believe that these threats, in many jurisdictions, can be negotiated without significantly diluting Google’s bright future.
The greatest data processing company on earth! Google does many things – e.g. search, advertising, Android, streaming media, etc. – but at its heart, it is a data processing company. Google essentially invented the cloud, and is generations ahead of its rivals in the sophistication, performance, cost, and reach of its 36 networked data centers. With the deepest roster of computer scientists, aggressive investment plans, and a big and fast growing stream of revenues from its cloud services to fuel it, Google’s advantages over its rivals, like Amazon, Microsoft and Facebook, are widening. This core asset is the base of all of the company’s many business initiatives, from the cloud services that ride it (Search, Maps, YouTube, Docs, Google+, Gmail, etc.), to the Android and Chrome platforms that shepherds users to those services.
Android insures Google’s scale advantage. Android is Google’s loss leader. The app paradigm gives platforms huge power over how consumers use the internet. Without Android, Google risked being squeezed by Apple, which could favor inferior rivals and eventually erode Google’s scale advantages. Android puts Google’s applications front and center, and has been wildly successful. Android now dominates the global smartphone market with 75% share in Q3, and appears to be gaining momentum in tablets toward the same end. As the nexus of the user experience shifts away from stand-alone applications on the device and toward integrated cloud resources, Android should gain further advantage, giving Google preferred access to the lion’s share of cloud opportunities. To a lesser extent, the market leading Chrome browser is positioned to play the same role for Google on the desktop and on other mobile platforms.
Google is the best and most broadly positioned cloud application player. Google search is, arguably, the most valuable the most valuable web business ever created, generating $47.5B in annualized revenue growing at 33% with 28% margins and an 80% share of the internet search market. On portable platforms, Search is the centerpiece of an archipelago of related applications, including Maps, Places, and Play, which provide further monetization options. Gmail recently reported 425 million active users, having caught and passed long time leaders Hotmail and Yahoo. YouTube reaches 800 million global viewers, streaming more than 4 billion hours of video each month, nearly four times the volume of Netflix. Docs has just 4% of an office software market dominated by Microsoft, but is growing at >100%/yr, and has a critical foothold into the enterprise market. Google+ is pitched as a social layer above all of Google’s apps, boasts 100 million active users many of whom use the popular Hangouts video conferencing capability. No other company can boast a web portfolio nearly as impressive.
Ads: Google’s monetization of choice, not necessity. 85% of Google’s revenues come from search advertising, 11% from display ads (including video) and 4% from a grab bag of other sources. Given the primacy of search, investors have been spooked by “cost per click” declines that may be attributable to the shift to mobile platforms, where ad formats and metrics are immature and advertisers remain cautious. Longer term, the ability to target users by location and increasingly an increasingly rich palette of user data, through a variety of integrated application contexts and a variety of formats, should make portable platforms MORE valuable to advertisers than the PC. Moreover, Google’s greatest advertising opportunity may be video, where YouTube can target $200B in global TV ad spending. Ultimately, Google’s broad portfolio and its peerless IT infrastructure could support non-advertising revenue models – it already sells its Docs software as a service, provides cloud hosting for 3rd parties, offers e-commerce through its Play store, takes transaction fees in Google Wallet and sells the Nexus line of devices. Google’s platform leadership, its global reach and its IT infrastructure position it to expand on any or all of these monetization themes in the future.
Value for users is shifting off of the device and into the cloud, favoring Google. With faster and more ubiquitous wireless networks, device platforms are increasingly integrating cloud-based functionality that bridges content and applications across devices. These functions – e.g. integrated search, voice interfaces, maps/navigation, messaging, image/file storage and sharing, electronic wallet, streaming media, etc. – are becoming the basis of platform differentiation. Here Google’s portfolio of intermeshed cloud applications and its superior data center capability are a substantial advantage vs. either Apple or Microsoft.
Government intervention is Google’s biggest threat. Google’s powerful IT infrastructure, Android market momentum, and portfolio of leading cloud assets, such as search, video streaming, and internet advertising, are a competitive bulwark for the company’s core revenues and a springboard to future growth and new opportunities. However, inquiries at the FTC and by several European governments could lead to restrictions on Google’s ability to leverage these advantages or hamstring the effectiveness of its core search franchise. While we believe catastrophic outcomes are very unlikely, the potential for some level of regulatory burden is real.
For our full research notes, please visit our published research site.