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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
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Get Four
|  | JUNE 11, 2004
 SPECIAL REPORT By Scott Kessler Google: What Lies Beyond Search? [Page 2 of 2] WEAKNESS OUTSIDE THE CORE. Our survey indicates that Google has the leading Internet search brand. When asked to name a search service, half of the Internet users we surveyed said Google, followed by Yahoo, MSN, and AOL. This isn't surprising, given that the word Google has become synonymous with online search. We believe that as search offerings become more similar (i.e., commoditized) over time, brand will play a more pivotal role in attracting and keeping users. However, because Google has established itself so indelibly in the search category, we think it could experience branding challenges as it expands into new segments. We believe this is why it didn't include its flagship brand in the names of some of its newer offerings: Froogle for comparison shopping, Orkut for social networking, and Gmail for e-mail. Although Google has an advantage over Yahoo, Microsoft, and AOL in terms of technology, user satisfaction, and brand strength in online search, we believe its positioning is not nearly as favorable when it comes to areas beyond this core segment. Because of the nature of most of Google's consumer search services, the company has few registered users. The clear leader in that regard is Yahoo, with 141 million registered users at the end of the first quarter of 2004. AOL was a distant second, with 32 million, while No. 3 MSN had 8 million. TOUGH REPLICATION. While this disparity doesn't seem to have had a negative impact on Google's growth and profitability so far, its ability to most effectively target advertising and monetize its offerings requires the establishment and enhancement of closer relationships with its users. Yahoo has an edge over Google, in our view, because it knows a great deal about its users, not only because of the registration information they provide but also because of the significant breadth and depth of Yahoo content (news, HotJobs, Yahoo Mail, Yahoo Messenger, etc.) that they consume. While Google has a number of consumer offerings, most of them are focused on search. Google's foray into news and e-mail services seems intended to better position it to emulate Yahoo's strategy. But we think Google will have difficulty replicating Yahoo's success in consumer content and services. We believe that while Google News garners millions of unique users per month, this is largely attributable to 41% of the outfit's users searching for news. With Froogle, Google has extended its search capabilities to comparative shopping. But users of Google search somewhat less for information about products and services than those of other major search services. While Froogle is a single, focused application, Yahoo offers similar search functionality, as well as browsing capabilities, a shopping marketplace, and payment offerings. We believe Google's relatively narrow range of online shopping services puts it at somewhat of a disadvantage vs. some of its competitors, including Yahoo. DIVERSITY IS KEY. Our research suggests Google will experience challenges with services that require users to provide personal information such as a name, a home address, or an e-mail address. For example, only 14% of Internet users would provide their e-mail addresses in order to receive automated search-result updates. And our survey suggests that only 23% of online users would sign up and regularly use Google's Gmail service. Google users were comparably unenthusiastic about these offerings. Moreover, Yahoo indicated it would increase the storage capacity for its free and market-leading e-mail service this summer. In our view, having diversified online marketing offerings is crucial to the long-term success of any Internet media company. We believe advertisers have been increasingly pursuing multifaceted online marketing strategies to more effectively interact with Internet users. Keyword search is the largest component of U.S. online advertising, and Google derives virtually all of its ad revenues from this category. The growth in that segment speaks for itself. Based on data from PricewaterhouseCoopers/IAB Internet Advertising Reports, the overall keyword search category generated $81 million in revenues in 2000, representing only 1% of overall online ad sales. Jump ahead to 2003, and keyword search accounted for $2.5 billion in revenues -- a hefty 35% of the total U.S. online ad-sales pie. And by 2005, S&P estimates that it will garner over $4 billion, and grow to 41% of the overall total. However, AOL, MSN, and Yahoo all derive significant revenues from many other types of online advertising, including the second-largest category -- display ads (e.g., banners) -- and the fastest-growing segment -- rich media (which employs audio, video, or animation to foster greater user interest and interactivity). Google has started to offer branded advertising options to its Google Network customers to address this shortcoming, but its success in this endeavor is uncertain. ISP LINK. The search giant also comes up short in terms of software offerings. AOL and Microsoft have their Internet software on computers around the world, from browsers, to media players, to messaging offerings (i.e., AOL Instant Messenger and MSN Messenger). This constitutes a significant competitive advantage over Google and Yahoo. While Yahoo has the Internet's second most-popular messenger product, according to comScore Media Metrix, Google's only notable foray into consumer software is the Google Toolbar. Although our survey indicates that the significant opportunity for penetration is associated with search toolbars, all of the major players offer them. Increasingly, companies have been partnering to aid toolbar distribution. Over the past month or so, Google signed a deal with with RealNetworks (RNWK; $6.11; 3 STARS, hold), and Yahoo aligned itself with Macromedia (MACR; $24.75; 3 STARS) We expect this trend to continue beyond toolbars. Perhaps more important from a distribution standpoint, in our view, is that AOL, Microsoft, and Yahoo all own or are affiliated with Internet service providers (ISPs), and their search services benefit as a result. Our survey indicated that the primary reason people use these companies' search offerings is because these services are their homes pages or are part of their home pages. Only 11% of Google users are motivated similarly. GLOBAL REACH. That's why we expect Google will try to foster closer relationships with ISPs. It already has a relationship with EarthLink, and we believe an enhanced partnership between them would be mutually beneficial. However, we don't expect Google to use its IPO proceeds to acquire an ISP for a variety of reasons, including that such a transaction would severely reduce its profitability. We foresee Google pursuing alliances comparable to the linkup between Yahoo and SBC Communications (SBC ), for example. One other challenge facing Google: Building a user base outside the U.S. We believe that global reach is important to Google's future because growth in international online users, usage, and advertising is becoming increasingly significant. Based on data from Nielsen/NetRatings, we believe that in terms of unique users, MSN is the world's leading online destination, offering content through 38 international Web sites. We see Yahoo as a close second, with more actively used online services that are available in some 20 countries and 13 languages. Although Google has 95 international domains, and its interface is available in 97 languages, its global audience lags behind those of MSN and Yahoo. Moreover, the breadth of Google's international offerings is somewhat limited. Where does Google stand as it prepares to set sail as a public company? The search king has some powerful things in its favor: advanced technology, useful offerings, strong brand, and a compelling business model. But it does face significant challenges. Although we foresee a successful near-term future for Google, we aren't as convinced as some other observers about its long-term prospects as it ventures beyond its core competency of search -- and faces increasing competition. Note: Scott Kessler is a Standard & Poor's Equity Analyst. He has no affiliation with any company discussed in this article. He has no ownership interest in any company discussed in the article. Regarding Microsoft, Time Warner, and Yahoo, affiliates of Standard & Poor's Securities Inc. received noninvestment-banking compensation from each of these companies during the past 12 months.
 Analyst Kessler follows Internet software and services stocks for Standard & Poor's Equity Research Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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