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Get Four
|  | JUNE 11, 2004
 SPECIAL REPORT By Scott Kessler Google: What Lies Beyond Search? S&P says the soon-to-IPO outfit's long-term future depends on how well it can diversify its offerings and appeal -- no small challenge The buzz surrounding the initial public offering of Net search leader Google is growing louder as the launch date draws closer (we at Standard & Poor's Equity Research Services expect it to happen sometime this summer, probably later in the season). Even Bill Gates has weighed in on the phenomenon: "Buy the stock -- whatever the price!" he joked at the D2: All Things Digital conference in early June. The IPO will likely be one of the largest and most talked about stock-market debuts in history. The intense interest in Google's public debut led us to undertake an independent and unbiased evaluation of the search giant, including opinions on its competitive position. And we've also come up with a preliminary assessment of its possible stock valuation (see BW Online, 6/11/04, "Putting a Value on Google"). S&P intend to issue the second part of our report, covering the IPO's Dutch-auction process, along with further details on Google's valuation, by August. (Editor's Note: This article is an excerpt from the full report. Subscibers to Standard & Poor's Advisor Insight can get the full versions of the Google Pre-IPO Report and Search Engine survey in .pdf format; Adobe Acrobat is required. Full .pdf versions of those reports can also be purchased directly at http://sandp.ecnext.com/ipo). DOMINANT SEARCH PLAYER. To better understand the online search category -- particularly its leader, Google -- we commissioned a proprietary survey of 1,000 Internet users nationwide in April, 2004 (see BW Online, 6/14/04, "Search Users Weigh In on Google"). We asked these users about their thoughts and usage regarding 15 online search services, ranging from America Online (a unit of Time Warner (TWX; recent price, $17.17; S&P investment ranking, 4 STARS, or accumulate), AltaVista, and Ask Jeeves, to WebCrawler and Yahoo (YHOO; $31.86; 3 STARS, hold). Some of the competitive industry analysis presented here are based on that survey's results. The poll showed that Google is by far the most popular Internet search service, used by 48% of respondents. Yahoo's offering was a distant second, with one in five respondents indicating they use it most. The search service of Microsoft's (MSFT; $25.96; 5 STARS, buy) MSN was the third-most popular, followed by those of America Online and Ask Jeeves. The order is largely in line with recent data from research outfits comScore Media Metrix and OneStat.com, giving us confidence in the validity of our survey and its results. Although Google is the leader in U.S. online search, we believe that Yahoo has become a formidable competitor. Moreover, we think future success in the category and related segments will be greatly influenced by factors beyond online search assets. The framework of our examination is based on information presented by Yahoo at its 2004 Analyst Day, but our assessments and conclusions differ somewhat from those the portal presented. HOME-PAGE HABIT. We think Google has the Internet's best current search technology, and according to our survey, 43% of online search users agree. Our survey indicates that while Google's use is motivated by the relevance and accuracy of its results, more than half the people use search offerings from AOL, MSN, and Yahoo because these services are their home pages -- or are part of their home pages -- or simply out of habit. Interestingly, neither America Online nor Microsoft currently own the search technology deployed on their sites: Google powers AOL's search services, while Yahoo provides MSN's capabilities.
Keeping its sights squarely on Google, Yahoo beefed up its search service by acquiring AltaVista, the Internet search business of Fast Search & Transfer, Inktomi, and Overture Services in 2003. After this service's relaunch in February, 2004, employing its newly constituted proprietary technology in place of Google's, Yahoo is poised to challenge Google in algorithmic search, in our view. One early victory: In May, 2004, Yahoo announced it won CNN as an algorithmic-search customer, replacing Google. Yahoo's Overture Services created the sponsored-search category, but it lost a number of customers following Google's entry into the business in 2002, including America Online, Ask Jeeves, EarthLink (ELNK; $10.25; accumulate), and Lycos. We also believe that Google has more sponsored-search customers than does Yahoo, which has retained MSN as a client. It's also worth noting that Yahoo has sued Google for alleged infringement of its sponsored-search technology.
BW MALL
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