Can Google Really See a Decline in Revenues?

by: Ashkan Karbasfrooshan December 03, 2008 | about stocks: GOOG    
Ashkan Karbasfrooshan

Ashkan Karbasfrooshan

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Could Google (GOOG) possibly be looking at two straight years of lower revenues? First, let's look at Google's historical revenue growth:

Then, let's consider the horror. Via Barron's:

Global Equities Research analyst Trip Chowdhry laid out in a research note today. He sees the company posting revenues of $15.71 billion this year, $15.23 billion next year and $14.57 billion in 2010, with profits of $19.44 a share this year, $19.24 next year and $17.98 for 2010. While his 2008 number is about in line with the Street consensus, he is way below most other forecasts for both 2009 and 2010. Chowdhry today set a price target on the stock of $270, which as it happens is not far from where the stock closed.

What does this look like with regard to year-over-year growth? Is this possible? Well, anything is possible. Of course, if this pans out, then forget about my 2006 call for Google to be worth more than MSFT by 2010. But let's explore this argument and see if indeed Google can see declining revenues.

Conventional wisdom is that paid search is more resilient to a downturn, because it is an ROI-based form of advertising, whereas banner display ads will soften up. As a result, the Google Bulls would say this doomsday scenario is impossible.

I am not so sure. I think it boils down to basic economics.

I agree that search is a better way for ROI-sensitive advertisers to market themselves compared to display banners, but the problem is that paid search is powered by individuals, small and medium-sized businesses who will have a higher propensity to reduce their ad budgets in a downturn. In aggregate, this will add up to quite a loss of revenue. Could it represent the missing $3-5B? Possibly.

At the other end of the spectrum, while Fortune 500 marketers will reduce their ad budgets too, they will continue to shift dollars away from untracked, offline media to online, tracked media.

When it comes to the biggest marketers and global ad agencies, this means a shift to display banners (in the form of rich media) and video advertising, not paid search. Yes, paid search will remain a major part of online advertising (it's 40% now), but this is not where ad agencies and marketing executives want to play in: marketing remains a "soft science" so don't expect the Web to devalue intangibles like branding and brand equity.

Brand equity, my friends, is not measured via text link. Only display banners, rich media and video advertising will really increase brand equity (though text links can play a role there, too).

I know what you're thinking: display banners will also move towards a performance-based model. Hmm… not sure, not so fast. Yes, crappy sites with crappy inventory will have to accept advertisers' requests for performance-based pricing models (CPC, CPA) but the premium sites will never accept this. They don't have to.

The social networking boom has increased supply of inventory, but on the low end of the spectrum. The experimentation will dissipate as marketing budgets come under pressure and there will be a flight to quality on premium content sites.

Lastly, there is an "underground" mindset with paid search that has a lot more to do with outbidding your competitors than earning a positive ROI. When I was running text ads promoting my second book "The Confessions of Alexander the Great: 33 Lessons in Greatness," I was at one point more concerned with outbidding a fellow author than with sales.

Sad, but true. The same could be said about Google's revenue growth in 2008-2010. This does raise the question: what is Google's management doing to diversify Google's revenues away from its one cash cow?

  • Doubleclick will help Google a bit on the display end of things, but Doublelick is an ad server with brutal margins and limited upside potential.
  • YouTube might be generating hundreds of millions of dollars per year, but it won't be making up the shortfall any time soon. Disclaimer: WatchMojo.com supplies videos to YouTube.
  • Feedburner had some potential but I don't see email advertising being a multi-billion dollar business for Google either.

As such, no wonder Google is looking at cost reductions to make up for falling profits.

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This article has 2 comments:

  •  
    Dec 03 02:43 PM
    Hmmm. When unemployment hits 10%, there will be a lot of people searching on Google. But will advertisers want to pay to reach them?
    Reply | Link to Comment
  •  
    Dec 03 03:02 PM
    The other 90% of the population will still be out their shopping. With gas prices at $.50 per gallon they will have money to spend, too.
    Reply | Link to Comment
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