Friday, January 13, 2006

Google and Search Engine Wars - Part III

In the earlier post, we analyzed the cash flow of three search majors and found that Microsoft still has an advantage over Google. The pointer to that article is noted below.

Of late, some of the Google bears have come out of hibernation. Henry Blodget, of the infamous estimate has written about Google in his blog. Cramer of madmoney has also been asking people to take profits and is not sounding overly optimistic about Google going beyond 500. What is the matter here? Should we be selling Google now or hold on to it?

Blodget is right about more competition and shrinking P/E for Google. However, I think his bet that click fraud will kill Google is a bit misplaced.

I signed up for Microsoft's adcenter. It looks pretty neat from the advertisers point of view. I got an offer to put up my ads on adcenter for no fee as a promotion for six months. The margins Google is going to generate from online ads will definitely deteriorate over the next two years. Microsoft doesnt have to make money from ads immediately as their other businesses are generating better profit margins than either Google or Yahoo! at the moment. Also - Microsoft's MSN portal ( stodgy one ) will continue to generate the ad dollars when the live platform begins to make money.

The bright note for Google is that adcenter wont be fully online for another six months. Also - the Google ads are placed better than adcenter ads at the moment. Google has also the advantage of getting traffic from a lot of small websites. Microsoft doesnt have a business plan for this yet. In addition, Microsoft's search is not as well known as Googles. Typing is easier than typing in the browser. Google has also done a better job of monetizing its e-mail and other web properties better than either Yahoo! or Microsoft.

The point to note is that while Google technology is superior to Microsoft and Yahoo! today, Google by no means have monopoly power like Microsoft does with its Windows and Office software suite. Since Google doesnt have monopoly power, look for more fierce competition in this space in the next couple of years. Google will always be a viable player but Google's P/E and profit margins will likely decrease. Yahoo! will be taken over if the founders allow it to - otherwise, it will continue as an independent company. For another six-nine months, things should continue to be ok for Google and expect a bunch of upgrades from other analysts after this quarter.

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