More sell signs at Google (GOOG)

Cnn ran this story yesterday about Google titled "Google - factory installed from Dell?" http://money.cnn.com/2006/02/07/technology/google_dell/index.htm. The article talked about Google pre-installing search and other software on Dell machines and Dell being paid upto a billion dollars to place Google software prominently. There is also an analysis by Henry Blodget that comments why this will reduce Google's cash flows will deteriorate because of this placement.

While Blodgets analysis is right on the mark, the main reason for Google to do this deal is competition from Microsoft. Expect live.com to be the default web page on every version of windows that is shipped in vista onwards. Over the next three-five year period, MSN Search will be on every PC that is shipped to the tune of several hundred million machines. Despite making noises by investing in OpenOffice (known as Star Office before) and Firefox, Microsoft still is very strong and not having a prominent position on the desktop can stifle Google not to mention Yahoo!.

The main reason Google is doing this deal is not to cut into Microsoft's profit but to survive in the search business in five years time. Microsoft is investing heavily into search and its search engine is slowly but surely catching up with Googles. Google's solution will not be relevant in five years time as Microsoft ramps up in this market. Microsoft can cause a slight deflation in the search revenue by reducing the pricing for live.com ads. Microsoft doesnt rely on ads from its live.com today for generating its revenues and it can easily undercut Yahoo! and Google. Yahoo! doesnt have this power as it earns about 18 cents on every dollar of revenue.

The dell deal will blead money for Google which is just fine with Microsoft. It is going to depress Google stock and eventually Microsoft is going to win as Google cant afford to pay every OEM the money it is paying Dell and still run a profitable business. The main reason for increased profitability at Google and Yahoo! is increased price points for online ads. Expect it to decline in the next two-five years.

We discussed Google, Yahoo! and Microsoft in the following articles and why Google stock is not a buy at the moment.

http://finnews.blogspot.com/2006/01/google-goog-analysis-google-internet.html
http://finnews.blogspot.com/2006/01/google-and-search-engine-wars-part-iii.html