Google Dominance Google Dominance: The Marvels of Google-Mart
Edited by Eric J. Fry
The Rude Awakening
Wall Street, New York
Thursday, January 12, 2006 Eric Fry reports a discussion between Justice Litle and Bill Bonner on the possible Google Dominance of the world's information distribution network. ------------------------- - Google This! – The Internet giant leaves Eric's
cholesterol floundering in its wake,
- Find out how razor-thin margins and eye-popping
volume are contributing to the charge and,
- Your chance to trounce Google, a couple of beauties
to join Team Rude in Nicaragua and much more...
------------------------- Eric Fry, reporting from the Isle of Manhattan... Last spring, Google's share price topped your New York
editor's slightly elevated cholesterol level. At the time,
he expected Google to slip back below 200 well before his
cholesterol would. But he was quite wrong...Google has advanced from triumph
to triumph, soaring through 50-point price levels like a
balloon-catheter through a coronary artery. The stock flew
through $300 in July, $350 in October and then $400 in the
early part of this year...in the process topping the market
capitalizations of Cisco Systems, IBM and yes, even
Berkshire Hathaway. 
Not surprisingly, Wall Street pretends that Google's
amazing run is only just beginning and, of course,
thoroughly justified by the "fundamentals." In the past
week alone, Goldman Sachs raised its 12-month price target
on "GOOG" from $400 to $500, while Piper Jaffray issued an
even more brazen $600 target. From the very first day that "GOOG" began dancing across
the Nasdaq ticker, the stock has been nothing short of
spectacular. Since coming public at $85 a share in August
of 2004, the stock has more than quintupled. At its current
quote of $472 a share, therefore, Google sells for 98 times
trailing 12-month earnings – a valuation that would attract
very few value investors. Google earned only about $1.3 billion over the prior 12
months and employs only about 4,000 people. By comparison,
IBM earned $7.5 billion over the prior 12 months and
employs about 329,000 employees. And yet, investors have
awarded Google with a higher market capitalization than
IBM's. Is the stock worth such a seemingly preposterous valuation?
We have no idea. With respect to the Google's of the world,
we admit to a paralyzing combination of befuddlement and
awe. We behold the stock's amazing ascent like we would
watch a bull fight: simultaneously impressed and horrified. We observe its feats from the sidelines with the same range
of emotions and reactions we make experience at a bull
fight: We are simultaneously, impressed by the skills on
exhibition, terrified to participate and horrified by the
spectacle of it all. Google may not be worth anything close
to 98 times earnings, but then it again, it might not, not
be. Justice Litle, editor of Outstanding Investments, and Bill
Bonner, editor of the Daily Reckoning and signer of
significant paychecks, recently exchanged a couple of
emails about the New Era in which Google operates...and
thrives. Read on...
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Edited by Eric Fry "Google's dominating trait," Justice Litle recently
observed, "is not the ability to transform Internet search
processes – the visible skill – but its ability to
coordinate data intensive processes – the invisible skill –
on a scale never before seen, with a finesse that none can
match. "The interesting point isn't whether Google will dominate
cyberspace. The point is that while wide-eyed futurists
need to be humble in their predictions, those of us who
rely heavily on the past need to be humble too. It really
is possible for new ideas and new innovations to turn the
game completely upside down. The goal is always the same --
to add value, to unlock efficiencies, to produce something
people want -- but the process for doing so is evolving
rapidly. "It's the same old world, but it's getting faster in
meaningful ways that can't be written off. Just as
scientists stand on the shoulders of giants in a knowledge
sense, today's producers stand on the shoulders of giants
in a productivity sense. Not a justification for airy-fairy
techno-worship... but food for thought in terms of
companies' and individuals' ability to create more value
per unit of time than ever before. "For example, say that Wal-Mart makes half a cent per tube
of toothpaste sold. Not much, but they probably sell an
aircraft carrier's worth of toothpaste every single day.
Multiply that half-cent margin by a hundred thousand other
products sold in prodigious quantities and you're talking
massive profits. Sign Up for The Rude Awakening Start your mornings off with a dose of Rude news. The Rude Awakening is dedicated to highlighting phenomena in the financial markets that others may not see. Let the Wall Street Journal and the New York Times "break news." Sign up FREE Today! We will not share your email address with anyone else, period.
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Google Dominance: Thin Margins, Heavy Volume "If a single player can dominate the world's information
distribution network in the same way that Wal-Mart
dominates the distribution of low cost consumer goods, that
player could enjoy a profit model similar to Wal-Mart's:
razor-thin profit margins leveraged to eye-popping volume. "The consumer wins in this scenario because margins are
taken as close to zero as possible. Competitors lose
because building and distributing the network, and then
running it at razor thin margins, is such a Herculean feat. "Google's success – like Wal-Mart's – relies upon a
superior logistics and distribution system. In fact, the
main source of Wal-Mart's profits is actually the company's
logistics prowess, which facilitates the scope and scale of
its network. Wal-Mart is probably one of the most efficient
companies on the planet. If Google can pull off the same
feat with distribution of information, in whatever form it
may come, it could theoretically capture the same
invincibility of Wal-Mart -- or even surpass Wal-Mart in
scale and scope. "The owner of the information distribution network, who is
able to combine razor-thin margins and mass distribution,
can squeeze the margin of all product delivered over that
network through its own ability to deliver for free. And it
becomes a hero to the public at the same time for
delivering a flood of cool cheap-or-free stuff. Google Maps
and Google Video being recent examples. "It is the ultimate application of Milton Friedman's
observation: the function of capitalism is to drive profit
margins as close to zero as possible (to the ultimate
benefit of the consumer)." "Yes," Bill Bonner replied, "but information and toothpaste
are very different. Information has no value. It has to be
given value by context...marketing...etc. It is typically
not a price-sensitive market...it is a quality-sensitive
market. You dominate it by building a reputation for
quality, not by cutting margins. "In fact, capitalism sometimes narrows profit margins and
sometimes widens them. Capitalism is nothing more than
economic competition with property rights recognized
sometimes, more or less. The outcome is as unpredictable as
any competition." Google Dominance: Domination Because of Superior Network "Absolutely," Justice conceded. "But as far as this
model/idea goes, Google is not trying to monopolize the
information business. It is trying to dominate the
distribution of information – not by strong-arming its
competitors, but by building a logistics network superior
to anyone else's. "The beauty of the Google idea is that it doesn't have to
produce any content, any more than Wal-Mart has to make
tooth paste. They simply distribute it, in the same way
that Wal-Mart distributes goods it does not make (and has
no desire to make). "If you have the best network – in terms of speed,
reliability, storage capability or all three – then it
doesn't matter what information goes over it or who creates
the information that passes through it. You are like a toll
collector, except people are happy to pay your toll because
you have the best roads. People can swap videos, phone
calls, romance novels, Greek pastry recipes...As long as
they are exchanging information over your network, you can
earn revenue through the distribution of that information,
without having to create it. "The information business is not Google's game at all,
except in terms of organizing it and facilitating its flow.
And so far, no one organizes and facilitates better than
Google. Does that mean Google's lofty valuation will hold
up over the short term? I can't answer that. But I expect
its business strategy to thrive over the long term." [Joel's Note: You may notice Justice has been featured in a
number of these email exchanges of late. This is wonderful
news for his readers, who benefit from a flurry of in depth
investment ideas. Justice's latest discovery is not for the
faint of heart or the weak of stomach. Learn how you can
profit from the coming petroleum apocalypse right here: "Petrocalypse Now!"
http://www.isecureonline.com/Reports/OST/EOSTFC25/
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will not be in monetary form, but they will be satisfying
nonetheless. For parting with $160 of my meager savings, I
am allowed the pleasure of taking two real beauties with me
on our Rude trip to Central America next week. They are both in the 6ft range, though one is slightly
wider than the other and has a rounder tail. Both are
freshly waxed and have brand new leashes. I am told the surf should be between four and six feet so
bringing both surfboards should ensure I have the
conditions covered. We will be staying right on the
beachfront in Rancho Santana, Nicaragua, for seven
glorious, sun-drenched days and six balmy nights. You'll be receiving your Rude Awakening, as normal, only
there will be a few extra bonuses. There will be a few
interviews with fellow travelers, some international
investment insight and maybe, just maybe, some photos of
your surf-starved editor, riding the waves of the week and
loving it! If you have any comments on today's "google-mart" article,
some travel pics of your own you would like to share or an
idea for a future Rude column, email me here at
aussiejoel@the-rude-awakening.com and let me know. Cheers, jOEL
-------------------------
And the Markets... | Wednesday | Tuesday | This week | Year-to-Date | DOW | 11,043 | 11,012 | 84 | 3.0% | S&P | 1,294 | 1,290 | 9 | 3.7% | NASDAQ | 2,331 | 2,320 | 26 | 5.7% | 10-year Treasury | 4.46 | 4.43 | 8.00 | 6.00 | 30-year Treasury | 4.63 | 4.61 | 7.00 | 9.00 | Russell 2000 | 711 | 711 | 12 | 5.6% | Gold | $547.75 | $542.50 | $7.80 | 5.9% | Silver | $9.01 | $8.91 | -$0.13 | 2.2% | CRB | 335.71 | 336.45 | -3.76 | 1.2% | WTI NYMEX CRUDE | $64.05 | $63.35 | -$0.16 | 4.9% | Yen (YEN/USD) | JPY 114.16 | JPY 114.32 | 0.27 | 3.2% | Dollar (USD/EUR) | $1.2125 | $1.2071 | 29 | -2.4% | Dollar (USD/GBP) | $1.7641 | $1.7656 | 65 | -2.5% |
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