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Antitrust

Google empire builders aren't "sharing" with investors...revenue up 51% but earnings up only 17%

After last quarter's earnings report by Google, I questioned whether Google was more interested in "empire building" spending than in rewarding shareholders (see point three of this previous post.)

  • I've heard lots of explanations why investors have soured on Google's stock:
    • Economic downturn (Google said no on its call)
    • Pay-per-click rates; (Google downplayed this in its call)
    • slowing traffic/searches... (ditto)
  • My simple explanation is that the "momentum pixie dust" that Google has been flying on for a long time -- simply came to back to earth.
    • Investors know what fuels "momentum pixie dust" is actual and expected earnings acceleration.

What blew away the "momentum pixie dust" surrounding Google's stock? At least for the time being?

FTC paved way for approval of Microsoft-Yahoo in approving Google-DoubleClick 4-1

I can't say I'm at all surprised to see Microsoft seek to acquire Yahoo. 

  • It makes obvious business sense for both Microsoft and Yahoo -- because it is the only viable and timely strategic option for either company to become a serious and credible competitor to Google-DoubleClick's rapidly increasing dominance of search and Internet advertising.
  • And given the FTC's surprisingly-strong consolidation-endorsing analysis of the Google-DoubleClick merger -- a previously-perceived yellow antitrust light to such a merger by Microsoft -- now has a bright blinking green light for approval.
    • Timing-wise it's obvious to Microsoft to get approval now while the getting is so good.

Google on 4Q07 earnings call: "we're almost uniformily seeing a gain in market share"

In the 4Q07 Google reported that revenue grew 51%!

  • To put this in perspective, Google grew incremental revenues by $1.6b (4Q06 to 4Q07) which is almost as much as  Yahoo's entire revenues for the same quarter of $1.83b. 
  • Moreover, at 51% revenue growth, Google grew over six times faster than Yahoo at 8%.
  • Furthermore, Yahoo is projecting capital expenditures (in part to improve search) will be $675-775m for all of 2008, while Google just reported that it spent $678 million on cap ex in just 4Q07.
  • Lastly, Yahoo is announcing layoffs of about 1,000 people, while last quarter Google hired 889 people.

Given that Yahoo is Google's main competitor in search and Internet advertising, it certainly looks like the market is rapidly tipping in favor of Google as I explained in Googleopoly.net my analysis of the network effects and dominance of Google in the context of the Google DoubleClick merger.

Google's Regulatory Outlook 2008

The big question for investors is why?

  • Why has Google felt the need to rapidly build up a new lobbying operation in D.C. (rivaling Microsoft's in size) and why did Google just unveil, with great fanfare, its new cutting-edge office space in DC with a party that attracted 650 people and many VIPs?
    • What does Google know that investors may not?

Google's Regulatory Outlook:

Federal Trade Commission

Antitrust:

Part II: Going forward what's different for Google as a result of the FTC merger clearance?

With the official conclusion of the FTC antitrust investigation of Google-DoubleClick, what's changed or what's different for Google going forward?

Impact on EU review? The real tactical reason the FTC majority was pushing hard to decide this merger before the end of the year was to try and take the wind out of the sails of the EU's review.

  • It will be interesting to see what the impact of the FTC's very Google-friendly approach to market definition will have on the EU review.
  • Moreover, it will also be interesting to see if the EU finds an analytical soulmate in Commissioner Harbour's dissent -- which took a more European, common-sense and forward-looking perspective on the merger -- rather than the majority's tortured market definition analysis that is driven by the unique US prosecutorial model -- where the real world standard is not whether the merger is anti-competitive or not, but whether the FTC is confident that it can convince a random Federal judge that it is in fact, legally anti-competitive.
  • Thus, the EU process is neither a carbon copy nor a rubber stamp of the American FTC process.
    • We could learn sometime in January whether the EU has its own independent concerns about the merger in a possible "statement of objections" procedure, or if the EU is looking to basically follow the FTC's lead.    

Enhanced FTC Scrutiny: Before the merger, the FTC, which is the default lead overseer of Internet competition and consumer protection, was not very informed about Google, Internet competition and/or online advertising. However, they are now.

Part I: FTC 4-1 approval of Google merger; the FTC gerrymandered its market definition...

To provide some timely analysis after quickly reading the FTC's 4-1 approval of the Google-DoubleClick merger let me provide some quick and important take aways:

The most important line in the FTC's statement was: "the companies are not direct competitors in any relevant antitrust market, eliminating the need for further analysis."

First, the FTC majority clearly did not want to risk losing in court again so the FTC effectively gerrymandered a tortured market definition that essentially granted Google a "get out of antitrust jail free card" for the purposes of this merger review.  

Candor in NYT op ed on how "open platforms engender "winner takes all" network effects"

For those who missed it, there was some surprisingly candid and chilling assertions made by Tim O'Reilly, the co-producer of the Web 2.0 conference in a recent New York Times op ed entitled: "Static on the Dream Phone."

While the article is ostensibly about cell phones, it is most relevant to the pending Google-DoubleClick merger and whether or not it will substantially lessen competition. Listen to someone who knows about the natural anti-competitive advantage of network effects.

  • "Like the open architecture of the personal computer, the open architecture of the Internet didn’t mean the end of competitive advantage. What we learn from the history of both is that open platforms engender “winner takes all” network effects. [bold added] Once a company gets a first-mover advantage, the mass of users adopting the company’s application or platform makes that product more attractive to the next user."...
  • "For the current generation of Internet applications, sometimes referred to as “Web 2.0,” the data collected from users is the true source of competitive advantage. [bold added] And the first movers, the companies that understand and apply this insight, have services that get better fast enough that their competition never catches up." [bold added]

The question is there anyone at the FTC that appreciates this point.

The legal standard that exists in reviewing mergers is does the merger "substantially lessen competition?"  

"Google Knols Best?" or should we say: "serfing" for Google?" yes "serfing" with an "e"

Google's latest business move to create "knols" should be sending shivers down the spine of any cognizant content publisher that cares about the future economics or growth of their online content. 

  • As Google explained in their blog announcement:
    • "At the heart, a knol is just a web page; we use the word "knol" as the name of the project and as an instance of an article interchangeably. It is well-organized, nicely presented, and has a distinct look and feel, but it is still just a web page. Google will provide easy-to-use tools for writing, editing, and so on, and it will provide free hosting of the content. Writers only need to write; we'll do the rest."

Google's ranked the LEAST ACCOUNTABLE in One World Trust's 2007 Global Accountability Report

What may be the most troublesome aspect of Google's extraordinary ascent to power in the marketplace and in our society is Google's exceptional lack of accountability.

On what basis can I say Google has "exceptional lack of accountability"?

  • First, the independent One World Trust just released its 2007 Global Accountability report in which it ranked Google lowest in its world survey of leading institutions when it comes to accountability.
    • "The Report applies the Global Accountability Framework’s four dimensions of accountability – transparency, participation, evaluation, and complaint and response – to examine the capabilities of transnational actors to be accountable."
    •  Why Does Global Accountabilty Matter?" "...their decisions and actions can have a profound affect on people’s daily lives."
    • "Those at the bottom... need to raise their game."

More on how #1 Google's Internet tentacles reach and "hold" onto #4 Ask.com's "private" data

ITNews has an interesting take in its piece "Google keeps what Ask.com erases."

  • "AskEraser may remove user search query data from Ask.com's servers, but deleted data may live on, in part at least, on Google's servers. That's because Google delivers the bulk of the ads on Ask.com, based on information provided by Ask.."

 I flag this in the context of the Google-DoubleClick merger because not only does Google:

  • Have dominant search market share (65% per Hitwise);
  • Enjoy exceptional network effects;
  • It's hidden market power tentacles reach farther than most appreciate...
    • What the ITNews article tells us is that there is a whole hidden layer of market power/influence by the #1 search engine over its #4 Ask.com "competitor." 

The market is even less competitive than I outlined in my Googleopoly white paper.

It reminds the astute watcher of how Microsoft used non-disclosed contractual arrangements to acquire more market power in the 1990's...

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