Google’s Capitalization Drops $20 Billion In One Week, Yet It’s Still Worth Nearly Double All Publicly Quoted Newspaper Stocks on the US Markets Combined. But Might Rupert Murdoch Be Preparing to Out-Google Google?

Philip Stone January 23, 2006

It was a bad week for Google. It started when Yahoo’s fourth quarter earnings, although good, came in just under what Wall Street expected. So Yahoo got dumped on and in Wall Street’s natural way it also sold off its prime competitor. And then the week ended with a double whammy – news broke that Google was fighting a US Justice Department subpoena to hand over one week’s worth of search requests and Wall Street on Friday suffered its worst loss in almost three years.

Wall Street, by nature, gets nervous when companies get subpoenaed for any reason and when a company fights a subpoena it then gets really queasy. Add to that Friday’s stock market drop, and the company’s shares start this week below $400 – at $399.46 -- which is down 14% for the last week and 8 ½% on the Friday alone.

In actual fact the subpoena wasn’t the “dangerous” type – it was not for investigation of possible wrong doing – rather the Justice Department wants to revive some anti-pornography law that the Supreme Court has blocked, and part of its study on the matter was to get an idea of search terms people use when looking for pornography. Apparently no names or computer Ids were to be delivered, just the search terms, but on privacy grounds Google took the view this was none of the government’s business. Yahoo, MSN and AOL all complied with their subpoenas.

And then there was Friday’s general sell-off, prompted because during the week some major US companies, including technology giants like Intel and Motorola, reported good earnings but still came in below Wall Street expectations and future forecasts were not as high as traders wanted to hear  – Wall Street doesn’t like to be shown to be wrong. At the same time the price of oil kept creeping up over fears the Iran nuclear affair could get really nasty with oil supplies used as a weapon, et voilà  – Black Friday.

But put into perspective, even with last week’s performance Google has a market capitalization of $118.06 billion, nearly DOUBLE the combined market capitalization of all the US newspaper companies listed on US stock markets ($60.4 Billion).  By example, Gannett, the largest US listed newspaper company, has a market cap of “only” $14.93 billion. And two other comparisons -- Time-Warner, the media/entertainment company that used to have the highest media capitalization in the world, is today worth $79.59 billion, some $38.5 billion less than Google, and News Corp is worth around $52.4 billion.

So, apart from the blips of down markets, government subpoenas, and perhaps falling a bit short of Wall Street expectations, is Google on an unstoppable roll or are there serious clouds on the horizon. There are those on Wall Street who think the really good times may be at an ebb. They don’t like that Google still depends on one major source for all its income – search advertising and Wall Street likes to see diversification – and then there is Rupert Murdoch and how might he choose to compete with Google?

For instance Scott Kessler, technology group head for S&P said in a BusinessWeek Online interview that he downgraded Google to sell last week because he worries that 99% of its revenue comes from Internet search advertising, and other competitors – Yahoo and Microsoft – are working hard on improving their search revenues.

Is there enough search ad money to go around? The Search Engine Marketing Professional Organization (SEMPO) estimates that 80-90% of the $5.75 billion 2005 paid search revenues were taken up, in order of largest gobble, by Google, Yahoo, AOL and MSN. And during the year prices rose by around 20%. In 2006, Internet advertising is expected to grow by some 25-30%, so for Google, at least, it looks like the model will still work just fine.

But there is the question of risk, too. The shares have jumped 450% in 18 months – time for a big fall? Did the market grossly underestimate Google’s value when it went public at $85 a share in August, 2004 – remember the company wanted to go out at about $110 but Wall Street beat it back to the $85 figure -- and its 450% increase is partly because of that, or has the share been bid up so high within a frenzy that people don’t consider possible risk for this company?

Answering questions like that beforehand is why those Wall Street experts get the big bucks. But could it be that an even bigger threat to dividing up lucrative search revenue could be hiding just around the corner and his name is Rupert Murdoch.

Murdoch got into the Internet fray late the first time around, just in time to take a real licking in the burst bubble, and caution learned from that lesson explains why he got into the Internet again late this second time around. But this time he is just about betting the company that it is the right thing to do. Since deciding last summer to jump in with both feet, News Corp has spent $1.4 billion on three Internet companies, and he and his executives have let it be known publicly they are out to buy more – especially in the field of search.

Murdoch started his spree buying the social-networking MySpace.com for $580 million. Its growth success is difficult to believe – about 150,000 new registrants sign on each day and its universe is now some 27 million visitors a month from the 16 million when he bought it.

None other than Eric Schmitt, Google chairman, says that of all the deals Murdoch has made in his life, he believes MySpace will turn out to be his best of all.

Murdoch has also bought a college sports site, Scout.com, and a video game and entertainment site, IGN, for $650 million.

Speaking at the Citigroup media conference a couple of weeks ago Murdoch said, “The Internet is the ultimate provider of choice.”  He said that whereas traditional media – newspapers and television – now deliver very low single digit percentage gains each year he estimated that the News Corp. online sites will generate between $350 million to $400 million in 2007 and he has said since that he won’t be satisfied unless there is about $1 billion in Internet revenues within five years.

He has made it quite clear he is ready to continue his Internet investing for three or more four years to come at the same or even higher level than last year, and that he and his people know the “real” revenue is in search advertising.

There were rumors last year of possible buys of small search companies, but they never came to fruition for one reason or another – probably ridiculous asking prices.

News Corp suffered the same fate as most media and entertainment companies last year – a decline in share value whereas the overall market was up. Murdoch has made it clear he sees growth for his company on two levels – being a major player on the Internet, and also using broadband, mobile phone television and whatever else comes along as reception devices for the programming that his Fox empire turns out.

Whether Murdoch turns My Space into a portal, or he buys a search engine, his Internet edge is that he won’t be dependent for search advertising for all his Internet revenue. He’ll have search advertising, banner advertising from his various sites, and revenues from the Fox video content he provides for the web and various digital devices. All together it’s the answer to Wall Street’s Google criticism of having too many eggs in one search advertising basket.

But meanwhile at Google, for all that bad news there was one piece of good news -- a poll published by Online Branding Magazine said Google has the world’s most recognized brand. And that Wall Street does like.

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