The Price of Google

Adam Thierer's making some other point in this post but his chart comparing the market capitalization of new to old media firms is fascinating. Did you know, for example, that at $214 billion the market capitalization of Google is about seven times that of the entire American newspaper sector ($31 billion)? Now admittedly, in part that just shows that the newspaper sector is small.

But it also certainly reminds me of the circumstances that prevailed before the AOL-Time Warner merger (speaking of which, Time Warner's market cap is a bit below $60 billion). Maybe Google's just hugely overvalued. Or maybe not. Maybe this points the way to the future of news operations. Maybe after another decades of attrition pure aggregation functions like Google News won't work so well since there's so little actual news being written. Maybe the continued decline of newspapers will start to be a drag on the blogosphere. Maybe a newspaper chain gets picked up for a song as a kind of loss-leader for Google News, Google Reader, and Blogger. Or maybe I just don't know what I'm talking about -- why, after all, would you take business advice from me?

Comments

Are you?

Posted by Drunk | January 31, 2008 11:54 AM

Are you?

Posted by parodying Ann Althouse | January 31, 2008 12:02 PM

No, Google is just overvalued - already, its value has slid to $170B, a loss of $44B from a couple of months ago (and which is admittedly part of a larger market downturn). But while all the sexy tech software (GMail, Google Maps, Android, etc.) grabs the headlines, Google's only real source of consistent revenue is the old media advertising-supported business model. And though they may have some of the best minds in the world placing these ads, it hardly makes them one of the most valuable companies in the US (particularly as older, more established companies crowd Google's territory (read: Microsoft)) - it just makes them another media company.

Posted by Anon | January 31, 2008 12:02 PM

Why not convergence? Would the idea of Google purchasing the NY Times be such a shock?

Posted by ninja3000 | January 31, 2008 12:13 PM

I believe John Ellis proposed a few months ago that Google buy NYTimes

Posted by Thomas | January 31, 2008 12:14 PM

Nice tight post. It reminds me of the time I recommended my Dad by "Atari stock".

Posted by joejoejoe | January 31, 2008 12:16 PM

Would the idea of Google purchasing the NY Times be such a shock?

Well, yeah, I think it would. What's the reason to believe it would make any more sense than AOL's purchase of Time-Warner?

I don't know what revenues look like for old media, but I expect to see far fewer paper copies available in ten years. More and more people expect to get their news from a computer, so why go through the hassle of producing a product on paper, if most of your revenue's from advertising.

Posted by Elvis Elvisberg | January 31, 2008 12:22 PM

More and more people expect to get their news from a computer, so why go through the hassle of producing a product on paper, if most of your revenue's from advertising.

The deeper question is: are content-producers with larger operating expenses (like the New York Times) going to continue existing at all in an era of vastly-more-diffuse ad revenues, or will content simply be limited to what can be produced on the scale of revenues (much smaller) available from aggregated Web advertising?

Obviously, If Google can think of some way to maintain high levels of revenue with an online edition of the NYT, then it makes sense for them to buy it. If not, then not.

Posted by James Gary | January 31, 2008 12:32 PM

Many 'news' outlets are run by wealthy individuals to prompt their political views. In that sense, media ownership is like owning a sports team, not really done to make money.

Posted by otto | January 31, 2008 12:34 PM

Matt, this is a mistake many people make. There's nothing in here about how companies are valued, you're just talking about what they're worth. So here's some expert opinion from my as I'm in the business, sort of.

Newspapers for the most part have low or declining growth. Google has 30% earnings growth. Since stocks are long-dated assets that matters ENORMOUSLY in determining the value of a stock. Indeed using a stock's growth rate and price to earnings multiple as a valuation tool is the most common method out there.

Google is making fabulous amounts of money. Newspapers are value traps.

Also, on a PE basis, Google is cheaper, CHEAPER, than its peers, including YAHOO. Based on Google's earnings and it's growth it's actually quite cheap when you compare it to other stocks with similar growth.

This is why it really steams me when people with no background in stocks start talking about overvaluation. They only have the internet bubble to look through, which makes them assume that any stock that has gone up quickly must therefore be due to go down quickly when the "bubble" bursts again.

Posted by Cliff Mason | January 31, 2008 12:34 PM

Cliff,

I think a better metric for comparison here is the PEG ratio, rather than the PE ratio, since PEG takes into account anticipated growth. For example, Washington Post's PE (trailing twelve months) is 23.46 versus Google's PE (ttm) of 42.75, but if you compare PEG ratios, Google's much cheaper at 1.01 versus 3.42 for Washington Post.

Posted by Fred | January 31, 2008 1:16 PM

I am still puzzling over who clicks on all these ads that are making Google so much money. Perhaps all the massive new datacenters Google is building are really just cube farms with thousands of illegal immigrants clicking away - in their slippers not their workboots.

Posted by ndm | January 31, 2008 1:27 PM

ndm,
That would make an awesome episode of 20/20

Posted by ChrisWWW | January 31, 2008 2:32 PM

What you guys are missing is that google has entirely different approach to the old problem of selling ad space. Previously, people wishing to sell ad space focused on attracting viewers. Simple enough. Google said: we're smarter than this, we'll do a better job of placing ads and extract the premium in value as payment. So far, they have been doing this extremely well b/c they thought of it first and they have lots of smart people working for them. They have also made it difficult for someone new to enter this market by establishing services which provide them with data on their target ad market.

I'm not sure if Google's overvalued or not, but the big concern if you're google is being able to maintain your market share in the space of intelligently placed ads. Theoretically, they don't have to sell any ad space at all. They just have to place ads for other people. But competitors will emerger. This is a completely different thing than selling ad space in newspapers, obviously.

Posted by mpowell | January 31, 2008 2:49 PM

Matt brings up a good point that for all the talk of new media, I think almost all of the original content, as opposed to commenting on the content, is generated by old media.

As the old media continues to either consolidate or drop away (either way, less original content), we'll probably going to end up with a greater percentage of - as otto says - personal propaganda sheets. Other content providers will likely follow the news service model (AP/Reuters), with content paid for directly, rather than indirectly with ads.

In the end, we'll still be left with less variety.

Posted by cmholm | January 31, 2008 2:50 PM

Many 'news' outlets are run by wealthy individuals to prompt their political views.

Makes me wonder why Bloomberg doesn't just start his own news outlet instead of running for president.

Posted by ed bowlinger | January 31, 2008 3:04 PM

Well, the chart might be more accurate if you split off MS's media division (MSN) instead of including the valuable software division in the calculation. Otherwise, why not just arbitrarily include Cisco in the old media category. It has as much to do with media as Windows and Office.

Posted by Mo | January 31, 2008 3:32 PM

Plus, what if that "ad revenue" Google gets is figured into search results?

I wouldn't be surprised at all if people were paying them off so that the secret Google algorithm "magically" placed subscribers higher up on the list.

Frankly, over the last five years, I've found Google has been worse and worse about ranking the results from my searches.

Posted by Greg | January 31, 2008 3:45 PM

Greg,

Google would never use ad revenue to determine ranking. It's one of their values and would kill a lot of goodwill and credibility. Therefore it would no longer be of use and lose share. However, I've read that Google's algorithm tries to get informational links (e.g. Wikipedia) higher up than vendor ones so that people that just want info (and therefore are less valuable) click the link and people that want to buy, click Ad Words.

Posted by Mo | January 31, 2008 4:09 PM

Mo, that may be true, but it seems unless I'm researching an explicitly academic topic, like Cauchy sequences, I get a bunch of spam first.

For example, I recall that in 2004, there was something like type John Kerry, and you get this fake GOP attack site.

Posted by Greg | January 31, 2008 4:21 PM

Doesn't look like things are all rosy at Google. The Wall Street Journal is reporting that Google's net income rose a mere 17% on a 52% jump in revenue. Shares fell 9% after hours - because, as usual, investors were hoping for more.

If the economy does go into recession I don't see how Google can avoid being affected by the advertising downturn that traditionally accompanies recession.

Posted by ndm | January 31, 2008 4:25 PM

I'd argue that Google is really more of a content-aggregator/content-organizer than any sort of content-producer like the newspapers or other media.

And these days, more and more of the content being organized by Google is produced by a vast army of free hobbyists, such as for the pages of Wikipedia, which are very frequently at the top of any Google search.

It's pretty hard for the newspapers---or the private encyclopedias---to compete with writers paid nothing, including the ones who produce all the billions of postings on the millions of blogs, including this one.

Posted by RKU | January 31, 2008 5:20 PM

I'm not sure, but I've heard that newspapers often return ~20% on capital. Business is declining, and margins tightening, but I'd take that rate of return.

Don't know what Google's return is.

Posted by M. Peachbsuh | January 31, 2008 7:38 PM

It's pretty hard for the newspapers---or the private encyclopedias---to compete with writers paid nothing, including the ones who produce all the billions of postings on the millions of blogs, including this one.

Sure. It's also extremely doubtful whether writers paid nothing will, in the long run, produce content of comparable quality to the old "paid" model.

By the way, please don't respond with the anticipated snark about how the "paid" journalism is just as lacking in focus, objectivity, resources, style, and that nebulous quality known as "professionalism" as the upcoming "unpaid" model will be. I really, really doubt that the number of trained reporters willing to expend time and shoe leather getting the story for nothing is going to be comparable to the number of people who would do it to make a living--even a fairly low-rent living.

Posted by James Gary | January 31, 2008 9:09 PM

I agree with ndm. Who clicks on all these Google ads? I hate advertising and I would never click on a Google ad out of principle. In fact, the one or two times I saw a Google ad that I was interested in, I looked where it went, the URL, and manually put it into the address bar of my browser. I love Google search and Google toolbar, but I am categorically against businesses that exist from advertising, I think advertising is basically evil, and if that means no Google would have existed, then I'm all for it. I could live with out all its services. Trading them and for less advertising is a good trade, imo.

Posted by blah2 | January 31, 2008 11:10 PM

"would you take business advice from me?"

Oh, hell, no!

I wouldn't take ANY advice from you, Matt!

As for Google Ads, well, the reality is a lot of people are making tons of money from people who click on those ads on Web sites. The guy running the Plenty of Fish dating Web site has pulled down NINETY THOUSAND DOLLARS of Ad-Sense revenue in TWO MONTHS! He's my new Web hero I wish I could emulate.

Maybe these are all the same morons who keep the spammers in business by clicking on stupid stock pump-and-dump links in their email, but somebody must want the stuff Google is running ads for.

This also answers the question of whether "for pay" reporting is better than "free" reporting. The reality is that neither are going away. Newspapers now post their stuff on the Web site, and they get revenue from that the same way the free sites do - Google ads. So the difference is minimal between "pay" and "free" since its Web site ads that bring in the revenue in both cases.

"I think almost all of the original content, as opposed to commenting on the content, is generated by old media."

That depends on whether you're talking about NEWS or CONTENT. Content is MUCH larger on the Net than News. Google indexes both. Commentary generally applies more to news and opinion than on content.

Google indexes literally billions of Web pages. That isn't all news and blogs, despite what you might think or what you are used to interacting with on a daily basis. Much of the Web is content, and much of it is in what is called the "dark Web" - content that is not freely available to anyone.

Also, newspapers aren't all there is in news. Broadcast news seems to be doing all right (albeit becoming more like game shows in their quality due to commercial influences.) Even there, however, it is their Web sites that are becoming important - and generating ad revenue.

Eventually you WILL primarily get your information from the Web - not newspapers, not magazines, and not broadcast TV.

As for overvalue, Google is hot, so of course it's overvalued. Duh! But Google has a lot of hot ideas being developed in the pipe that could make them much more important than anyone thinks they are now. Go back and read some of Bob Cringely's speculations on what Google might be up to. (He's rarely right, so there's no guarantees - but if he's right about even one of Google's possible future business plans, Google could be even bigger than they are now.)

Posted by Richard Steven Hack | January 31, 2008 11:30 PM

I wouldn't be surprised at all if people were paying them off so that the secret Google algorithm "magically" placed subscribers higher up on the list.

Duh. Targeted advertising is their biggest selling point. If you search for "Mexican Food", the first thing you see at the top of the page is a paid advertisement for a Mexican food business. To the right, more paid advertisements for Mexican food. Down the page are the actual search results. Based on your IP address, they can determine your general location (often down to zip code) and show you ads for local Mexican food businesses. It's the holy grail of advertising -- reaching people who are looking for what you are selling, every time.

I am still puzzling over who clicks on all these ads that are making Google so much money.?

Click thru's aren't really sold anymore and advertisers aren't paying for clicks. Typical ads have *much* less than a 1% clickthru rate. Advertisers are paying for their ad to be seen by as many of the right people as possible. Google targets the "right people" really well. Thru other tools, businesses are able to measure the effectiveness of online ads in driving traffic to their business.

People use Google because their search is effective and relatively reliable. Google makes money because businesses selling what you are searching for want your eyes on their ad. Whether you click it or not is mostly irrelevant. The subliminal power of advertising takes over.

Posted by CharlieLA | February 1, 2008 5:40 AM