Google’s SEC Filing

So, the Google numbers are out. And they are quite something. 2003 revenue of $961 million in 2003, $389 million in the first quarter of 2004 with profits of $61 million, and a cash hoard of $454 million. As of March-end, Google had nearly 2000 employees. The company is planning to raise $2.7 billion in an unusual auction of shares in the coming months. Estimates are that the market cap of the company would be $20-30 billion. WSJ has more:

The biggest surprise in the filing was Google’s plan to distribute all of its shares through an unconventional auction method. Under the system outlined in the prospectus, which resembles a so-called Dutch auction, investors would register with the underwriting investment banks, indicating how many shares they want to buy and the price they are willing to pay. Those bids would determine a “clearing price,” at which all the shares could be sold.

The process could create intense jostling among bidders as they try to figure out a price that will get them a piece of the deal. Because anyone bidding below the clearing price doesn’t get any shares, there will be an incentive to bid high. Those who bid above the clearing price will be able to buy at that price.

Google did not commit to selling shares at the clearing price. Instead, the company and its bankers would take into account other factors, such as reducing the chances for big swings in the share price, in setting an offering price. The filing does not specify whether the bids would be submitted online, or by some other method.

Adds WSJ: “Google leads in search traffic, but Yahoo is close behind. In revenue, the company trails Yahoo, and trails Web retailers InterActiveCorp, Amazon and eBay. Google tops Amazon in revenue but is behind InterActiveCorp, eBay and Yahoo.” has a background, highlights from the filing.

In an article written before the Google SEC filing, The Economist has words of caution:

Google owes its massive success to two events. First, Messrs Brin and Page came up with what was for some time the best algorithm for searching web pages. Second, Eric Schmidt, whom they hired as chief executive in 2001, figured out how to monetise Google’s popularity by selling small and unobtrusive advertisements on related topics, so-called sponsored links, alongside the search results.

But the IPO hype around Google and its likeable and soon-to-be fabulously rich founders, Sergey Brin and Larry Page, obscures a more subtle point. Not only is Google less strong than it looks, but an IPO might make it even weaker at a crucial moment, since Google is about to face simultaneous onslaughts from two fearsome rivalsYahoo!, an internet portal that offers free e-mail and other services, and Microsoft, computing’s software superpower, which runs an internet portal of its own.

In search, Google is now vulnerable because the barriers to entry to its market are low. This is the big difference between Google and eBay, the firm held up by the bullish analysts as a valuation benchmark. The auctioneer keeps ahead of rivals due to network effects that draw traders to the most liquid market, whether in shares, cars or second-hand junk. In search, network effects do not apply. Hence, in the late 1990s, Google was able to displace the cognoscenti’s engine of choice, AltaVista. Hence, too, Google may in turn be oustedperhaps by a bright new upstart, such as Mooter, an Australian engine that draws on psychology to improve search results, or, more likely, by Yahoo! or Microsoft.

Google now knows that it must match Yahoo! by gathering more information about users and making them more loyal to its website. Matching Microsoft will require something even bolder. Google has decided to try to turn its own technology into, in effect, a new operating system, which will run on the internet rather than the desktop, so making Windows irrelevant. Microsoft and Google, in other words, share the idea that users should no longer care whether files are located on a personal computer, a remote computer, a digital video recorder, a cell phone, a car stereo or any other connected gadget; but they clash because each wants its own software to do the locating and retrieving.

Google has another disadvantage. Microsoft is still primarily a vendor of software licences, earning fat profits that it can use to subsidise a search war almost indefinitely. Google relies for its revenues on selling sponsored links. On search pages, this is a $3 billion market growing by 20% a year, according to US Bancorp Piper Jaffray, a bank. But competition is fierce, not only with Yahoo!’s advertising arm, Overture, but with smaller players such as and Kanoodle.

The search advertising market is mature, says Mark Josephson, Kanoodle’s marketing boss, adding that future growth can come only from placing sponsored links on the 95% of web pages that contain not search results but content. Google knows this. It is trying to use its algorithms to crawl newspaper articles, web journals and so forth to identify their subject area and place contextual ads. Its problem, says Mr Josephson, is that advertisers are not buying keywords anymore, they’re buying topics, which requires a different approach. As Google spreads out from search pages, he says, its people are getting further and further away from their expertise. In trying to morph into an operating-system firm or online ad agency, Google is less a leader than a novice.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.