Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Google Valuation: A Slight Quarterly Miss and Allegations of Unfair Content Exploitations??

As has been well reported elsewhere, Google slightly disappointed yesterday in the reporting of their 4th Quarter 2005 financial results due to a higher effective tax rate and the shares plunged more than ten percent in after-hours trading. Any stock with such a high price-to-earnings ratio and international presence is likely to have a few gyrations as it responds to various business challenges. Hence, as a whole, TCM suspects that this is just one downward gyration on what investors are likely to look back on as a steadily growing stock price chart driven by capturing an increasing portion of world-wide advertising budget outlays.

Longer-term there may well be some troubles ahead with Google’s business model of gathering content and tying key word advertising into that content. Recently there has been some discussion about whether search engines such as Google may be extracting too much of the value from website enhancements and from the efforts (and expense) exerted in creating original content. (Lars highlighted this theme in his personal blog post Search Engine Keyword Advertising As Leeches on The Web.)

The Financial Times out of London picks up on this compensation for content theme in a January 31, 2006 article entitled Search engines challenged on ‘theft’ written by Andrew Edgecliffe-Johnson, The FT Media Editor in London. The first portion of the article reads:

A group of newspaper, magazine and book publishers is accusing Google and other aggregators of online news stories of unfairly exploiting their content. They are demanding compensation from search engines. Gavin O’Reilly, the president of the World Association of Newspapers, which is co-ordinating the campaign, said on Tuesday: “We need search engines, and they do help consumers navigate an increasingly complicated medium, but they’re building [their business] on the back of kleptomania.”

The group of publishers, which includes the International Publishers’ Association, the European Federation of Magazine Publishers and Agence France Presse, is seeking meetings with Charlie McCreevy, the European Union’s internal market commissioner, and Viviane Reding, the commissioner responsible for media. It would not rule out legal action to enforce copyright or “collective action”, Mr O’Reilly said. “Ultimately, the aggregators need the content providers.” Services such as Google News link to original news stories on the home pages of newspapers and magazines and display only the headline and one paragraph of the story. “That’s often enough” for readers browsing the top stories, Mr O’Reilly said.

To date Google and the other search engine aggregators have not directly compensated on-line content providers. The Google business model and valuation no doubt will need to be adjusted if such compensation is required in the future. Toomre Capital Markets welcomes your thoughts and comments on Google’s valuation.