Reuters Breakingviews
Google shrugs off economy and sets bar for rivals
By Robert Cyran The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
What weak economy? Google’s second-quarter revenue and earnings both jumped more than a third year-on-year. Android, Google’s surging mobile platform, is picking up 550,000 customers daily. And a suddenly thriving social network is a warning shot for competitors.
Critics have always claimed that Google is a one-trick pony dependent on advertising sales, that it wastes capital on wacky projects, and that arrogant managers have little concern for shareholders. The first part has some validity, but it’s not such a weakness when ad sales grow briskly even in a traditionally weak second quarter. Meanwhile Larry Page, the chief executive, patiently answered investor questions on Thursday and was at pains to point out that Google is a careful shepherd of investor capital, pouring most of its efforts and cash into strongholds like search rather than ideas like driverless cars.
Moreover, Page pointed out that popularity often arrives before profitability for newer Web businesses. Of course, that’s what all Internet companies like to point out when revenue is slow in coming. But there is an element of truth in it, as Facebook’s now rapidly rising revenue and Google’s early history illustrate.
Google antitrust deal sets stage for bigger fight
By Robert Cyran The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The U.S. government’s agreement to allow Google to buy Internet travel programmer ITA Software — with a few sensible restrictions — is just the appetizer. The main course in the extended meal shared by Washington and Silicon Valley will be control of the huge markets for broad Internet search and mobile operating systems.
Travel companies such as Expedia and Hotwire lobbied against Google’s acquisition of ITA, which makes software for many airfare and travel search websites, travel agents and airlines. Their fear was that Google would use its new subsidiary to gain an unfair advantage in online travel search. Stipulations that Google must continue to develop ITA’s software, license it out to rivals and ring-fence their data should reduce these concerns.
Yet travel sites aren’t the only businesses complaining that Google uses its powerful position to its own advantage. The company has about two-thirds of the U.S. market for Internet search and a share in excess of 90 percent in parts of Europe. And Android, its operating system for mobile phones, may be following. It is now the most popular smart phone operating system, with a rapidly growing 33 percent slice of the U.S. market, according to comScore.
Of all the Internet giants, Yahoo has, albeit unintentionally, contributed more to the American economic development via search engines than any other.
This happened before Icahn forced its control on Yahoo and ruined its lofty philosophy.
Yahoo created the idea of a search engine. If Yahoo sought intellectual property protection on the search engine idea, Google would either have to be a subsidiary of Yahoo, or must pay hefty royalty to Yahoo, enough to fend off Icahn’s hostile moves.
Imagine how much creativity and excellent innovation on searches that hypothetical situation would have stifled, if Yahoo had imposed its intellectual property right. Likewise, the antitrust judges and lawmakers need to heighten their knowledge and sharpen their awareness about the sensitivity of creative industries to over-regulation and under-regulation. Over focus on short term gains results in myopic legal policies that restrict long term growth.
Google’s M&A machine stuck in antitrust limbo
By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Not long ago, selling to Google offered one of the best alternatives to an initial public offering for up-and-coming technology startups. YouTube did it. So did AdMob — along with 70 or so other companies from 2005 through the end of last year. But Google’s M&A machine looks to be gumming up.
The search monolith hasn’t lost its desire to expand. On Monday it was reported to be looking at buying patents from bankrupt Nortel Networks, for example. Nor is it lacking for money. Google is sitting on $45 billion of cash generating paltry returns and just waiting to pounce on good ideas, emerging technology and budding talent. And it should generate around $10 billion more of free cashflow this year.
The problem is antitrust limbo. Google’s dominance of the search advertising market has everyone worried. And it’s not just competitors like Microsoft. Regulators, and even some customers, express concerns Google may have too much market power.
T-Mobile sale not the only telco worry for antitrust watchdogs
America’s antitrust and telecoms watchdogs have their hands full with AT&T’s proposed purchase of T-Mobile. So they may overlook what’s at stake in a seemingly esoteric spat between Google geeks and their Facebook cohorts. But the quarrel raises vexing questions about the search giant’s increasing dominance in the mobile handset market — and whether it can resist the temptation to abuse that power.
On its face, the kerfuffle is still something of a “he said, she said” among the engineering set. Google said it is making a “small change” to the way contacts from Facebook appear on its next-generation handset, the Nexus S. This modification essentially no longer allows customers to download their contacts from Facebook. The reason, Google insists, is that the Facebook data cannot be exported from the device, creating “a false sense of data portability.”
Of course, users of the phone and all those using Google’s Android operating system can still access Facebook on their devices even if they can’t synch contacts onto their gadgets. The concern among those outside the Googlepex is that this is the first sign of the search behemoth gradually creating barriers for Android customers to access Facebook and other websites it considers a threat. Both companies are battling for advertising dollars, users and talent.
Google’s surging dominance of mobile operating systems is what’s especially worrisome. Android-powered phones hold a 53 percent share of the U.S. consumer smartphone market, according to The NPD Group. And some Silicon Valley executives expect it to reach 80 percent in a few years.
Demand Media kicks off Web bubble 2.0
Demand Media’s IPO seems to have kicked off Web bubble 2.0. Investors clamored for a piece of the Internet content sweatshop. The company upsized its offering, raised the sale price and the shares still popped 38 percent in their debut. Yet Demand is festooned with red flags. Just imagine how higher-quality Web firms would be received.
Investors are attracted to Demand’s growth: revenues grew at a 25 percent clip in the first nine months of 2010. And since Internet businesses tend to scale well, there’s the prospect of rising margins as sales growth outpaces costs. Yet it’s hard to see how the seventeenth largest U.S. website can really justify a market value greater than that of The New York Times.
For starters, Demand gets about 40 percent of revenue from registering Internet domain names, a slow-growing business. So investors have latched onto Demand’s sexier operation of paying freelancers $15 or so for articles on topics suggested by an algorithm to maximize ad revenue. It’s this business that makes Demand equally intriguing and frightening.
Advertising on Google accounted for 28 percent of Demand’s revenue in the first nine months of 2010. Yet Google’s principal engineer wrote last week that the search giant needed to do a better job of eliminating low quality articles and videos made by “content farms” from polluting search results. That can’t be a good sign for Demand.
Google sets surprising example for CEO succession
By Robert Cyran The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Google has set a surprising example for chief executive succession. Usually it’s the founders that step aside for professional managers. But Google’s young co-founders did that a decade ago. Now, Eric Schmidt’s adult supervision is no longer needed — and Larry Page, who founded the company with Sergey Brin, is ready to run things again. This adds a fresh blueprint for Silicon Valley’s new crop of geniuses.
When Schmidt first stepped in back in 2001, Page was just 28 years old. Page knew enough about Internet search and had enough drive to run the company. But Schmidt had a wealth of experience and contacts. He had worked at Bell Labs and Xerox’s PARC research center. Moreover, he had been chief executive of Novell, a company crushed by Microsoft. Schmidt’s background added a needed hard edge to the relatively idealistic young company.
His skills in execution allowed the co-founders to concentrate on the technology underlying Google. It’s been a happy combination. The company now provides about two-thirds of all Web searches. The company is worth about $200 billion, and its revenue is still increasing at a breakneck pace — the top line grew 26 percent in the latest quarter from a year earlier, according to Thursday’s earnings report.
Google stock will lag the market in 2011 but eventually regain in few years.
China yuan investment a nod in right direction
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
HONG KONG — How many yuan does it cost to buy Google? Or Goldman Sachs? Chinese companies may soon be allowed to use the domestic currency to buy foreign assets and companies, according to a new pilot scheme announced by the People’s Bank of China on Jan. 13. There are plenty of restrictions, and a global rash of yuan-denominated deals is a distant prospect. But the move is an important step.
China’s leaders want the yuan to become a global currency and have loosened several of their strict controls to prove it. First came rights for foreigners to hold deposits in yuan, and to use it to buy and sell goods. Some $10.3 billion of trade was yuan-settled in October. Yuan deposits in Hong Kong hit 280 billion yuan ($42 billion) in November. Both measures were tiny six months earlier.
Outbound investment is a sensible follow-up. China’s outbound investments were negligible until around 2004, but by 2009 they had hit $56 billion. More animal spirits, and lighter touch Chinese regulation, could see that figure improve rapidly. Meanwhile, if investment flows to companies and countries that already buy from the Middle Kingdom, money that flows out through M&A could flow back through trade.
Net neutrality compromise won’t calm new Congress
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
WASHINGTON — The compromise struck over writing Internet rules of the road gives telecom companies reasons to keep investing while also protecting consumers. Of course, that delicate balance won’t please political purists who either deny government has a regulatory role or, on the other hand, want to make the Internet into a utility. So expect plenty of pushback from the new Congress.
Civil libertarians should rest easier. Under the so-called net neutrality proposal from the U.S. Federal Communications Commission, broadband access providers like Comcast and Verizon would be prevented from blocking or discriminating against lawful Internet traffic. But they would be allowed to sell faster service for those who want to deliver video, games and the like. And they could increase rates for subscribers who use the Internet for those tasks that hog bandwidth.
This could potentially curb some expansion of video services over the Web. But such variable pricing schemes will not only give telecoms a better return on their current infrastructure investment, they will also help pay for the much-needed upgrade of America’s pokey wireless networks.
Google’s innovation engine sputtering big time
By Rob Cox and Robert Cyran The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
NEW YORK — With an optimistic spreadsheet and a lot of creativity there just might be a way to rationalize the $6 billion or so that Google is expected to shell out on Groupon. Yet making the numbers work on the search giant’s purchase of the coupon website may not matter over the longer term. The bigger lesson to draw from what would be Google’s biggest-ever deal is that the company’s reign as the Internet’s innovation king is ending.
Google’s apparent willingness to spend so much shareholder treasure to acquire a two-year-old startup, in a business with almost no barriers to entry, is the most damning evidence yet. In its heyday, Google would have channeled some of its prodigious cash flow towards creating a Groupon of its own.
That era is receding. Few of these venture-capitalistic initiatives panned out. Google is still a one-trick leviathan: a search engine — albeit an incredibly successful, even scarily dominant one. But it must now buy its way to innovation. Attempts to take on fast-growing, newer companies by itself have resulted in damp squibs. Two quick examples: Google Checkout never came close to dethroning online payment king PayPal; and Google’s social networking tool, Buzz, accomplished the seemingly impossible feat of making Facebook look responsible at protecting users’ privacy.
EU antitrust pile-on overshadows Google’s Groupon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — Google’s problems in antitrust are intensifying, and it’s likely to be a long slog. The European Commission is examining whether Google is using its dominance in online search to unfairly extend its reach into related areas the way Microsoft once did. The probe is auspiciously timed: Google is contemplating a near-$6 billion bid to enter the e-coupon business by buying Groupon, according to news reports.
Google has about two-thirds of the search market in the United States, according to comScore, and that goes higher in Europe. In France it’s about 90 percent.
Meanwhile, the company has expanded its offerings in areas from maps to comparison shopping. And it keeps on adding more. It agreed earlier this year to buy ITA Software, which specialized in online travel search. Buying Groupon would give Google pole position in the fast growing market for online coupons.
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