It is an interesting analysis. I've followed Google's numbers pretty closely since I left in 2010 to track trends from the outside that had started becoming apparent on the inside. Basically there is a limit on how "good" you can be at search advertising, and other companies are relentlessly investing there and so as Microsoft, for example, has quarters of growing ad value both in CPC and volume. Google has declining CPC and growing paid distribution costs. It is often hard to hold a technological edge without moving the bar forward, and while Google was way out ahead before, now they get fewer and fewer gains with the investments they do. That squeezes margins and that results in focus (good) and conservative management (not so good).
What is really spot on in the article is that when the 'luster' of being a growth company comes off, the stock feels it disproportionately. And as RSUs are the retention package of choice your "retention bonus" gets smaller as the stock takes a hit. That unlocks hand cuffs and people who are smart and aggressive opt to try something with more risk and a better potential reward.
It really is true that nothing is forever, but I know there is always the tendency to operate as if it is. Looking forward to the next wave.
> Google has declining CPC ... now they get fewer and fewer gains with the investments they do.
Keep in mind that the declining CPC is coupled with increased revenue, caused by the amount of ad inventory they're moving. So, your second statement is not supported by your first.
(disclaimer: googler, but not in ads or anything related)
That is correct, revenue is increasing, but that increase is coming through increases in ad inventory on the core sites, and paying for more traffic (aka Paid Distribution) as more and more people don't bother to switch off 'bing' or 'yahoo'[1] on two big platforms (Windows and Firefox).
There is a limit on how much traffic you can buy, there is a limit on how many ads you can put on your pages before those ads push people away. And when those work arounds lose their effectiveness (my guess is Q3/Q4 2016) then revenue will be flat year/year. If people decide that Google isn't a "Growth" stock, they will reprice their value based on current revenues rather than projected revenues, and call for the elimination of everything that cuts into profits. As the original article points out, there are many previous examples.
[1] Currently also Bing :-) but will no doubt change when the agreement expires.
Google's revenue formula is: CTR x CPC x # of Searches. If number of searches & CPCs are under pressure then they will continue to tinker with CTRs by changing ad formats & screwing with the user experience:
Agreed, but the formula is more like (CTR x CPC x # Searches) - Paid Distribution. And "yield optimization" (which is code for increasing CTR) is all about tricking the clicks.
The two negative forces this employs then is that if they bump their CTR and yet people who click don't buy, this further depresses CTRs as advertiser value the clicks less and less. And by paying to send them search traffic that money is paid if you search for "new car insurance" (very valuable) or "Pythagoras theorem" (basically worthless).
I'm not sure I agree with the author's analysis on compensation.
While RSUs at a large company don't have the growth potential of a startup, Google, Microsoft, etc still seem to be the smarter choice for compensation-minded engineers.
And of course the author also ignores the CEO change that occurred at Microsoft in 2000, and the reawakening that has occurred after his departure in 2014.
That is a good point. History is going to remember Ballmer as one of the worst CEOs in history, though, unlike Jeffrey Skilling or Bernard Ebbers, Ballmer will be remembered for mistakes of omission rather than commission. And the revival of Microsoft should be factored in to a full understanding of the situation.
Ballmer grew profits, there is no denying that. He definitely missed a lot of things, but there is no qualification for the title of "one of the worst CEOs in history," just like Bush 2 made mistakes but will hardly be remembered as one of the worst presidents.
I agree Ballmer was not "one of the worst CEOs in history", but Bush will quite certainly rank among the worst presidents in history. Bush's two war mistakes were gargantuan, scholars estimate over one million war dead in Iraq, in addition he accelerated the decline of the American state in numerous other aspects.
Eh, I'm no Bush fan, and the historians will sort it out 20 or so years from now anyways. There were plenty of bad presidents in the 19th century to compete with.
Every time someone draws historical parallels for tech businesses I think back to Apple. Remember how the iPhone was repeating Apple's mistake vs Windows in the 80s?
The author happens to find some factors that match Microsoft in the 2000s, but completely ignores the ones that don't.
Microsoft is enormously profitable! And though their growth may have stalled, that simply means that their growth stopped accelerating - not that they stopped growing. Being a Microsoft is pretty great!
That said, Microsoft did decline. Not in revenues (which grew), but in relevance. Their new products were perceived as chasing market leaders: Zune, Bing, Windows Live etc. Their strategy for their most popular products seemed ill-defined: remember Windows.NET and Office .NET? And this was reflected in their P/E, which did decline, from the 40s to the low teens. Most tellingly, at some point, people stopped being afraid of Microsoft, which may be the most telling. Microsoft competes with everyone, but its competitors don't worry about Microsoft any more.
This would not be a terrible fate for Google, but it's not ideal and far less than they're capable of. For that matter, it's less than what Microsoft is capable of!
This is written by someone who isn't in the advertising business and doesn't understand the dynamics of that industry. Extrapolating from stock prices doesn't cut it.
Google is not going anywhere anytime soon, it's the defacto unspoken leader in online advertising and the closest competitor these days is Facebook, and even they have a very hard time getting to parity. Google owns so much of the adserving stack and online ecosystem that it borders on ridiculous. Any issues they might face with shifts in advertising would be the same challenges anyone else will face, but Google has more talent, money and scale to solve these problems.
The article compares Google to Microsoft. Microsoft, too, had a dominant position in a lucrative market (and still does, with revenues ~50% higher than Google). Microsoft also underwent a decade of a flat stock price.
Their revenue kept growing during this period. It grew by a lot! But their P/E declined, from the 40s to 12 or so. This is because all of the action (iPod, Google Search, iPhone) was happening outside of MSFT. The "growth genie" was gone, and they transitioned from a growth stock to a value stock, and (as perceived) an innovative company to a company protecting its cash cows.
The article discusses whether Google will undergo the same fate. Being the undisputed leader in online advertising is an enviable position; the question is whether Google can grow to be more than that.
It seemingly can as it actively has ventures in several out of band ventures and is encroaching in all the areas Microsoft already is, while having search/advertising as a massive foundation which MS doesnt have.
And yes, advertising will continue to grow, native/video/mobile are all still growing at double digits and Google is slowly rolling out their products to extract even more value here. The ad industry is going through another revolution and Google, while not innovating, has plenty of growth potential still left.
I never care enough to defend a company. The article was arguing about growth slowing but Google's foundation in advertising needs to be studied in more detail than these signals. The ad market is going through massive changes and Google has plenty of potential still left, along with all of the other areas where they are starting to cut into MS business.
Stalled and similar words is not how I would describe them.
i would say i felt similar lackluster when i interviewed (engineering position) there a few years ago. probably one of the worst interviews i've had, completely mechanical. literally all human emotion removed from it. the interview consisted of purely how well one did on the 5 sessions of solving problems. not a single session even bothered to take into account personality. the last interviewer explained they did't want to introduce any sort of bias hence the reasoning for the robotic interviews.
was pretty sad. i love search/gmail/maps but there isn't much coming out of google thats pushing the envelope these days for me.
once again the story of david and goliath... infinite growth is not sustainable...
Perhaps that's not the end of the world. Is Google's primary burden to growth their quality of engineering? I doubt it, so weighing the entire interview on coding skills seems like a mistake, one that is compounded by creating a homogenous culture where everyone has the same blind spots.
The counter to your argument is that many of Google's products, like Google+, feel like something a shut-in would develop. No soul, no emotional appeal, and I suspect it comes out of this engineering is everything (at the expense of product people and creative types) mentality.
What if the "robotic" questions themselves have a bias? They almost certainly do. (They've already turned off people who don't like robotic questions. :P) Demographic diversity is just as important as creative/intellectual diversity - I think diversity of hires requires diversity of questions. It requires some bad interviews, but it creates some great interviews. I've had interviews and been interviewed in both settings; no regrets. White male, though, so hard to say.
What is really spot on in the article is that when the 'luster' of being a growth company comes off, the stock feels it disproportionately. And as RSUs are the retention package of choice your "retention bonus" gets smaller as the stock takes a hit. That unlocks hand cuffs and people who are smart and aggressive opt to try something with more risk and a better potential reward.
It really is true that nothing is forever, but I know there is always the tendency to operate as if it is. Looking forward to the next wave.