Google is a great website, but a lesson of the dotcom bubble is that a great website is not always a great business, advises Dr. Steve Baba, a Ph.D. in Economics from the University of Maryland, in a report on Google stock.
Google’s expected IPO has attracted enormous, one-sided, positive buzz from Google fans, techies nostalgic about the boom years, and day traders hoping for quick profits. For balance, below is a list of Google’s many potential business challenges, several of which could turn Google into a penny stock.
1. Companies that grow quickly by viral marketing, also known as word-of-mouth advertising, can fall just as quickly by competitor’s viral marketing.
2. Companies that grow quickly from free publicity can also fall quickly by competitor’s free publicity.
3. Switching costs and brand loyalty of search engine users are low.
4. A winner-take-all business, also known as a contest business model, is only profitable if you are the winner, as Google is today.
5. While Google is free to searchers, a price of zero, profit-lowering price-competition is still possible with a negative price.
6. In addition to price competition, search engines can compete for users by offering less advertising.
7. A competitor could develop a better, patentable search algorithm, as some hopeful inventors claim to be working on.
8. The search engine industry may be in a temporary disequilibrium, and the long run equilibrium, dominance by Google or highly competitive industry, is unknown.
9. Microsoft and Yahoo might actually try and compete with Google.
10. The rapidly declining cost of technology, computers, storage, and bandwidth (Moore’s Law), will reduce the cost of entry for competitors.
11. Any competitor can outsource software deployment to India, Russia or China, which will reduce the cost of entry for competitors enabling new competitors.
12. There is open source competition.
13. The increasing power of programming tools, languages, and scripts reduces programming costs, which increases competition.
14. Google’s revenue source, text Pay-Per-Click advertising (PPC) often causes a race to the bottom as the most expensive/profitable products outbid less expensive products for the limited PPC positions, having negative reputational then financial effects.
15. Text pay-per-click advertising is only one form of advertising and is subject to competition from other forms of advertising.
16. Google’s revenue source, advertising, may be blocked or replaced by ad blocking software. This is similar to the TiVo problem for television advertisers.
17. Google’s reported 50% margin with AdSence (displaying ads on third party sites) is unsustainably high for a middleman.
18. Much of Google’s future profit potential depends on brand extension to other services, such as their shopping comparison site Froogle or Gmail, which involves risks and cannibalization.
19. Being number one, Google is the number one target for search engine spammers and search engine optimizers, which reduces Google’s quality.
20. After an IPO, with no prospect of great stock options to employees, Google may be at a comparative disadvantage attracting and retaining top talent.
21. Google may not discover significant new advances in search if none are there to be easily discovered and all the easy techniques, the low hanging fruit, were already discovered, wasting Google’s research investment.
22. In contrast to the already discovered and easily copied low hanging fruit, the high hanging fruit of artificial intelligence may be decades away if it’s even possible, wasting Google’s research investment.
23. Everyone online, including Internet entrepreneurs, uses Google or another search engine, making search a well-known and glamorous business opportunity.
There are many good reasons to buy Google stock, but these are well covered elsewhere. The potential rewards of purchasing Google stock may justify the risk, but the risk should be evaluated, and the smartest investors my sell Google ahead of the market if risks develop. A full report analyzing the above risks with a conclusion and possible events affecting Google stock is available at www.Gstockreport.com.