The annual report filed by Google with the SEC reveals hefty revenues, its thoughts on Yahoo and Microsoft, and the potential for its multi-billion dollar business to suddenly go pancake-shaped in certain circumstances.
Google Has Resources, Rivals, And Risks
Google made a lot of money, and spent quite a bit of it in 2006. Their annual report showed $10.6 billion in revenues, earned with $7 billion in costs and expenses. That left over $3 billion in Google net income for the year.
They also built their war chest up to $11.2 billion in cash and equivalent, and marketable securities. This gives Google the capacity to challenge their chief rivals in the marketplace for companies those rivals might want to acquire.
Yahoo and Microsoft rank as the companies Google fears the most. From the report (emphasis and spacing added):
Currently, we consider our primary competitors to be Microsoft Corporation and Yahoo! Inc. Microsoft has developed features that make web search a more integrated part of its Windows operating system and other desktop software products.
We expect that Microsoft will increasingly use its financial and engineering resources to compete with us and Microsoft has more employees and cash resources than we do. Also, both Microsoft and Yahoo have longer operating histories and more established relationships with customers and end users.
They can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing more aggressively in research and development and competing more aggressively for advertisers and web sites.
Microsoft and Yahoo also may have a greater ability to attract and retain users than we do because they operate internet portals with a broad range of content products and services.
If Microsoft or Yahoo are successful in providing similar or better web search results, more relevant advertisements or in leveraging their platforms or products to make their web search or advertiser services easier to access, we could experience a significant decline in user traffic or in the size of the Google Network.
The problem for Microsoft and Yahoo is that they haven’t challenged Google significantly yet on search results. Advertising concerns keep them from being as devoted to the purity of highly relevant search as Google is today.
Increasing competition from those two companies, and a host of smaller upstarts, should start pushing Google’s revenue growth down, along with its operating margins. If revenue should start coming more from Google Network members using AdSense, and less from Google Partners that the company controls, it will cost Google more for its revenue.
Advertising itself poses the greatest concern going forward. “We generated approximately 99% of our revenues in 2006 from our advertisers,” they noted in the report. “If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively harm our revenues and business.”
John Battelle unearthed an interesting piece of information about Google’s YouTube purchase:
The YouTube acquisition is detailed, technology from that was valued at just $24mm. Goodwill (if ever there was an irony…) is the majority of the price. There’s $45mm in liabilities assumed.
That transaction had been valued at $1.65 billion at the time, thanks to the price of Google stock.
