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Google Strong, But Microsoft Pays Attention to Verticals

Posted on Friday, Apr 18th 2008

Google (GOOG) reported their Q1 numbers yesterday exceeding all market expectations. Q1 revenues were $5.2 billion with EPS of $4.84 compared to the street’s views of $5.1 billion with EPS of $4.52. The revenue reported a 42% increase over Q1 revenues of the previous year.

Google’s revenues recorded an impressive 49% growth over the year and 9% over the quarter to reach $3.4 billion. AdSense revenues grew by 25% over the last year and 3% sequentially to $1.69 billion. Their paid clicks grew by 20% over the year and 4% sequentially.

To expand their geographical reach, they launched tailored homepages for Asian markets and promoted local country search results while demoting foreign search results. These efforts resulted in the growth of International revenue share to 51% from 47% contribution a year ago and 48% contribution in the previous quarter.

Google also completed their acquisition of DoubleClick which will allow them to offer a more comprehensive solution for advertisers and publishers. Using DoubleClick’s display ad management products and Google’s ad network, they are expecting to be able to help publishers get more revenue while they put forward a richer content. Despite all that, AdSense continues to grow at a marginal growth rate of 3% per quarter. This slow growth is also derivative of the fact that AdSense still does not monetize the social networks it pushes ads to. Like I said before, AdSense is great at monetizing crap.

Their monetization strategies of YouTube continued for the quarter with the launch of AdSense for videos. In-video ads can now run on sites besides YouTube. Presently they get traffic of more than 10 hours of video uploaded every minute on YouTube. They are getting better click through on these video ads than on their banner ads.

During the quarter, Google continued to improve the quality of their search, increased the value for their advertisers, and improved their web experience. They partnered with Salesforce.com in a continued effort to build a business applications business to compete with Microsoft.

However, Google does not seem to be doing enough on increasing their vertical scope. They are absent from key verticals such as Jobs, Travel, Auto, Real Estate, Health and Personals, domains that have seen the rise of compelling Vertical Search Engines and Vertical Ad Networks. While in the short term this will not affect the company (Travel portals are some of Google’s largest customers for AdWords), in the long run, eye-balls will veer away to sites like Kayak that provide a better search experience.

There is also a farce going on between Yahoo and Google right now, as Yahoo makes a rather silly attempt to fend of Microsoft’s hostile takeover bid. At some level, it is a wastage of time for everyone. For the moment, there is nothing interesting to report on the Microsoft-Yahoo saga. Once the deal gets done, which I believe it will, it would be interesting to see how Microsoft plays its hand. In fact, Microsoft’s purchase of Travel Search Engine Farecast tells me that they are paying attention to the verticalization opportunity that I have been pointing at.

In the after hours trading session, the Google stock was up 13% to $507.71. This morning, it has traded up further to $544.

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Nice in-depth analysis, Sramana. I would argue that Google has never paid attention to vertical channels because they use technology to target ads, rather than finding (or creating) audiences around vertical subject matters. In other words, Google takes a broad, horizontal market approach and lets their technology do the targeting.

But the bigger issue I see is how Google enables marketers to reach the all-important youth market in social networks. Their MySpace investment has performed horribly.

Effective advertising in social networks requires more than good targeting, it requires getting the consumer to “invite the advertiser in”. And this requires offering the consumer something valuable and/or entertaining. It’s a dance between consumer and marketer. I discuss this here: https://blog.splashcastmedia.com/?p=48

Google’s method of advertising in these social environments, even with highly TARGETED banner ads, is still a far cry from what’s required to be effective.

Mike Berkley Friday, April 18, 2008 at 12:50 PM PT

There is also something to be said for company DNA – it is hard to imagine G going out and building a job board, for example. But they have been verticalizing their diff. information types (news, blogs, etc.) and then bringing them all together in the form of Universal Search.

I also have to disagree with your blanket assertion around “eyeballs shifting towards Kayak”. Says who? Where is the data to prove it?

Fundamentally, I dont buy this black/white argument that by not “verticalizing”, Google loses out in the long run. What’s the rationale for it?

Saumil Mehta Saturday, April 19, 2008 at 1:34 PM PT

Saumil, You must be a new reader. I have written endlessly about this. Do some catching up on your reading, you’ll find what you are looking for. Sramana

Sramana Mitra Saturday, April 19, 2008 at 3:26 PM PT

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I find some of your analysis interesting about stocks such as Rimm and Google. My question to you is what are the best small cap high growth stocks that will be emerging from China in the next year.. I currently have my portfolio geared to ” roll long” and Im loading up and high growth companies. Please would love to hear some thoughts.. Thanks,

Anthony Beardall Saturday, April 26, 2008 at 10:12 PM PT

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