7 Reasons Google Will Rule the World

Once again Google surprised the street with much higher than expected earnings. The stock price has jumped $20 today to more than $210 per share and the market cap is almost $58 billion.

I will not be surprised to see consistent positive earnings surprises coming from Google for many years.

I believe that Google is on track to being the most valuable company on the planet. I blogged last year my prediction that within 10-15 years Google will surpass Microsoft in market cap. Here are 7 reasons why it won’t even take 10 years for this to happen:

  • Google Philosophy. Google has the right philosophy for our time–they want to change the world by helping everyone in the world have access to the information they need at any time. By giving us all access to extremely valuable data and tools, they are amassing the largest customer base in the world. After providing a service and attracting an audience, they figure out smart ways to monetize it. But that is not their first priority–changing the world is.
  • Efficiency of Advertising Model. Once they have eyeballs, the Google self-service model allows hundreds of thousands of businesses to manage their own accounts. New advertisers can set up an account and have traffic coming to a site in just a few minutes. Overture’s staff of humans often takes days to approve a new campaign. Google pays almost nothing to get new customers and almost nothing to generate this revenue–the customers themselves do all the work. The profit margins here are breathtaking.
  • Good Partner. Google is unbelievably generous with partners–content sites who accept Google ads in exchange for a percentage of the revenue. Because Google is not evil, and they want all sites to accept their ads, they share most of the revenue with their content partners.
  • Employee Pet Projects. Long term, this is the #1 reason why Google will become the most valuable company in the world. I have read that every employee at Google is allowed (or maybe even required) to spend 20% of their time each week working on a pet project. Most companies operate from the top-down. Managers tell employees what to do. Executives make all the resource allocation decisions. But Google has embraced a philosophy which I think can revolutionize the business world–if other companies are smart enough to adopt it. While the most talented, creative, and entrepreneurial people leave companies like Microsoft in frustration in order to start their own enterprises, Google has created an environment where the most talented, creative, and entrepreneurial employees can play in their own sandbox, attract attention and support from top management, and have their pet projected funded within the company. I understand that Larry and Sergei keep a list of the top 100 pet projects in the company. Many of the existing services which Google offers (including Orkut and Google News) were developed by employees. I expect to see hundreds more innovating and exciting free services coming from Google in the coming years. I see more innovation here than from almost all the other top internet companies combined.
  • Speed of Decision Making at the Top. Once a pet project or an outside company catches the imagination of Google’s founders, its maybe only a matter of days before they make a decision to invest in something or make an acquisition. Consider Google’s acquisition of Blogger and Picasa. I don’t think a dozen MBAs took weeks or months to build extensive financial models to justify the decision to get into blogging or free photo sharing. Google’s founders’ instincts are so good and they have the ability to make decisions so quickly–that the rest of the world–slow and bureaucratized as most of it is–better watch out as Google makes big moves and does business at the speed of thought.
  • Cash Flow Funds Pet Projects and Acquisitions. Google’s cash flow is so amazing that anything the founders want to do in terms of funding employee pet projects or making acquisition, they will be able to do. While Microsoft is distributing tens of billions of dollars to its shareholders through dividends (signalling the end of their ability to generate high returns from investing the cash internally), Google will be investing more and more in its world changing strategies–like scanning millions of books from the major research libraries in the world and offering free voice over IP (free telecommunications) to people around the world. No doubt they will become a leader in instant messaging; they will launch a browser to steal market share away from Internet Explorer; they will be prominent in blogging, online photo sharing, and in online communities. Eventually they may even offer an operating system or network computer with application functionality that will compete head on with Microsoft Windows and Office.
  • Open Source and Declining Hardware Costs. All the services Google rolls out are being launched on cheap hardware using open source software. The costs of providing services to the world are declining at an astonishing rate. And Google is there at the right time, investing like crazy. I heard a Berkeley professor in 1999 talk about how CPU, storage and bandwidth costs were approaching zero over time. I don’t think most companies understand what this means. Google is on track to having a million or more cheap computers configured into one great network computer system that will store our personal data, host the knowledge of the world, and provide us with tools for communicating with each other. And the cost of deploying such a world-wide network is decreasing all the time. Which means profit margins at Google will be breath-taking for years to come and the street will continue to be surprised.

In the spirit of full disclosure, I’ve sold my Google stock and invested the profits in Infobase Ventures’ own startup companies. Even if Google increases in value over the next few years and passes Microsoft in market, the return on equity for a good startup company should be much higher than the 5-6 fold returns that Google might provide, the way I see things.

The main risk I see in investing in our own startup companies is that the thousands of smart Google employees might beat us to the punch in executing on most of our good ideas. They seem to be everywhere these days; and I see their pace of innovation only accelerating.

9 Comments

  1. Didn’t you invest some of your “own money” in Myfamily.com and end up with nothing but getting your butt kicked out of the company? Do you think icount.com is going to make money? give me a break!!!!

  2. Wow, Paul. I wouldn’t come into your house and throw dirt on you like Gene did.

    Anyway, I like your comments on Google. They amaze everyone, it seems. They are nimble, fast, ingenious, complete, stylish. Great, great stuff!

  3. I’ll answer Gene’s questions:

    I invested the first money in MyFamily.com back in 1997, and then again in the Series E round in 2001. My ROI on both of these investments will be extremely high.

    I was not kicked out of the company. I turned down an offer to become Chief Marketing Officer and instead chose to leave in February 2002 to pursue other startups. Ask any MyFamily executive or board member and they’ll confirm this.

    I do think iCount.com is going to do very well.

  4. Paul – nice post about why Google is great. This list could be a manifesto of sorts for countless other businesses. I know I’m working to make some these ideals part of my business. Anyway, thanks for sharing your thoughts. KMS

  5. Paul, excellent analyis. You correctly point out the significance of dwindling infrastructure costs (hardware, commodity software – that is either already Open Source or destined to head down the Open Source path, communication, …). Although some companies such as Google are highly successful, many software companies have this far failed to see that they are operating outdated business models which provide less and less returns going forward. Instead of innovation, many of these companies look to “cost-saving” within their current business model, rather than thinking out-of-the-box.

    Until recently new implementation technologies and improved hardware performance have been a main driver of new business models in the ICT space. I believe that in the next decade innovation in ICT will be dominated not by “technologies” in the classical sense, but rather by new “techniques”, i.e. new paradigms for “business transactions” and new models of interaction between those who make up the web – people.

  6. Kyle

    This got my heart racing a bit. Your language is that of great conviction.

    Microsoft is going the way of the dinosaur and their business model is going to have to take a new direction (which i think will be software for embedded systems (nano/micro), but who knows if they can get out of their business software hole), the next generation of computer users will not be burdened by their software structures, for the web shall host the software as Google’s is showing us it can do. Most people will only be interested in the services that the internet can provide. Google is the god of the internet as far as i am concerned, yet it shall not come without an increase in risk.

    We must acknowledge that as Google’s infrastructure becomes more important that risk becomes involved with all of the investments that are made. It is simply the “scaling up” of the “impact” of the corporate structure to the global scale. As more and more groups buy into Google for their service this increases the amount of responsibility that Google has to deal with. People will want answer when their investments don’t make return, or when the services bring harm / dont work.. And the larger the group of people negatively effected the larger the threat.

    We should take some time to consider how the continuation of Google’s growth (say for 50-100 years) is in essence reliant on human behavior. That behavior can obviously be controlled in many capacities through conditioning, yet there are still limits to control. Looking at the roster of Google employees there is no doubt that they do much psychological / behavior speculation, and their true study is on the behavior of humans (for now). Their software and systems revolve around human beings accessing information and now they are swiftly moving into manipulating information. Who would of thought that the “ad in the bar” would be such a competitive edge? Advertisement…

    And is that not the bedrock of revenue that grows Google?
    Their service is at the forefront, offered for free, while behind exist the advertisement. Google would be oh so wise to invest in a ubiquitous wireless network system that they could deploy in cities at a low cost. For if they can get all of their hands around the routes they will basically be limited only in terms of what is physical possibility as to what they could compute.

    Google is going to need to keep the trust of the people who use their service, and they are going to need to expand their services, always. If they faction and only one portion of the globe uses the service there is going to be trouble…

  7. Aurfilius

    I agree with everything you say about Google but I just want to mention one thing which is making me uncomfortable i.e. why Paul Allen” (The Lesser)”?. You can use Paul Allen “(The Later)”. It sounds honorable and relevant. By using “The Lesser” you are clearly revealing that you measure success or persona of individuals by their net worth or power of their position. (May be I am missing something on this and you might have some other reason to title yourself as “The Lesser” , in that case I wonder what that reason is!). Respect successful people but yourself too.

    Do you have any idea how important are little ants? If they would not have been there, Google would have made a lot less revenue as nobody would have searched about ants thus cutting on advertising opportunities for Google which they have now with all those pages about ants. Even if you dont change your mind I would never call you Paul Allen (The Lesser), I would prefer Paul Allen of paulallen.net

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