Friday, February 18, 2005

GLEANINGS FROM SEARCH BLOG

Like Ruth, I say thanks to those who allow me to glean their fields. "Search Blog" by John Battelle is hosted at www.battellemedia.com. I plan to link his blog in my favorites list. The following are some highlights and comments on his recent postings.

I have written about content being key. John reports that Yahoo is moving into streaming video! The new internet based TV/Movie company!

Google is now offering the 3rd revision to its toolbar. I down-loaded it and especially like the auto map link system. I will email Google maps and directions to my customers. The more important point John makes is that Google is building more and more attractive features into the tool bar. One can be on an IE browser and have easy access to free, advanced, Google features.

FoxFire has been down-loaded 25 million times. Google and Yahoo are working rapidly to strengthen services offered and MSFT has announced coming enhancements to IE for the first time in a while. Will Google and Yahoo co-operate with FoxFire to go head to head with MSFT? I can honestly imagine FoxFire-Google-Yahoo winning that battle. Do you suppose AOL would join the FoxFire side?

Yahoo is working closely with several phone company Yellow page listings. Yellow pages has been and is a very profitable business. Phone companies employ thousands of sales personnel and charge large fees for business listings. Yahoo has made it worthwhile for companies to customize their Yahoo postings. The actual Yellow page book may be obsolete in a five or ten years.

Price of key words up 43.7% yoy! EBAY is growing by leaps and bounds but is paying GOOG and YHOO big bucks for key word listings.

The tail of the long tail. The long distribution tail is a very important concept. The long tail is changing our world and making search engines very profitable. Google and Yahoo continue to report very high growth rates. As a holder of YHOO, GOOG, EBAY, AMZN and NFLX, I very much like the power of the long tail. I hope I can explain it to you.

Traditional businesses must market to the population that occupies the center of the bell curve. For example, the vast majority of all shoe stores cannot afford to stock unusually small sizes or unusually large sizes. The cost per pair to inventory slow selling shoes is many times the cost to inventory fast sellers. This is not a problem for shoe stores because the middle sizes account for the majority of shoes sold. The poor customer with small or big feet or a taste for unusual styles is the loser in the traditional supply system.

Now compare NFLX and BBI. Blockbuster can inventory only so many movies in each store. It can inventory all of the current popular movies but movies stay popular for only a few weeks. Older selections must be moved out before the next group of "popular" titles is stocked. The cost to inventory thousands of movies in each store is prohibitively high but relatively cheap in a central warehouse. Therefore, NFLX can offer thousands of movies on line that BBI cannot offer in its stores. BBI has been forced to cannibalize its store business by offering a similar mail service. BBI tries to make the unlimited service supportive of the store by granting two free in-store rentals with a monthly subscription. BBI does not want to admit it but if you want the most popular hit movie, you will be able to get it quickly only by picking it up at a store. Time will tell but recent numbers show that NFLX continues build market share.

Do you see the long tails of the movie bell curve? At any given time, there might be a few hundred movies that are very popular. These movies may enjoy a high turn rate and account for a significant percentage of the total rentals each month. However, the infrequent rentals of tens of thousands of "un-popular" adds up to a large number of rentals. This gives the online system a huge advantage. It gets paid the same price for low cost older movies. Consumers get the best of both worlds. They can order the most popular if they want but also sneak a peak at an oldie goldie. A good deal for all. (Any business that can cut its costs and give the benefit to the customer is going to grow its number of customers--think Google.)

TV networks have been experiencing longer distribution tails for years; the lengths of the tails are about to grow very long. The Yahoo example is a good one. Yahoo has teamed up with Showtime Networks to stream shows over the web. In days to come, millions of shows will be available over the internet. Many a consumer might occasionally watch a re-run of Howdy Doody, Hop-a-long Cassidy, the 1982 NCAA Basketball Championship game, or thousands of other shows and events. Consumers will be thrilled to have these shows available through a Yahoo or Google search and down-load. Name any popular or un-popular show or sporting event in the past 50 years and there are those who would happily pay a small viewing fee. Consumers with a GOOG or YHOO account could pay with the click of a mouse button.

Consumers actually strongly prefer fixed rate or flat rate subscription plans similar to the NFLX $17.95 per month fee for unlimited movies. Plans that include only the older shows would naturally cost relatively small fees. "Oldie goldies", toon networks, soaps and many other "channels" might be available. A sports fanatic might pay ESPN a few dollars per month to choose from hundreds of classic games available on any given month. ESPN would have zero production costs and would monetize old content. Recent bidding wars have shown the increasing value of content. Buffet seems to like AOL because of content.

Writers on the subject, talk about adding to our culture. I agree but my focus is on the freedom of choice. What a powerful concept. Freedom of choice has always been a powerful concept but choices have always been relatively limited. Peggy Noonan recently wrote a piece on blogging in the Wall Street Journal. She says that "Professional Journalist" are very upset because "un-professional bloggers" are taking away readers. Actually many "professionals" have used "un-professional words" to describe bloggers.

Too bad, the bell curve we are now talking about has very long tails. The number of folks willing to pay a buck for a traditional newspaper will drop relative to the number of people who will find free or low cost blogs that focus on their interest. The parents who have children who play for a local soccer team or who are stars in the local school play will enjoy reading about, hearing about and watching the news about these activities on a local blog.

Boaz was kind to let Ruth glean his fields of the left-over grain. Boaz left extra grain behind for Ruth but in truth it would never have made sense for him or any other land owner to gather every last head of grain. The good news is that the big media cannot begin to cover every story or to produce every good show.

Search technology is just beginning to effect our lives. Google and Yahoo are well in front of many other competitors including MSFT. MSFT is planning an all out assault to gain market share. Competition will be stiff. Over the next few years, billions of consumers will link-up in several ways with the market leaders. Each companies programs have a growing list of "sticky" features built-in. Once a consumer has a mail account, blog or adsense type account with a provider, he is not easily moved. Relationships established this year will pay off for years or decades. Google and Yahoo are growing relationships quickly. Their paths are different but the results are similar.

I understand that extrapolating current growth rates into the distant future would make YHOO and GOOG companies of impossible size. The market caps for these stocks are huge. GOOG has passed EBAY as the biggest internet company. The GOOG market value of $54 Billion is more than twice the General Motors value of $21 Billion!

MSFT is a 279 Billion Dollar company. Is it possible that Google will pass MSFT ten or fifteen years from now? A tall order but I believe it is possible. Can MSFT double in value in 10 years? I believe it can double in less than 10 years? For sake of argument, let us assume that MSFT will double its market value in 10 years and that Google will catch MFST in 10 years (as I recall the MSFT IPO was in 1985). The compounded annual growth needed would be 23%. A very large number for a very large company. If accomplished, the value of one share would be $2,045; a 10 bagger.

Traditional value investors would choke upon reading the above paragraph. They would call my numbers crazy speculation. They are! I happen to believe that GOOG is one in a million. It is already priced as such. Only a wild eyed crazy believer would buy this stock. YHOO is almost as big a speculation.

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