Monday, May 05, 2008


As written last week, the pending merger of DAL and NWA will increase the number of city pairs served by a huge number; 6,000. From Sarnoff, Metcafe and Reed, we know that the value of a network expands exponentially as the number of "nodes" increase.

GOOGLE is building not one but several huge networks. Its large network of advertisers is a very profitable network and its social network could grow into billions of nodes. Yahoo and Microsoft have each started, built and restarted competing networks. Microsoft and Yahoo have each purchased competing networks. Microsoft nor Yahoo have been able to come close to catching up with Google. This weekend, Microsoft tried and failed to purchase Yahoo. A major part of the Yahoo defense against takeover has been the strategy of "doing an advertising deal" with Google. If such a deal is completed, Yahoo will earn higher advertising fees by doing a deal with Google, but the power of the Google brand will take another leap forward.

The price of Yahoo will drop this morning and the price of Microsoft will rise as the arbitrageurs unwind positions. Those who believed that Microsoft would prevail at a higher price were bidding the price of Yahoo up and the price of Microsoft down. They were buying shares in Yahoo and selling shares of Microsoft short. Those who suspect that the Microsoft "walk away" is only a negotiating ploy, will probably keep the price of Yahoo from falling back to pre-bid levels.

Microsoft is still a cash flow machine. The demand for computers and computing services continues to grow by leaps and bounds. IBM is another big computer company that is enjoying world wide growth in demand. Still, the "hot computer growth" is in areas of Internet services offered by Google.

Growth does not assure profits. Back around 1984, Jack Fields, a top producing Merrill Lynch Stock Broker, conducted growth stock investment seminars. His key point was that if a lot of companies are trying their best to become the king of the hill in a high growth industry, they can easily hurt one another. Put another way, a fundamental law of economics is that in perfect competition there is zero profit.

It has been amazing to see how many services and how much service Google has been able to offer free of charge. Google is king of the hill in several areas, but it continues to be challenged. For example, FaceBook has built a very large and active social network from scratch.

Advertising is an economically sensitive business. When there is an economic slow down or recession, companies often cut back or even eliminate advertising. Last year, Google's share price fell a couple of hundred points. In recent months it has been on the way back up. All the while, its networks have continued to grow. If I and the Google management team are correct, advertising revenues on the mobile networks will eclipse desk top advertising revenues.

Mobil computing is going to see great growth over the next 10 to 20 years. Microsoft has invested billions trying to make its Smart Phone software the mobile computing standard. Nokia and others support a software platform called Symbian (spelling?). Google is attacking from all sides. While Google search will work on all platforms, the company and a consortium of partners are preparing to launch Android, another software platform. The Android software will be tailored toward making Google Search Functions easier to use. For example, there might be a map button programed to bring up a selection of available maps of the area. One selection might be a commercial map offering a choice of maps to service stations or restaurants. A click on a restaurant icon might bring up a menu and an order form. Of course, voice commands might increase the utility of search to the driver of a vehicle.

There are millions of people who have already joined mobile computing networks, mostly through their cell telephone. Many of these "nodes" are seldom or never used for mobile computing due primarily to the speed of the connections. As the roll out of 3rd and 4th generation services occurs, the number of working nodes will increase dramatically and the value of the networks will grow exponentially.

Google is the king of the mountain. Google is in a position similar to the ones held by Boeing, Proctor and Gamble or FedEx. All companies have competitors but dominate players have advantages that are difficult to overcome. In the Boeing example, companies such as McDonald Douglas eventually were pushed off the hill. Airbus ultimately became the competition, but it required the backing of a couple of nations. Baidu is the Chinese version of Google. The French are promoting a national version of Google, 75% of all searches done in Russia are done on Google and Yahoo has done well in Japan. Steve Ballmer, President of Microsoft, has the historical example of GM versus Ford as a guide. It will likely take a conglomeration of many to challenge the leader, Buick, Pontiac and Oldsmobile had little chance to overtake Ford by themselves. Google looks at the same historical example and is not following the Ford playbook. When GM offered trade-ins, financing and numerous options (including colors), Ford saw no need to respond. Today, Google is going toe to toe with challengers in multiple areas. All programmers at Google have been granted the freedom to spend 20% of their efforts on ideas they think have merit. Google is not offering only black model T's. Land line connections were AOL's model T's.

Google shares are priced such that 10 to 20 years of growth is needed to justify the price. One can get into great trouble when one tries to extrapolate growth into the future. Last night, a blogger at The Oil Drum based an argument on the idea that the number of cars on the road will increase from 800,000,000 to 3 billion over the next 40 years. What a joke? He simply extrapolated from current trends without accounting for the probability of technological improvements or substitutions. Had this fellow been writing at the turn of the 20th century, he might have predicted mountains of horse manure on the edges of towns all across America by 1940.

At the turn of the 20th century, one might have invested in blacksmith shops and wagon works because these well established businesses were profitable and growing. When Ford standardized auto parts in 1908, making it possible to assemble duplicate cars at a faster pace, one still could have made good money in blacksmith shops and wagon works. In 1914, when Ford invented the assembly line, one still could have done well in "mature industry investments". From 1914 until 1919, Ford was the AOL of the 1990's. Today, Google is the GM of the 1920's and the USA will is not waiting 30 years to build the Internet Interstate Highway System. The "Interstate Web" is already under construction by private enterprise. Under these circumstances, it seems reasonable to bet on 10 or 20 more years of fast growth by Google. No other company can currently match the number of servers spread around the world or the high speed networks that connect these servers.

In many areas, Microsoft is matching Google. For example, Microsoft has web enabled its Works Software, offering free word processing, spread sheets and other services like Google. Microsoft is not done. The company has something like $40 Billion in cash. It will buy or build businesses to compete with Google, however, it will take more than money to overtake Google. If Google does not make a major mistake or two there will be great growth in its future. There will be so much growth that the number two player might make billions of dollars. The number one player will make much more than number two.