If you invest in Google (GOOG), the mid February release of the Google 2009 10-K is the once-a-year tickler time to remind yourself what Google is. It is not a consumer software company. It is not an advertising or media company.
Google begins its 10-K with the statement:
"Google is a global technology leader..."
As such Google doesn't compare itself against Amazon or eBay, Disney or McGraw Hill. If you think of Google in that way instead of as an enteprise software market leader along with IBM, Microsoft (MSFT), Oracle (ORCL) and SAP, you do so at odds with the founders and other insiders that control 70% of the votes. If Eric, Larry and Sergey think they own a technology company, Google is a technology company.
So instead, think of Google this way: Primarily Google indexes information and web sites on its extremely large worldwide server farms in order to facilitate free Internet searches that help Google “sell” marketing enterprise applications. Brilliantly these enterprise software sales are monetized by over $20 billion in advertising revenue annually instead of boring old license and maintenance contracts. But Google is still an enterprise software company.
The Google Adsense and Adwords applications are most relevant to advertising agencies but useful to enterprises in all industries, who Google calls “content owners,” that market via the Internet. As an aside but not to worry, the patent to Google’s indexing/search technology called PageRank is owned by Stanford University, not Google. Google licenses it exclusively through 2011 and non exclusively perpetually. Stanford’s patent expires in 2017.
Searching on google.com is done primarily by consumers, which is what makes the marketing applications so interesting to advertisers (and which is what makes some investors think of it as a consumer software company). But Google’s search functionality has some enterprise applicability as well. In fact, the indexing/search software was initially sold in the more common, to enterprises, perpetual-license/annual support-contract manner and Google realizes more than $100 million in revenue annually under these more traditional terms and conditions.
Over the 12 years since its founding, Google has added mapping, office productivity, messaging and other applications such as YouTube that also appeals to consumers. Google also monetizes these adjunct applications primarily via advertising revenue and secondarily via traditional licensing/support terms and conditions.
Google has also added operating and security software and a browser to its product line up, some of which is especially tuned to mobile devices. Google believes the operating software and browser improves the performance of all of the above applications software on such devices as compared to more general-purpose operating software and browsers. Google hopes program developers will adopt its Chrome and Android operating software and browser via open source terms and conditions in order to make the more important applications software even more popular.
That's the company you are investing in if you invest in Google. Boring but lucrative if you understood that and got out at the top.
-- Dennis Byron