In a post last week entitled The Freight Train That Is Android, Benchmark Capital General Partner Bill Gurly explains the unprecedented success of Android as a defense, or “moat” around Google’s (GOOG) castle.
One of Warren Buffet’s most famous quotes is that, “In business, I look for economic castles protected by unbreachable ‘moats’.” An “economic castle” is a great business, and the “unbreachable moat” is the strategy or market dynamic that heightens the barriers-to-entry and makes it difficult or ideally impossible to compete with, or gain access to, the economic castle. . .
For Google, the economic castle is clearly the search business, augmented by its amazing AdWords monetization framework.
The post is spot on in almost every sense. But I have one issue…
Just about everyone still thinks of Google as a search company. The reality is that those days are long over. Google is a web services company that makes quite a big chunk of its revenue from a very large, efficient advertising platform.
The notion that Google is 90+% search hasn’t been true for a long time, but lately it’s become obvious: YouTube, AdSense, Enterprise and location/mapping are becoming huge businesses in their own right and together may have replaced search as Google’s biggest revenue generator.
Google doesn’t derive nearly 90% of its revenues from search. So how much revenue does it represent?
On Google’s last earnings report, it said that AdSense accounted for a significant 30% of its revenue. AdSense is advertising on third party websites. That has little to nothing to do with search (there is ‘AdSense for Search’ where Google powers the local site’s search engine, but it is a very small part of AdSense). From Google’s last earnings statement:
Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $2.50 billion, or 30% of total revenues, in the fourth quarter of 2010. This represents a 22% increase from fourth quarter 2009 network revenues of $2.04 billion.
In other words, Google revenues from search must be less than 70% from that statement alone. But moving forward, Google’s other businesses are growing at a much higher clip than search.
YouTube:
All but 3% of the remaining 70% of Google’s revenues come from its “Sites”. Google doesn’t break down search within that, but that 67% is likely still mostly search. Still, YouTube, another huge Google business not directly tied in with search, is “hockey-sticking” as well.
At a special one-time earnings announcement last October, Google said that YouTube averaged over two billion pageviews a day and users were uploading 35 hours of video every minute. That’s likely to have increased significantly in the past six months. Even more importantly, YouTube has learned to monetize its pageviews much more effectively.
Google’s 3 YouTube tricks:
1. Display ads: YouTube’s homepage usually has a huge, high-value display video ad on top. CPM-wise, these are extremely lucrative. Google gets 100% of this ad revenue vs. the 30% of revenue from AdSense ads after third-party partners get their share.
2. Copyright control, aka Content ID: Google has gotten incredibly efficient about monetizing videos, not just for themselves but also for copyright holders. As those 35 hours of video are uploaded every minute to YouTube, Google checks against its database of copyrighted content. If a match is found (and by most accounts, the system is very accurate), the video is flagged. It’s not monetization per se, but it keeps content-owners from suing and wasting Google’s money on legal battles.
Copyright monetization: Here’s where things have changed recently, however. YouTube used to take the offending content down by default. As of 2007 however, copyright holders are given the opportunity to leave their content up and let Google point to purchase options on iTunes and Amazon (and likely Google, too, in the future) and/or run ads on the video. Google then takes its cut of referrals and ads.
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Here are some rough stats on Content ID that Google was able to provide Fortune (as of December 2010):
- 1000+ partners are using Content ID, including every major US network broadcaster, movie studio and record label.
- More than 4 million reference files (over 300,000 hours of material) are in Google’s Content ID database, among the most comprehensive in the world. The number has doubled in the last year.
- Content ID scans over 100 years of video every day.
- Tens of millions of dollars were spent developing the technology.
- The majority of partners using Content ID choose to monetize their claims and many have seen significant increases in their revenue as a result – and claims choosing to monetize content are up more than 200% in the last quarter.
- Rights holders who claim their content with Content ID generally more than double the number of views against which Google can run ads, doubling their potential revenue.
- 100m videos have been claimed.
3. Embedded and in Apps: YouTube videos are easy to publish to websites, blogs, Facebook, etc. By embedding YouTube videos around the web, publishers are giving Google another window to viewers from which to extract some value. Not only is the embedded video often shown with advertising, but when the video completes, other related video options appear which give YouTube more options for advertising. Publishers are putting little YouTube TVs all over the Internet.
Then there are the YouTube apps on AppleTV, GoogleTV, Boxee, iOS devices, Android devices and so on. YouTube isn’t just making advertising money on youtube.com, but also on the billions of other pageviews it gets from third-party websites and applications.
Down the road, YouTube could turn into a bigger revenue producer than search. For now, Google won’t break it out, but it is huge – perhaps enough to
push search below 50% of Google’s revenue.
Enterprise:
Another hockey-sticking business for Google is its Enterprise Apps division. Google won’t provide any recent specific numbers, but here are two metrics to consider:
- Google told me that its Apps business is growing faster than any other major cloud business. Specifically, Google Apps is the fastest-growing cloud business today, calculated by quarterly growth among major Cloud operators. That may seem vague (and it is) but if you consider the other majors like Salesforce, and that Cloud is where every major business is steering their tanker ships, Google’s lead is meaningful.
- Enterprise is a monster potential business. This is where Microsoft (MSFT), Oracle (ORCL), SAP and other titans earn most of their money. As businesses move to the Cloud, Google has positioned itself well to take clientel from the majors and build new business as well.
Google doesn’t just earn the $50/user/year that its Cloud services cost. Once a business is in the Google Cloud, Google offers business Apps that are available via the Cloud. There has been significant growth in this area as well. Google takes a 20% cut of the cost of these businesses.
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Location, Location, Location
Finally, Google’s Maps/data/location services are just starting to explode. To put into perspective how important location is to Google, consider the fact that the company recently tried to buy Groupon for an estimated $6 billion. That’s almost four times what it paid for YouTube ($1.65B) and it’s pretty clear how that investment is playing out.
Google is well-positioned to do extremely well in location-based services because it owns market leading products in areas surrounding location. Advertising will play a big role. Maps are important. Smartphones that can use GPS data are also important. Google is the market leader in all three of thee areas and already hard at work integrating these products.
Though location-based search could be considered part of search, the way search is done in a mobile maps application is fundamentally different than the way it is currently done in a browser. Results are often graphical and data can be pulled from Google Local data rather than webpages, for instance.
The Wild Card: Social
Social is either Google’s biggest failure or its biggest opportunity — or both. Its Facebook-like attempt, Orkut, is all but dead outside of Brazil and India. However, if you consider the social features in YouTube, Google is in some ways the biggest social site on the net outside of Facebook. Google is constantly iterating its products across the board to be more social: with products like Picasa photo-sharing, Android, maps, Latitude, Gmail, Reader/Buzz, no other company, (outside of Facebook) is better positioned to exploit social networking.
Search
Compared to the businesses above, search revenue and growth potential is relatively flat, prompting some to announce the search party over. Google has known since the earlier part of the decade that there is only so much market for search, and they’ve planned accordingly. That’s why the next decade of Google’s growth will be dominated by other businesses.
And back to Android…
So back to the original metaphor of Android-as-moat for the Google castle. I’ve explained why Google’s castle — more like a city of products — isn’t just search, but the thesis still holds. Google’s got a city of products to protect and Android ties them all together. Android is the best way to get on Google Apps, it has a Mobile client and direct upload for YouTube (and Android-powered GoogleTV), and it is a huge part of Google’s social and location efforts.
But, no matter what, Android is not just the moat. Android is increasingly the tie-into everything Google is doing — even more so than search. It is really the new beacon at the core of Google’s city.
