Google got a lot of publicity from their latest RE<C renewable energy initiative, but my first reaction upon hearing it was "short the stock." Companies are not good at everything; indeed, they tend to be good only in rather narrow spheres. When you start hearing a company claim otherwise, be cautious. If their claims seem unbelievable or are explicitly based on nothing (except ego or "we have a lot of smart people here") - run. The last company to sell that line was Enron.
Think I'm exaggerating? Check out the tenor of Google's official release:
"We have gained expertise in designing and building large-scale, energy-intensive facilities by building efficient data centers," said Larry Page, Google Co-founder and President of Products. "We want to apply the same creativity and innovation to the challenge of generating renewable electricity at globally significant scale, and produce it cheaper than from coal."
Trans: "I've eaten more cheeseburgers than I can count. Of course I'm qualified to be a cowboy."
What Google is talking about is a set of reductions in cost in the 25-50% range. There are 2 possibilities here. One is that this is happening anyway - in which case, Google's money isn't going to make a huge dent beside the large amount of investment already flowing into the field. The other possibility is that everyone else in the world isn't on track to achieve this goal, despite the devotion of a great deal of engineering talent and a lot of funding. But Google will magically break through this barrier because... we have money and smart people. In which case, sorry but they're smoking crack.
So, barely a dent and hence a wasted effort, or you're smoking something. Not promising. Which may explain this excerpt from the Google release:
"Lots of groups are doing great work trying to produce inexpensive renewable energy. We want to add something that moves these efforts toward even cheaper technologies a bit more quickly. Usual investment criteria may not deliver the super low-cost, clean, renewable energy soon enough to avoid the worst effects of climate change," said Dr. Larry Brilliant, Executive Director of Google.org, Google's philanthropic arm, "Google.org's hope is that by funding research on promising technologies, investing in promising new companies, and doing a lot of R&D ourselves, we may help spark a green electricity revolution that will deliver breakthrough technologies priced lower than coal."
Trans. "Actually, we told you up front that we'd probably pee away a lot of money. If you kept investing in us, that's your problem."
"Dr. Larry Brilliant"? Hmmmm.
Anyway, I don't think will have much effect on the stock. First off, they're going to be spending "tens of millions", which is probably less than they spend on snack food for their employees. Second, it's not stated clearly but seems to be implied that all of this money will be considered charity work, not normal business expenditure. For the amounts involved, I would suspect this is primarily a PR stunt rather than anything of significance to the core business.
Maybe so, AOG... but the attitude is not that of a healthy corporate culture. Tens of millions to solve problems that hundreds of millions/ billions haven't, just because we're Google? No sense of "it's a big pool, but we're throwing our pebble in?"
There's a line between confidence and delusional grandeur, and Google's own statements cross it badly. If they believe this stuff here, where else do they believe it? Mobile phones, where they look to be making a major strategic platform creation bet? And will be up against Apple, Microsoft, Nokia, Samsung, and the phone companies?
Not a good sign.
I think you may be wrong here, Joe. Energy is going to be a significant investment opportunity in this cycle, and Google actually has a significant player in the space - Dan Reicher, their director climate and energy initiatives. He was an Undersecretary of Energy in the Clinton Administration, and is very darn smart about energy issues (disclosure: he's the brother of a dear friend of mine).
I'd meant to blog about the meaning of his going over to Google, but got involved squabbling.
A.L.
This relates directly to Google's bottom line. Power for data Centers costs a fortune and Google runs a lot of them seeing that the give anyone that signs up for GMail 5 Gigs of storage. They are also about to announce entry into the storage field with a major storage initiative.
This also falls in line with a growing trend for businesses to produce their own green electricity. With no end in sight to rising energy costs. I doubt that this will effect Google's bottom line much.
Unless you are going to short Google after a big run up when people are taking profits, shorting Google is a very, very dangerous proposition.
Google's MO is to launch initiatives, Beta's that act synergistically with other initiative that they exist or they are planning. It takes a while to see how they come together. The current situation with the GPhone is an example. First rumors that they will produce a mobile phone. Then the "from left field" of their intent to bid on the 700 wireless spectrum accompanied by demands about the ground rules for the auction.
Now no GPhone but a Software Development Pack. Verizon's announced yesterday the beginning of the end of their walled Garden approach to software development for their phones.
Google has also recently received a patent on Portable Data Centers, essentially data centers in a shipping container to replace Thousands of square feet of data centers in buildings and offices. Portable power is a necessary option for these devices.
When Google says it has smart people, what it means to me is that they are ingenious when it comes to carrying out their business strategy. This move appears to me to be a part of something larger they are planning that will be revealed further down the road. These are very thoughtful and deliberate business people and they have created a commercial Juggernaut.
If they believe this stuff here, where else do they believe it? Mobile phones, where they look to be making a major strategic platform creation bet? And will be up against Apple, Microsoft, Nokia, Samsung, and the phone companies?
Do they need to make a profit on mobile phones or just keep the other guys from forming a sort of cartel that rakes off the money?
The better they do at keeping other companies from creating bottlenecks that suck away consumer dollars, the more consumer dollars are available to compete over.
AL, thanks for the personnel note. TOC, good thoughts and background.
The remaining questions, therefore, are:
[1] Is Reichert smart enough and experienced enough in the venture field to make Google a successful energy Venture Capitalist? Do they have a team in place that is capable of being an internal VC and performing at a good-high level by the standards of the VC field? It's possible, but it is a tall order.
[2] Is the vertical integration that Google is pursuing an integral part of that commercial juggernaut? Or is it a distraction from that juggernaut's true source - search technology so good that "Google it" has become a popular culture phrase for looking up almost anything you don't know?
There's certainly a play to be made in the mobile "look it up" space, and big strategic bets make some sense given that the trend in computing platforms is toward mobile devices as the primary AORTA access point. A strategy of "defend the desktop while enabling the shift" makes a lot of sense, and existing players' positions may make some unconventional moves smart business.
That desktop will have to be defended, though, since it's still the #1 AORTA access point. Microsoft continues to press forward in the area of search, with ties to its OS and an anti-competitive strategy based on leveraging that monopoly in its back pocket. They aren't close to succeeding yet, but they have 2+ monopolies from which to draw cash and show no signs of quitting.
"Verizon's announced yesterday the beginning of the end of their walled Garden approach to software development for their phones."
Which, as I understand it, may allow iPhone users to use Verizon's network for service. The device field has hit a level where providers who presume to dictate choices are shifting from an annoyance to an unacceptable intrusion on a key lifestyle choice.
iPhone is just a kind of focal point, and I suspect that may have been a bigger motivation than Google's moves.
An open field is both helpful and more challenging to Google. On the one hand, it can build and host great mobile apps for anyone who takes the garden walls down, in a field where its biggest competitor's OS monopoly doesn't help it much (though WinCE helps some). On the other hand, it's denied the ability to lock in entire gardens via strategic telco deals for its apps that lever its currently dominant position. I suspect Google prefers a "let us win on merit" field, but a lot of folks still won't do download & install, so deals with the phone companies still make some sense.
re Verizon/iPhone - GSM vs. CDMA - not gonna happen.
Dan ran a energy investment fund before going over to Google; I haven't loked at their books, but I can attest that he's hella smart and knows the domain as well as anyone I've ever talked to or read (think Amory Lovins).
A.L.
TOC's right, naked shorting a momentum stock is very, very dangerous. You're praying for a collective hallucination to end before you run out of collateral. Scary. If you're dead convinced a company is ridiculously overvalued, there should be someone else around who's undervalued due to the same misestimation. Go long there and maybe buy some puts on the subject of your scorn. (If you can't find the undervalued someone, think twice about your hypothesis....)
Re the fundamentals, I agree this doesn't show a lot of managment discipline on Google's part. Two problems with applying that fundamental analysis to this case. First, the market has already partially discounted that lack of discipline. It's no big secret that centralized management is thin on the ground at Google, shall we say. A lot of the official projects, let alone the spare-time endeavors, seem to be market and technology probes without central coordination. Call it a genetic algorithm within the bounds of a corporation. Yes, it's very scary taking that 'methodology' into an unknown, capital intensive market. Google's grown up in a low capitalization, fast feedback environment - it's going to be a stretch.
But the second thing is that Google's turned into an enormous cash generator. It's become a sort of black hole for bright young things to feed the 'GA' innovation machine. But even all their salaries can't really employ the cash being generated - incremental services development and deployment just aren't that capital intensive anymore. They recently bought one of our companies - Postini - for $600m and that barely dented the cash pile. So unless they want to start paying a dividend, or turn into a sort of holding company, they need some place to absorb the cash.
Fearless forecast: It this turns out to be a crock, it'll die as quietly as possible. If it gets some traction, it gets spun off along with a new management team and a big cash injection.
i will tell you what i think is the biggest risk to google -- self-satisfaction. several of my friends (from uni) work there, and they act (without knowing it) like they have reached olympus, that their struggles are over. there is no sense of urgency or even real interest in the work they are doing. just my $0.02
#6 from Joe Katzman at 4:08 pm on Nov 29, 2007
AL, thanks for the personnel note. TOC, good thoughts and background.
The remaining questions, therefore, are:
1 Is Reichert smart enough and experienced enough in the venture field to make Google a successful energy Venture Capitalist? Do they have a team in place that is capable of being an internal VC and performing at a good-high level by the standards of the VC field? It's possible, but it is a tall order.
Contrary to what Wall Street says about Google, that it is a on line advertising firm, I do not think this is the way Google looks at itself. I think that it sees itself as an engineering firm and nothing else and here lies the key to it's success.
Its success in selling advertising is a by/product of wonderul engineering. delivering solutions to people that allow ease of use when it comes to the 'net. Remember their explosive rise came with a simple uncluttered easy to use uncluttered search engine with the simplest of text ads and unobtrusive paid ads. No pictures no banners. They new their product and it was information which they gave to their users in the simplest and most elegant way. From what I have seen, it has not strayed from this. They are shoemakers who know how to make shoes.
Next we were told that Google would become a media company. They will become a media engineering company, their purchase of YouTube. where they will make their money is not from delivering the media, but delivering it in the most efficient and elegant way. Again, engineering.
In the mobile phone market, Google has not become a telecom, nor a phone maker, ironically the margins are not high enough for Google. They have though opened up a way for developers to get access to mobile commerce, by engineering a Software Development Platform, in essence outsourcing dvelopment for a share of the profits, much like they did with Google adwords. The internet is full of Google adveritisng partners, like Winds of Change, notice the ads in the top left hand corner of this website.
Another thing, how many ads in print of on television have you seen for Google. I maybe have seen 5 if that many. How many multi Billion dollar companies have an ad budget that is close to zero.
2 Is the vertical integration that Google is pursuing an integral part of that commercial juggernaut? Or is it a distraction from that juggernaut's true source - search technology so good that "Google it" has become a popular culture phrase for looking up almost anything you don't know?
Google has been pretty up front about what its goal is "to organize the world's information" I do not see where they have strayed from that. Google Maps are everywhere. Google earth shows up more and more on Television used by almost everyone. The recent LA Fires were reported with overlays on Google Earth on a local TV station.
Google has taken very seriously the idea that information is king and have not strayed from that.
There's certainly a play to be made in the mobile "look it up" space, and big strategic bets make some sense given that the trend in computing platforms is toward mobile devices as the primary AORTA access point. A strategy of "defend the desktop while enabling the shift" makes a lot of sense, and existing players' positions may make some unconventional moves smart business.
Look beyond the GPS aspect of mobile commerce. The device that the world is aiming for is a telephone, camera, GPS advertising platform, CREDIT CARD, and the next place you will see them is up against American Express and Mastercard.
That desktop will have to be defended, though, since it's still the #1 AORTA access point. Microsoft continues to press forward in the area of search, with ties to its OS and an anti-competitive strategy based on leveraging that monopoly in its back pocket. They aren't close to succeeding yet, but they have 2+ monopolies from which to draw cash and show no signs of quitting.
For the people who use Google for ads on their websites, Google earth, Google Apps and spreadsheets, calenderss which are wonderful light mobile programs, the ability to access your information from any computer in the world will make us more addicted to Google. Google is about to announce a venture into Storage in amassive way. No more hard unless you want them. All your information backed up on Google servers and accessible from anywhere.
MicroSoft, in a lot of ways is not even inthe same space as Google though it appear that way. Put it this way, compare the incredibly light and lithe engineering that went into the Google suite of products with the lumbering mess Microsoft recently came out with, Vista.
"Verizon's announced yesterday the beginning of the end of their walled Garden approach to software development for their phones."
Which, as I understand it, may allow iPhone users to use Verizon's network for service. The device field has hit a level where providers who presume to dictate choices are shifting from an annoyance to an unacceptable intrusion on a key lifestyle choice.
More than that. The duopoly of Verizon and ATT is ended. The way I see it, Google has destroyed their business model in the same way that apple destroyed that of the record industry. Verizon and ATT, after being sure that their duopoly would easily control the 700 spectrum are now dancing to Googles tune. Their problem is that they know the Walled Garden is no longer defensible. So how do they re-engineer their business model to meet the new commercial landscape. Bear in mind that the Google barbarians showed up at the gates of the Walled Garden no more than three months ago. As far as military strategy nd tactics are concerned Google's were breath taking.
iPhone is just a kind of focal point, and I suspect that may have been a bigger motivation than Google's moves.
An open field is both helpful and more challenging to Google. On the one hand, it can build and host great mobile apps for anyone who takes the garden walls down, in a field where its biggest competitor's OS monopoly doesn't help it much (though WinCE helps some). On the other hand, it's denied the ability to lock in entire gardens via strategic telco deals for its apps that lever its currently dominant position. I suspect Google prefers a "let us win on merit" field, but a lot of folks still won't do download & install, so deals with the phone companies still make some sense.
You won't have to download and isntal. the directionthet theweb is going in is ASPs, Application Service Providers, they deliver Applications as a service. Search engines are ASPs. you do not download them. They rest on the compnies servers and are delivered to you as a service.
#8 from Tim Oren at 7:20 pm on Nov 29, 2007
Postini may wind up being an enormous part of Google's mobile strategy.
Corporations are already using YouTube as a communications platform. I intend to have it all over my site.
The work that comes out of Google, once out of beta is excellent. What looks like anarchy in the development process may only look that way from the outside. These guys run an incredible tight ship. No one knows what the hell they are doing until they announce it.
In the Art of War, Sun Tzu says it is better to be formless, since arraying your troops in certain ways or forms only gives intelligence to your opponents. Google seems to understand this. They I like the Mongols, seemingly in one area with certain goals in mind, then attacking in a completely different area with a completely different goal. These guys have taken on Microsoft, Yahoo, ATT, Verizon, and soon the credit card industry without ever facing any of them head on and lived to tell the tale. They did this starting, comparatively with no resources. I would not sell them short, nor would I short sell them.
#9 from cjm at 9:12 pm on Nov 29, 2007
i will tell you what i think is the biggest risk to google -- self-satisfaction. several of my friends (from uni) work there, and they act (without knowing it) like they have reached olympus, that their struggles are over. there is no sense of urgency or even real interest in the work they are doing. just my $0.02
Not good. It is probably the thing they have to watch out for most. I am a Met fan, so I know the results of thinking you have something in the bag before you actually do.
TOC: The Postini story I heard (giving away nothing here, the deal is done) was to form a core to Google's enterprise service offerings, which had been more announcements that reality. Postini has a very scalable message oriented architecture, and had made deep inroads into some verticals where knowing the social and business networks gives a lot of leverage for further sales.
While that's certainly applicable to mobile in general, don't take that step for granted. Google's track record with acquisitions has been hit-or-miss. For instance, on one hand you've got Google Earth fka Keyhole, where their execution and integration have been exemplary. OTOH, there's blogger, which they seem to have botched. At any rate with their cross promotional capability and operational scale, you think they'd own a bigger chunk of the blog platform space than they managed, given they made a clueful buy early on in the history.
I think the Sun Tzu analogy is appropriate. Hard for the opponent to figure out your schwerpunkt if you don't completely "know" it yourself. We could be looking at something new in organizational history. Or we could be looking at a hot house powered by high margins that will eventually be driven down. The question is where that would come from? Google has well-nigh turned search driven advertising into 'desperate ground' for its opponents. Look what happened when Yahoo finally got Panama deployed. Did they get a 'Cool!' and an attaboy from the market? Nope, they got clubbed because they are still losing share to Google.
I would flee Google like a burning building. Google is overpriced now, with capital drained off to lunar power projects, they are going to crater. I do not think This action the same as Enron's overt criminality, but Google's willingness to put foreign didssidents' heads on the block to secure market share leaves me cold. I wouldn't even bother shorting Google, depending on my cost basis, but dump it like a chunk of radioactive waste.
#13 from Tim Oren at 10:13 pm on Nov 29, 2007
I agree with everything you say. I is really amazing to watch. Your point about Social Networking. Why wouldn't they devour that. It looks like they might make a play in the space and then you never hear from them again, but you can't count them out of it.
I think it is exhilarating watching them for unique perspectives on different industries and quite frankly, I do not see yet where their revenue stream stops growing. Mobile commerce, video on demand, you name it.
The business strategy side of this company is really something unique. I don't think that anyone has ever seen anything like it before. They don't really seem to give a damn about anyone that is in their way. They analyze a market and enter it in their own manner at their own pace, rapidly or in fits and starts. I think that the idea of allowing employees to work part of the time on their own projects is a wonderful way to not only free up R&D mental energy, but also build a strong base of employee loyalty.
So far so good.
Some of this has already been stated above, but to add to it:
1. This business venture, is separated out some, for Google proper. Part of their VC stuff, as has been pointed out, and part of their philanthropic enterprises. Microsoft has done something similar, with the Gates fund.
2. As A.L. has said above, their team on this is pretty bright. I know a Green Building firm director, who's been impressed with the focus at Google on creating opportunities.
3. The GPhone - This isn't Google's strong point, but they worked to open up the market, so GOOGLE won't be hamstrung by the Verizons and AT&T's of the world.
4. Something similar is happening with the spectrum offering. We keep hearing the issuing of the threats of "tiered service" for the privilege of unfettered bandwidth - as if my paying 60 a month shouldn't guarantee me an un-tiered, unfettered service.
5. Google DOES have some expertise in this area, as they had to pioneer some methods of power consumption, to feed their server farms. At least as much experience as wireless phones.
6. They are concentrating, pragmatically, on the right thing. Cheaper than coal. Once that is done (god willing) everything shifts.
I would flee Google like a burning building. Google is overpriced now, with capital drained off to lunar power projects, they are going to crater.
You could easily be right. TOC could be right too. You could both be right at the same time.
Google could win every battle he thinks they'll attempt, and still not pay off well for investors in the medium run. It might be the thing to do is sell Google now and buy it back when something happens to get investors disenchanted with it.
Google could operate very very well and still not pay off for current investors unless they can wait a long time.
I wouldn't at all fault you to take your profits now if you have a better candidate to invest in. Real unlikely that everything will work out to promote investor confidence every quarter from here on out. If you have the right kind of nerve you could take your winnings now and buy back cheap when the public thinks there's a real chance Google is worthless.
If investing followed obvious rational principles a whole lot more smart people would be rich.
#16 from hypocrisyrules at 1:27 am on Nov 30, 2007
I forgot about the tiered service. This Google initiative is a threat to that as well. In a sense it is just trying to create a walled garden. It seems to me that these exclusionary telecommunications, internet, IT business models have been in retreat for some time now.
No one really wants to pay for anything on the net. they will look at some advertising and pay for a connection but that, more or less is about it. The Telcos complaining about getting money back on their lines is sort of ridiculous in light of this at this point. No one asked them to lay the cable and they knew what they were getting into. If it turns out to be a money loser for them, then that is their problem. With the spread of wireless, those lines are less and less valuable.
Just wanted to thank everyone for a really good discussion.
If their claims seem unbelievable or are explicitly based on nothing (except ego or "we have a lot of smart people here") - run.
Having said that, Google actually do have a lot of very smart people. And a proven track record, i.e.:
web search was a mature application; they built a better search engine and now own that territory
web-based email was a mature application; they built the best web-based email, and everyone else had to catch them up
online maps were a mature application; they built the best online map server, and lewft everyone else behind
I think Google will succeed with mobile phones. I wouldn't be surprised if they succeed with renewable energy too.
Hmmm some kind of solar thermal + underground storage both optimized for high tech facilities... that can work.
Some kind of solar thermal + underground storage to get a 1 GWe plant... that would mean 3 GWth using a gas/steam turbine, that is, 3 GWh of thermal energy per hour, twelve hours (average) +36 GWh of thermal storage capacity of a fluid being at least at 600 ºC...
collecting capacity of +6 GW, that is, 1200 football fields, a square of, at least 3.5 km long sides, which happens to be somewhat just above two miles... on a dome able to contain such quantity of water and heat...
UNLESS, both geothermal and solar thermal are combined, but that is cheating: that does not happen but in some specific places...
It could work, but, according to actual data, sadly it won't save mankind of perishing due to the gas exhaust of the airplanes of the climate change advocates.
By the Way.
CLICK ON THOSE GOOGLE ADS IN THE TOP LEFT HAND CORNER. iT PROBABLY WILL HELP AL WITH HIS SERVER COSTS.
"Short Google" is a bit harsh, as is the comparison to Enron.
Enron was committing total and pervasive fraud. Google is not doing that.
If what you say is true, Google is merely going to waste $10-$20 Million, or less than 1% of their annual profits, on this experiment. Even if it is a total failure, it will not crater the stock price.
A more accurate analogy would be Microsoft's forays into TV (MSNBC) and .NET in the late 1990s. That did not destroy Microsoft, and it still has a market cap of $300B. It lost maybe 1% of its money, nothing more.
I am an advertiser with Google and a user of some of their more popular services. Here is something I have observed:
They have been systematically driving up the cost-per-click and cost-per-conversion by pushing "optimizations" which make them more money, but after which we seem to be paying MORE per result, not less. We think that the MORE occurs after they "do the rounds" with other advertisers in our same segment (our competitors for the same search terms, but not necessarily our competitors per se) Thus, after everyone has been "optimized" in a segment, it looks like they are all paying more for the same or less.
What this means to me is that Google as not so much been earning their recent growth by conveying more value, but rather, they have been getting growth by extracting more flesh from advertisers. The problem is that the cost per result from these folks has gone up so much in the past 2 years that is really not so appealing to us as it used to be to advertise with them.
From a user perspective, I also see that they have set up a pecking order of payers for each search term, which is often not payers who have the right product/service to match the term, but who will simply pay up to get the placement (for whatever reason -- competitor lockout?)
What this means to me is that over time the paid search results are gentrifying so much that they are increasingly worth ignoring.
Additionally, I see MSFT and YHOO pushing hard to offer context type ads where they act as middle man just like Google does. There is no reason for MSFT in particular to not price so aggressively as to wipe out GOOG's ability to make any margin as an ad broker.
Finally, I see 3rd party companies offering self-service ad placement services to folks like the NYTimes, and similar services for radio and TV. Google's offering for radio is good, but they don't own the stations like they own their own search traffic on the web. Again, they are in a good position to get squeezed and squeezed out of radio and TV just like with context ads.