Early this morning I received a comment from Stefan, a fellow GOOG investor, wondered what my thoughts were on the Google Q4 2005 Earnings Conference Call Transcript posted at The Internet Stock Blog. The major Google players were present including Larry Page, Sergey Brin and Eric Schmidt. Key quotes from this call I felt included (emphasis mine):

Eric Schmidt:

The expansion of our advertising network continues apace, continues to be very, very strong. But perhaps most important, we believe the rate of innovation will increase in 2006 as we continue to bring the most talented minds into Google and our unique innovation model delivers amazing new products

George Reyes, Chief Financial Officer:

So, to summarize, we are very pleased with our Q4 results. As we have previously emphasized, we are investing aggressively in our business and scaling rapidly to pursue enormous opportunities for long term growth. We will fuel innovation through deliberate and appropriate investments in R&D and in our core infrastructure as well as through acquisitions. We believe these investments are critical to achieving our mission and to maintaining our competitive advantage.

Larry Page:

Overall, we’re continuing to make progress towards our mission to organize the world’s information and to make it universally accessible and useful. Looking to 2006, we expect o launch more products that bring more information and more content to our users.

Sergey Brin:

As we look forward, we will intensify our efforts to build out our infrastructure overseas and to develop products that are tailored to individual markets. We will continue to develop tools for our advertisers to help them better understand and improve their ROI. And ultimately, our goal is innovation. We hope to create new and better ways for advertisers to connect with their customers wherever they may be.

Back to Eric Schmidt for some final 2006 predictions:

So looking at 2006, lots of investment in better search tools, more personalization, much more content, a lot more focus on the advertisers. We’re already seeing strong monetization from our existing advertisers and many more advertisers are joining. We get feedback from our advertiser cycle. Feedback in the cycle causes us to provide better monetization per query, more services and more ways of making money as this market grows and as our reach grows.

My thoughts
I fully understand and appreciate that this is a financial call, but I’m disturbed by the amount of focus and emphasis on advertising. Here is a company that founded itself on search and once they start talking earnings details it’s nearly all about advertising. Is Google losing their search focus? They maintain that their “… fundamental mission of getting all of the world’s information easily accessible and useful” and yet whent they speak about financials, they talk primarily about advertising and ROI. Is this double speak?

As an investor, I’m curious about what they plan to do about impending threats from MSN in the search sector, several lackluster product launches in 2005, opening up this data they want to make available to the world, the whole Google Print debacle and battling with the government over privacy issues. None of these things were discussed with any significant detail during this call, instead we were treated to the Adsense spiel. Really, it reads like a sales pitch for Adwords and Adsense. This further reinforces the notion among growing camps that Google is not really a search company, it’s an advertising company. I invested in a search company, a really, really great search company, not an advertising company.

I will divest if that’s the path they continue to go down because IMO, that path will lead only to disaster for them.

Now let’s talk about Adsense. Really.

I’m worried about Adsense on a number of levels. My biggest concern with this program by far is click fraud. As long as advertisers are willing to put up with this in their purchases, Google will continue to be successful in this arena, but Google’s willingness to explore more aggressive advertisements like rich media, intersitials and the omnipresent accidense continue to shake my confidence in their model going forward. How much can they squeeze from the marketplace? The answer isn’t to squeeze harder on the fruit they already bear, it’s find new fruit, cultivate more crop. They seem to be focusing on the former, not the latter.

Also there are the click rates themselves which I can’t speak specifically about without violating their TOS (we use Adsense) but can state generally that I’m not sure how long they can continue these payout levels. They do not align with payments made and successfully sustained by any other click thru affiliate program ever. I’ve joined literally dozens, maybe hundreds over the years (I didn’t count) of affiliate programs and Google is in a league by themselves with sustaining extraordinary clickthru rates. In fact, if this was anybody but Google then I’d be saying this ship had already hit the iceberg and was taking on tons of water below deck.

And yet I’ve bought more stock in Google every month for almost the last year for very different reasons than their advertising prowess. This month there is another buy order planned but I’m going to wait and watch and see what happens the next week before making my plan to continue to buy or to exercise a hold. I’m not entertaining selling any GOOG yet as it appears a significant number of investors — or at least some investors with significant stock holdings — did after this news, but am definitely entertaining holding off buying more for the first time in quite some time. Naturally if other investors do the same, this could make Google’s chances of bouncing back after another fall more unlikely.

My feeling — definitely alert and concerned — is that the stock price hiccup will pass after perhaps another dramatic shift downward, perhaps to sub $300 level, but then will start to rebound because Google has a good record of fixing their products over time and investors will see that and respond favorably. If Google had made the Google OS a reality, that might have had significant power in shifting things tomorrow because some investors might have seen that as Google drawing a sword up against Microsoft, but it seems Google continue to deny that they have any interest in working on their own OS, despite hiring engineers with OS expeirence. I’m not buying it, sorry.

Despite their products coming out increasingly less impressive like Google Video where even they admitted recently they didn’t do the best job, they still manage to make them better over time which to me remains one of their strongest assets. I think the newest Google Toolbar with the custom buttons is a great move to give up some real estate to other sites.

By far their greatest asset is the search traffic that they wield. If they didn’t have that, they wouldn’t have Adwords/Adsense — couldn’t have them. Because if you think about it, they need that traffic to wield. They need to send that around to get webmasters interested in them. If you get the webmasters on board, you get the webmaster’s traffic — which means eyeballs. And what does Google need for Adwords/Adsense success? Eyeballs.

Google became the dominant search force because they offered a clean and notably improved search relevance experience. Cleaner than Yahoo, MSN and other competitors and more relevant at the time. They came out of nowhere because they focused not on advertising, but on search relevance and quality. The fact that they still haven’t been able to deliver a blog search that is on par with their traditional search concerns me deeply. Yes, the blog search has improved, but Technorati, whom has had scaling problems galore over the years, has done a better job at blog search. How can this be?

Meanwhile MSN has been quietly improving their search relevance. They might be in the #3 position, but do not count them out of the game by any stretch.

Could this perceived lack of search intensity and focus be because Google has put more manpower and resources on the advertising side than search? Lopsided focus? This is the iceberg, folks. This is what scares me most about Google. This is what makes me think it’s just past midnight on April 15, 1912.

Stefan, to get back to your question, I will be watching the market results this week very closely and evaluating my GOOG stock future purchase decisions in the next week or two. I’ve already held off on buying more Yahoo.

A part of me says that Google will bounce back from this drop because the markets may focus on Google’s willingness to swim deeper with more aggressive advertising markets. From a shareholder perspective, I can see this being a good shareholder relations strategy but from a technologist perspectiv, I think this is a huge mistake. The battle over Google Print to me seems extremely ill-advised. The DOJ battle on the other hand, is worth fighting but the timing admittedly stinks. Savvy investors who aren’t so savvy about technology will probably see these legal battles as an overall negative scenario, especially the way some of the media have spun the story to seem as if Google is buckling to China but not to the homeland US.

The truth is Google cannot pull out of China without huge financial ramifications, needs to be in China, and therefore has no choice but to operate under China’s rules. In the US, we have a democracy and Google has the freedom to challenge the government and kudos to them for doing so. Just bad timing unfortunately.

Throw this all in the blender and right now, right this minute as I write this, it says to me: hold, do not buy any more GOOG stock. I’m not giving stock advice to anybody else, just sharing my own thoughts about my own portfolio and my own musings, so please don’t anybody take this as investment advice. In the next week or two I plan to make a firm decision either way and almost certainly will blog about it here. The only tech stock I’m looking forward to buying more of this month is Apple. I also continue to like IGT, the makers of several popular one-armed bandits. I may need to find some new tech investments to replace Yahoo and Google though.

Anybody have some good stock suggestions? And please don’t suggest Microsoft. I’m not ready for their stock yet. Let’s see what happens as Vista rolls nearer.

Did this post make you go hmm?

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