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Google’s Sales in 2004 were $3.2 billion. Time-Warner’s Sales Were 13 Times Higher. So, Which of the Two By Stock Market Capitalization is Now the World’s Largest Media Company? Hint: Think Colorful Letters.

By Philip Stone 

When Google’s shares hit $290 each in June (they launched at $85 in August, 2004) it propelled the search engine Internet advertising giant into the world’s most valuable media company. And while the Wall Street bears fear that its bubble could break any time now, the bulls are predicting the shares will surpass $300 each in short order and stay there.

No matter the daily ups and downs in which it and Time-Warner could swap positions on a daily basis, the point is that the American public (and probably a lot of non-Americans) are completely sold on Google’s search advertising models and the continual flow of new features that drives more and more people to the search engine.

To put Google’s worth in perspective consider that its $80 billion market capitalization puts it “just” $2 billion ahead of Time-Warner, but around $25 billion more than Disney and Viacom, dwarfs competitor Yahoo by close to $30 billion and News International by some $31 billion. And yet its current annual turnover is just a shadow of many media giants.

Investors tend to put their money where they believe it will do the most good in the future. UBS rates Google a buy and raised the target price, RBC Capital Markets rated it “outperform” and raised the target price, and some other bulls are looking for the shares to hit $350. But they could get nailed just as easily (the day this is written the shares were down some $14, nearly five per cent)) to less than $280 each.

All of this brings back memories of when the Internet bubble burst not that long ago, but the major difference here is that most of those companies that went bust were not making a profit, and you can’t say that about Google. RBC Capital Markets forecasts that Google will earn about $1 billion this year -- about $5.18 per share -- and that will jump to $2.5 billion in 2007. It posted a profit of $396 million in its most recent quarter, well above expectations. The general Wall Street consensus is that Google will increase its earnings annually by some 32% in each of the next five years.

Google and Yahoo have hit upon that pot of gold at the end of the rainbow with their sale of search based keyword advertising that sits alongside the results of a user’s search. Search about newspapers, for instance, and up will come advertising keyed to that search, for instance to subscribe to the New York Times or the Wall Street Journal.

How much is that worth? The revenue that Google and Yahoo earn combined from that type of advertising is more than the combined advertising revenue of the three major US television networks for their prime time programming, according to the Financial Times.

Google currently has indexed about 8 billion web pages. But it is now expanding beyond the web and its Library project within its Google Print service, in beta, is underway to digitize 15 million English language books from the world’s most prestigious libraries. Serious copyright issues are arising, but Google believes it will handle that by making only a few lines of copy available at any one time.

Also non-English speaking countries – France and Germany in particular – are not pleased that the project concentrates mostly only on English language books. The French, besides muttering about “cultural imperialism” are seeking EU funding for a similar project to digitize books throughout the EU. In Germany, Borsenverein, the book trade association, is drawing up plans for a similar project.

But the library is just one part of the project. Google is approaching commercial publishers to allow their books be part of the service with no more than 20% of the book available within any search. Google will place ads on the book search and split the advertising revenue with the publisher.

At the recent Book Expo America publishers were torn between the publicity a book can have by being in the Google Library and whether allowing up to 20% of it to be read will hinder sales.

Another project, Google Video will enable users searching scripts, captions and other textual material to search home movies, films, and television programs.

One of the big debates in the newspaper world is whether they should provide news on the Internet at no cost, and depend upon an advertising –supported sales model, or whether to charge a subscription. Google has achieved its success without charging its users for any services. All of its revenue has come from advertising.

And Google is betting that advertising money will flow wherever consumers congregate. And as just about every survey produced says more and more people are accessing the Internet, so Google expects more and more advertising dollars to flow its way as it introduces more and more services.

And so, it seems, do many investors.

© Philip M. Stone of  Stone & Associates, a partner in followthemedia.com


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