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Wednesday, 08 December 2010 21:18

Why Traditional Media Still Doesn't Get It Regarding Google, And Why Not Getting It May Marginalize Them!

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In media, particularly video, distribution costs have been literally flattened by the web, production costs have been dramatically reduced by digital HD technology and do-it-yourself CGI, and marketing made democratic via viral and social networking channels; the barriers to entry that allowed the big media houses to rake in fat margin profits no longer exist. Its just a matter of time before the world at large figures this out. It would behoove those in positions of power and influence in these shops to come to this realization and truly embrace the magic of distributed computing in lieu of trying to force the genie back into the bottle, replete with all of its accompanying magic.

With this being said, there has been much talk regarding the MSM blocking access to their content though Google TV, Google's new initiative to merge the Web and TV content through a unified, seamless interface...

ABC, CBS and NBC Stupidly Block Google TV | The New York Observer

The Wall Street Journal is reporting that the Big Three TV networks have decided not to allow their programs, which already stream online, to be available through Google TV, which puts the web onto consumers' televisions.

According to the The Journal's Sam Schechner and Amir Efrati, "The move marks an escalation in ongoing disputes between Google and some media companies, which are skeptical that Google can provide a business model that would compensate them for potentially cannibalizing existing broadcast businesses."

Fox joins broadcasters in blocking Google TV link - Crain's New ...

AP) - News Corp.'s Fox has joined broadcasters ABC, CBS and NBC in blocking access to full episodes of shows when searched from Google TV's Web browser. That's according to a person at Fox familiar with the matter.

Comedy Central, MTV now blocking Google TV | Crave - CNET

"The Daily Show" and "The Colbert Report" were some of the few high-quality TV shows that allowed streaming. The last we checked, "Conan" is still available, but there's no guarantee TBS won't begin blocking Google TV too.

Practically all of these entities offer some form of streaming content, usually without charge, over the Internet now. The Google TV product is simply a highly integrated web browser over TV interface. What the media companies are doing is akin to blocking their media content from Internet Explorer, Firefox or Safari. Sounds absurd, doesn't it?

Well, what the big media companies are truly afraid of is Google's monetization of their content. Google will, in time, end up selling adds either directly over their content or adjacent to said content, thus generating a revenue stream from another's efforts. This is what they are trying to avoid, which was the fate of the print media companies who were cannibalized by Google through it is successful efforts of corralling news through its portal and search engines. It is the semantics that are key though. Print was cannibalized by Google, but it was commoditized by the print MSM's failure to grasp and take advantage of paradigm shift that was the Internet. These entities clung to the high friction old school business model that relied on high barriers to entry and high distribution costs to generate profits. As web technology reduced these these barriers and costs, the print and radio model was laid bare. The print/radio MSM clung to these antiquated business models as long as they could, and even when they did succumb to change by force, they still tried to fit a physical print business model into an online, digital hole. It just didn't work, and it will not work for the video media companies either.

What will end up happening is that these actions will encourage a new crop of new media savvy content producers that create slick, media appropriate content with an appropriate business model that is bound to be far superior to that being used by the MSM to monetize this new medium.

With YouTube claiming more than than 143 million viewers in July of 2010, this Google property has immense potential. It had 219 million impressions, which are one third of that of Hulu (the MSM's new media collaboration), but with tremendous room for growth due to the fact that most of the YouTube content does not contain ads and is of the short clip, amateur type while all Hulu content is long form and designed for ads. This is changing, and with this change lies the potential for Google to actually sidestep the major networks with user generated content that costs Google nothing while generating very material revenue which they will gladly split with the content creator. This revenue also has the potential to be very, very sticky as well. Google's YouTube alone has more than a quarter billion links to its content from 2.3 million unique domains, I would guess many multiples of that of all of the major networks combined.

So, what are the chances of this comeuppance happening? Well, as content producer myself, I would love to take the extremely original, very difficult to replicate BoomBustBlog content and have it professionally produced to compete with the Fox Business Channel. Take a look at my pungent analytical content and track record and compare it to any other finance and business outlet currently in video distribution. Imagine being able to watch TV and determine that Bear Stearn, Lehman or GGP were going to collapse 4 months to a year in advance, with ample evidence of such. How about knowing the housing market was going to crash back in 2006? Or knowing that the Case Shiller index quoted by all of the other media outlets on a regular basis misled most to believe the housing market was improving when it wasn't, with ample proof? Highly detailed advanced notice of the European sovereign debt crisis? What would be the advertising value of such a high end audience? Anyone interested in pursuing such a venture should contact me, I would definitely be interested.

I assume most get the message in terms of a paradigm shift in media production, distribution and consumption, and if you don't the content below should assuredly drive the point home.

The "Search for Gollum" is an online-only "Indy" movie serving as a "prequel" to the Lord of the Ring Series enjoys over 10 million viewers and counting over the past year, and was made on a budget of merely $5,000. Referencing the FAQs from the filmmakers' site: Was the budget really only £3000?

Yes - as the crew were all unpaid volunteers (fans like us), the only production costs were for equipment, costumes, props....etc. And we used digital HDV cameras to keep the budget minimal. It was funded by the filmmakers themselves.

THE HUNT FOR GOLLUM was released to global press acclaim and became the most viral film ever released to the Internet with over 7 million views. The award winning 40 minute 'Lord of the Rings' prequel was made as a tribute to the writing of J.R.R. Tolkien and films of Peter Jackson.

IMDB Page

"GOLLUM IS A MASTERPIECE"
- The Times

"AWESOME"
- Total Film

"A LAVISH PRODUCTION"
- BBC

"STUNNING"
- Wired Magazine

"SERIOUSLY SLICK"
- The Guardian

"AWESOME"
- Entertainment weekly

"FABULOUS..STUNNING..A MARVEL..."
- Popmatters.com

"WILL REALLY SURPRISE YOU"
- Dark Horizons

"simply amazing... every bit deserving of the overwhelming positive response it has received"- Scifiscoop.com

" every aspect from the cinematography to the creature makeup to the weaponry to the acting - is all absolutely spot on" - Twitchfilm.net

Trailer 1

[youtube FnMHgwG9aAo]

Trailer 2

[youtube LkSa-pmknfY&NR]

The actual full length movie, The Hunt For Gollum - LOTR Prequel

[youtube 9H09xnhlCQU]

The website: http://thehuntforgollum.com/

Any one who does not see the threat to the mainstream movie houses who spend $100s of millions of dollars on movie productions to have them filter through the high friction theater circuit and after market DVD circuit, giving up a piece of profit each step of the way obviously does not grasp the destructively creative potential of this new medium, and YouTube in particular. The $5,000 production above is light years ahead of the vast majority of stuff that I have seen on TV with production costs that are literally 1,000s of times greater.

It doesn't end there either. Google's advertising technology, at least when it comes to things web-related, runs circles around all of the networks and movie houses, even if we were to combine their efforts. In addition, Google is rapidly expanding its capabilities. Not only is Google quite capable of monetizing said content, it is capable of rapidly transforming the entire business model in such a fashion that the old school simple will not be able to compete. We know it can happen and we know how fast it can happen. Ask the print media and news organizations, or you can query the smart phone industry as to whether they have heard of Android...

Risks...

According to a report from the Wall Street Journal, Google executives are pushing hard to convince content owners to share data about their video websites to make it easier for Google to search and display their shows in blended TV-Web listings as richer data sets will help improve the search function. However, as indicated above, talks with TV networks including ABC, CBS, Fox and NBC have not been fruitful due to concern from networks that their content will be commoditized and unilaterally monetized, hence lost amid a range of web content, including pirated clips. This is a catch 22 situation, though, since any network or any fledgling content providers that do share rich data with Google will receive significantly more traffic from Google users – both on and off the Google TV platform. This will pretty much coerce competing networks to join or risk being potentially marginalized through being left out of search traffic.

The network providers are actually risking creating a "Facebook for TV, leveraged through YouTube"to be used against them by playing hardball with their content. Think of it in terms of the value of a website that does not get picked up in Google searches as compared to the value of a site that constantly gets listed in the first three lines of every Google search that contains the appropriate key words – keywords potentially used by Google’s 600 million users! Trust me, this is not lost on the big three technology players in this space! Remember, in the beginning of the summer I reminded my followers that There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All.

Let's peruse a few pages from our 63 page (subscriber only) File Icon Google Final Report wherein I go into detail Google's efforts to enable the monetization of free video with high quality production and content such as the Gollum piece above, the success of which would be the bane of network TV and conventional movies studios world over:

I strongly urge all paying subscribers to read and reread the longest forensic analysis that I have ever released (@63 pages): File Icon Google Final Report, as well as the An Analysis and Valuation of Google’s Android and AdMob. The Google Q3 2010 review is also available for all paying subscribers. Professional subscribers are strongly urged to play with all of the market and valuation models that we have to offer (click here to subscribe):

- Google Valuation Model (pro and institutional).
- Smartphone Market Model – Blog Download Version – all paying subscribers
- Mobile Operating System Market Share Model – all paying subscribers – This model is key to showing the trends across operating systems, and not just handset manufacturers.

Google’s 3rd Quarter Operating Results: The Foregone Conclusion That Was Amazingly Unanticipated by the Street!!!

Summary: A full analysis of the grand slam Q3 earnings performance that was anticipated in full detail by BoomBustBlog, yet took the Street by surprise.

Google hit the ball out of the park with their latest earnings release, yet I feel the gist of their success is missed by many. Although Google was able to increase revenues and profits on expanding margins (a win, win, win situation), what is most impressive is that they were able to do it while simultaneously investing in very high risk/high reward ventures. Google TV, Android, YouTube and AdMob are the ones that come immediately to mind. Android alone threatens to, and actually is, disruptively transform the entire ultra mobile and mobile computing space. The potential of Android coupled with Google’s ad revenue subsidy prowess and plethora of cloud services is not only quite formidable but obviously the wave of the very near future – a future that Google is more apt to dominate than most of the technology powerhouses of today.

On that note, I am releasing the File Icon Google Q3 2010 review for all paying subscribers (click here to subscribe):

Google Valuation Model (pro and institutional).
Smartphone Market Model – Blog Download Version – all paying subscribers
Mobile Operating System Market Share Model – all paying subscribers – This model is key to showing the trends across operating systems, and not just handset manufacturers.

As is customary, I am excerpting a generous swath of the subscription report (sans updated valuation) for free distribution on the blog…

Google Q3 results

For the quarter ended September 30, 2010 Google reported gross revenues (before traffic acquisition costs) of $7.29bn, an YoY increase of 22.6% and QoQ increase of 6.8% while net revenues (after traffic acquisition costs) increased 25% YoY and by 7.7% sequentially to $5.48bn. These results clearly demonstrate decoupling of digital economy vis-à-vis the real economy, or put more aptly, the wholesale movement of traditional marketing and advertising to that of the Web-based variety.

Google continues to be a reckoning force in the online search market commanding almost two-thirds of worldwide search queries. In Sep 2010 Google’s share of core search queries was 66.1%, the highest since January 2009. Despite commanding over 60% of market share the company continues to expand its share of search. After a slight blip in May and June, the share has increased for four straight months in a row.

All the three reporting segments and geographies delivered strong growth rates during the quarter. Google website (66% of total) revenues increased 22.2% YoY and 7.4% sequentially to $4.8bn while Google Network Revenues (AdSense, 30% of total) increased 22.1% YoY and 6.6% sequentially to $2.2bn and Licensing & other revenues increased 34.9% YoY to $254m. In terms of geographic split, both US revenues (48% of total) and RoW (41% of total) grew 26%) and UK (11% of total) witnessed revenue growth of by 10% (19% organic growth offset by negative currency movements).

Total cost of revenues increased at a slower pace compared with revenue growth positively impacting the margins. Total cost of revenues excluding stock based compensation expenses (which includes Traffic Acquisition Costs) grew 15% YoY to $2.5bn (35% of gross revenues in Q3 2010 vs. 37.2% in Q3 2009). Traffic Acquisition Costs grew 16% during the quarter to $1.8bn (or 25.7% of advertising revenues) compared with $1.5bn in Q3 2009 (or 27.1% of advertising revenues). Cost per click increased 3% YoY and 2% QoQ. Research and development excl stock based compensation grew 33% YoY to $750m and stood at 10.3% of revenues versus 9.5% in the previous year. Sales and marketing expenses excl stock based compensation increased 35% YoY to $586m, or 8.0% of revenues in Q3 2010 vs. 7.3% in Q3 2009 while general & administrative expenses excl stock based compensation increased 39% YoY to $479m, or 6.6% of revenues in Q3 2010 vs. 5.8% a year ago. Stock based compensation increased to $380m (5.2% of revenues) from $318m (5.3% of revenues) in Q3 2009. Overall, income from operation increased 23% YoY to $2.5bn with operating margin of 35%. However, due to lower tax rate (20.2%) net income increased 32% YoY to $2.2bn, or diluted earnings per share of $6.72 over $1.6bn in Q3 2009, or diluted earnings per share of $5.13. Adjusted dilutive earning per share (adjusted for stock based compensation) was $7.48 in Q3 2010 compared with $5.90 in Q3 2009 and $6.45 in Q2 2010.

The BoomBustBlog Investment Thesis Remains Intact

As highlighted in the Google forensic report, our key investment thesis for our bullish view on Google includes:

Secular mix shift from offline to online ad spending, and Google with c67% share in search market is set to benefit enormously from the secular mix shift though growth in search ad spend (ad words)
- We had meticulously demonstrated the case for several of the next multibillion dollar business lines after search in the form of display, mobile and other emerging business.
o Increase in share of display revenue as Google which currently lags Yahoo in display is ramping up its efforts through YouTube monetization, the DoubleClick acquisition and Teracent acquisition
o Opportunities in wireless search as Google goes mobile with Androind and AdMob. The success of Android coupled with Google’s traditional dominance in search advertising has laid a solid foundation for Google to thoroughly monetize the opportunity in the mobile space.
o Potential premium free call options on several new multi-billion revenue opportunities in the form of Google TV / Google Voice / Google Cloud Computing (for details refer to Google Forensic report)
Bolt-on acquisition strategy

Given our investment thesis, Google’s consensus beat in Q3 was hardly a surprise to us at BoomBustBlog.com. We have been persistently arguing for higher share of display and mobile space. In Q3 revenues annaulised revenues from display segment were $2.5bn with total revenues of $625m for the quarter with revenue share of 8.6%.in Q3. Mobile revenues at annualized rate were $1bn, or $250m for the quarter with revenue share of 3.4% in Q3. We believe these numbers put a definitive end to the argument on whether or not Google would be able to successfully monetize Android on which we had spent considerable ink in our Forensic report. We were however pleasantly surprised at Eric Schmidt response during earnings conference call when he mentioned that mobile space has potential to outgrow that of the PC market – a view which Reggie Middleton has espoused consistently!

Eric Schmidt, CEO of Google:

“It would be I think premature to – for us to estimate what that would be, but if you assume that search monetization on handsets will become equivalent to PCs and then eventually exceed it, which is my personal view, then it should be highly lucrative, because those – the customers that are using Google services, they are going use it more because they are more personal and more targeted. And so ultimately, it should be a very, very strong revenue stream compared to a PC.”

Valuation

At current price ($625) Google has already reached our base case target price of $630 (which would have given handsome returns of 20% since we released the report (and a return of 35% when we first mentioned about long opportunities in Google when it as c$470). However, unlike sell side analysts who change their target price post math the share (studies show that actual share price is leading indicator of sell side target price contrary to the logic that target price should be leading indicator of actual price) we reiterate our base case valuation of $635 (marginally up from $630 previously as a result of stronger-than-expected Q3). As a reminder, our sell side target price of $595 reflected Google’s fair value including online ad spend (display and search) and mobile while our base case fair value of $635 reflected sell side valuation plus base case valuation of Google TV, Google Cloud and Google Voice (assuming nominal returns from each of the returns). That is, at $625 we believe the current price fully reflects above opportunities. However, if one were to assume success of Google TV, Google Cloud and Google Voice the stock could potentially reach…

The balance of this quarterly report is available here File Icon Google Q3 2010 review for all paying subscribers (click here to subscribe or upgrade). For those wondering how the two first technology reports released fared in terms of performance, please see below (and keep in mind that we were contrarian on all of these calls at the time of initial publication)…

A recent, 1 month snapshot of Google medium term calls, up nearly 350%

Excerpted from (the must read) A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!!:

So, following up on the piece that I did just a few hours ago – Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He? along with this cute chart…

Excerpted from BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM:

Google is seeking new revenue streams, including searches on mobile phones. Its Android software has surged in popularity among consumers, overtaking Research In Motion Ltd.’s BlackBerry to become the top smartphone operating system in the U.S. in the second quarter, according to research firm Gartner Inc.

Display advertising at Google is growing as its YouTube video-watching service attracts more marketers. The company said in May it had boosted the number of display advertisers 10-fold on YouTube.

“Our newer businesses — particularly display and mobile — continued to show significant momentum,” Chief Executive Officer Eric Schmidt said in a statement.

Display revenue is on pace to top $2.5 billion annually, Jonathan Rosenberg, senior vice president for product management, said on the conference call. Mobile-ad sales are on track to exceed $1 billion annually, he said.

This is pretty much verbatim as we predicted it, and the stock and option prices are performing accordingly…

And on the short side, as excerpted from The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download:

I strongly urge all paying subscribers to read and reread the longest forensic analysis that I have ever released (@63 pages): File Icon Google Final Report, as well as the An Analysis and Valuation of Google’s Android and AdMob. Professional subscribers are strongly urged to play with all of the market and valuatin models that we have to offer (click here to subscribe):