Gauging Google's Bite By Vishesh Kumar TheStreet.com Senior Writer 1/17/2007 11:20 AM EST
Google (GOOG) may be an even bigger fish in the search pond than people believe.
The company dominates the search market to a greater degree than anyone has reported, controlling an "effective market share" of 90% to 95%, according to Trip Chowdhry, a managing director at Global Equities Research.
Using a different methodology, leading industry researcher ComScore, which released figures Monday for traffic trends in December, placed Google's market share at a 47.3%, compared with second-place Yahoo!'s (YHOO) 28.5%.
Chowdhry arrived at the figure by asking industry contacts to tally their access logs, which show how a user landed on a particular Web site. ComScore, on the other hand, reports the data that it extrapolates from the roughly 2 million Web surfers around the globe who allow the research firm to peer into their Internet browsing habits, says Gian Fulgoni, ComScore chairman.
ComScore's method counts those searches launched on an engine as part of the market-share figure, even if the user does not click through to arrive at a Web site pulled up by the results.
Though the approach may be a good way to gauge browsing behavior, it is less important in assessing the type of market share that's important to investors, contends Chowdhry.
Looking at how users actually arrived at a Web site, instead of what they may have initially entered on a search engine, is more important because it offers clearer insight into how ad dollars -- and the associated revenue for the different engines -- will be allocated. Searching for Dollars
Advertisers will be swayed by how users arrived at their own sites and dole out ad dollars accordingly, says Chowdhry, who dubbed it an "effective market share" when compared with the more commonly used "market share."
Google's outsized role in drawing audiences to Web sites may be a testament to the company's celebrated search algorithm, and this could translate into more-relevant search results for users.
Its dominance may also be attributable to advertisers already spending more on Google's advertising system than that of competitors, increasing the likelihood that users will see a relevant ad and click through to a site.
Either way, Google stands to benefit from a virtuous cycle as advertisers continue to shovel more money toward the engine they see generating the most results for them, says Chowdhry.
Chowdhry estimates that Yahoo! commands an effective market share of between 3% and 5%; Microsoft's (MSFT) MSN registers at less than 2%.
While Google already controlling so much of the search market may seem like a negative sign -- how much more can the search giant garner? -- Chowdhry says this worry is offset by the rapid growth in the search market, which he estimates is growing at about 100% year over year.
That still leaves plenty of upside for Google's stock, according to Chowdhry, who reiterated his $600 price target Tuesday. Google's shares have rallied $37.41, or 8%, to $505 so far in 2007.
Though Chowdhry's estimates may be the first that credit Google with so large a market share, this isn't the first time commentators focusing on a site's access logs have complained that Google's share is severely underestimated when compared with numbers put out by mainstream research firms.
Truth and Advertising
Richard Skrenta, CEO of Topix.net and a former AOL veteran, wrote on his blog in December that "every month I have to suffer through reading about Google's supposed 40-something percent market share."
"Everybody involved in the search industry and everyone who actually runs a Web site knows these numbers are completely wrong," wrote Skrenta, taking issue with researcher HitWise, which uses an approach similar to that of ComScore.
Google's "true market share" was closer to 70% when looking at traffic to a basket of Web sites, Skrenta added. "Let's look at search referral traffic the way a site owner would," he wrote, advocating his approach.
Looking at traffic with the lens of a site owner is important for investors as well, because most advertisers are, after all, also site owners. They may be as likely to turn to their own sites when assessing the merits of investing in ad campaigns on different search engines.
Most Wall Street analysts, meanwhile, continue to focus on the figures released by industry research firms when creating their estimates.
The rigorous methods and rich data generated by firms such as ComScore have many advantages over the kinds of back-of-the-envelope calculations used by Chowdhry -- who concedes that his sample size was far from scientific -- and Skrenta.
ComScore takes steps to ensure that its sample reflects the broader demographic of Web users, and transparency in browsing habits provides marketers with vital information, such as what types of products consumers are buying online.
Still, while the sophisticated and heavily publicized data by researchers such as ComScore, which releases figures to the press on a monthly basis, may be hard to miss, investors should keep the quick, crude calculations like Chowdhry's in mind as well.
The definition of what constitutes a better measure of market power is at the heart of the debate. And there, Chowdhry's "proof is in the pudding" approach provides valuable insights for investors as well.
POSTED: 2:44 pm EST January 16, 2007 UPDATED: 2:46 pm EST January 16, 2007
LENOIR, N.C. -- Proposed tax breaks to lure a Google Inc. computer hub to the foothills of North Carolina are mounting as the search engine company considers where to locate a $600 million operation.
State and local tax breaks, if Google brings the 210 employee operation to Caldwell County, could total more than $100 million for the next three decades. About $96 million of the total would be from state tax incentives.
The Caldwell County Economic Development Commission and Duke Energy, which would sell power for the massive computer "farm," bought 150 acres to build a business park for Google, if it comes. The land was rezoned by the city of Lenoir to allow such a facility.
The Mountain View, Calif., company's proposed investment is roughly half the tax base of the city. City and county governments have agreed to forgo property and real estate taxes for 30 years if it moves to Caldwell County.
"People are expectant but hesitant," said Dinell Clark, whose family runs a home furniture store in Lenoir. "What do we get for that 30 year generosity?"
Caldwell County has traditionally been a furniture manufacturing hub, but the industry has been in decline for the past several years. The roughly 3,400 unemployed people in the county would need specialized training to compete for a job with Google.
"How can it possibly be worth it?" asked Jim Henson, who dismantles old furniture factories.
Economic developers say Google would lure other employers to the area.
George Bernhardt Jr., who is the sixth generation of his family to run Bernhardt Seagle Hardware Store, said Google may not solve all the area's problems. But he said the company could help change the area's economic focus.
Cynthia Hicks, who owns a gift shop, said Google could bring a more educated and better-paid work force.
"The economic impact that this is going to have, I can't even fathom it," she said. "It is absolutely one of the best things that could happen."
Spending at this level to attract industry to North Carolina isn't unprecedented. In 2004, state and local governments offered $280 million worth of incentives to get Dell to build a computer plant in Winston-Salem.
Critics of the spending sued unsuccessfully.
"It's mind-boggling that these kind of giveaways are taking place," said Bob Orr, a former state Supreme Court justice who led the lawsuit against Dell incentives. "There are a number of struggling businesses or people who would like to open a business who don't get this kind of break."
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