Quick Thoughts: Google Can’t Buy Everything… Where Would They Put It?

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–          Google has cash and likes to spend it. The recent past demonstrates a tendency to grow through acquisition with Google having made almost 60 acquisitions since the beginning of 2010

–          Google’s cloud ambitions are thwarted by oligopolistic broadband operators.  It has stumbled in social networking, lacks scale in e-commerce, is late in local ads and needs video content.

–          Clearwire could give Google an end-run around cable and telco networks, Twitter and Quora could give Google+ the buzz and momentum that it has lacked.

–          Craigslist though an unlikely target would be a coup in local advertising. VEVO would give Google content to battle iTunes and Gilt would give Google a store front with an upscale social angle.

 

On Friday, I took a crack at the “What if Tim Cook went on a spending spree?” game, positing 6 pick ups: Akamai to shorten the internet infrastructure gap vs. Google, Pinterest to make iOS more social and tap e-commerce and advertising opportunities, Square to give iPhone users a seamless way to buy their Starbucks half-caff cappuccinos, Nuance to make Siri an honest woman and Leap Motion to eventually replace her, and finally, a $50 billion splurge on CBS to scare the bejeebus out of the cable industry.  Today is Google’s turn.

What do you get for the person who buys everything they want a soon as they get a chance?  Google has averaged nearly an acquisition every other week since 2010, just announcing another – the purchase of the Frommer’s travel guide book business from publisher John Wiley & Sons Inc for an undisclosed price – this morning.  Google has not been afraid of the big deal either.  It has done 6 deals in its history in excess of $500M – starting with the $1.7B deal for YouTube in 2006 up to the $12.5B purchase of Motorola last year.  M&A yielded the basis for many of Google’s most successful businesses, including YouTube, Android, AdWords, AdSense, Maps and Places.  So unlike Apple, Google is actually likely to spend some its $43B in cash on acquisitions.

At the core of Google is a towering expertise in the design, implementation and operation of distributed data processing centers.  Everything else is Google’s move to leverage that massive advantaged asset into markets where ubiquitous reach, unmatched computing performance, and extraordinary cost economies can be exploited.  Lately, Google’s fancy seems turned toward unblocking the broadband distribution oligopoly that threatens to squeeze demand for cloud based applications, along with strengthening its position in social networking, local advertising, e-commerce and video content.  Following those lines, I found six companies that fit the Google suit:

Clearwire: Google clearly bristles at Cable MSOs and Telcos thwarting its Internet manifest destiny with their tiered pricing, usage caps and bandwidth throttling, starving network capital spending while crying to regulators for even less oversight of their less than vigorously competitive behavior.  The Google Fiber project in Kansas City, is a shot across the bow – it is offering gigabit per second internet speeds and TV services including a massive DVR with access to both traditional TV and online video – for an initial capital investment of more than $1,500 per household, that could top $500M in total.  While Google is raising the possibility of expanding Google Fiber to other communities, there is another, much less expensive, way.

Clearwire owns 150MHz of spectrum licenses, covering 130M pops across 35 of the 40 largest DMAs.  Unfortunately, Clearwire’s spectrum, in the 2.5GHz range has proven uneconomic to deploy for broad mobile coverage given its substantial range limitations relative to the spectrum used by market leaders Verizon and AT&T.   Clearwire’s network is built on the WiMax standard that is essentially obsolete, with its primary reseller, Sprint, moving definitively toward the alternative LTE standard using its own spectrum assets.  However, while Clearwire’s previous business plan has failed, its spectrum is still valuable, particularly for fixed wireless broadband services, where coverage limitations would be far less of a liability and where the benefits of deploying 3 times more spectrum than any other carrier devotes to a single service will be at their greatest.  LTE Advanced, which will support user internet speeds of more than 100Mbps and aggregate per cell capacity of more than 2Gbps, is expected to be available for commercial network deployment by next year.  While Clearwire has committed to using this technology, Google could accelerate investment and price the service aggressively for penetration, opening an inexpensive and high performance distribution channel for its own cloud-based services while pressuring traditional broadband operators in the process.  Although Clearwire carries about $3B in net debt against its $2.5B market cap, the spectrum assets are valued at more than $4B without considering the potential for fixed residential broadband.  Given Google’s strong interest in bypassing the cable/telco oligopoly, Clearwire could be a steal.

Twitter: Andrew Ross Sorkin’s NYT Dealbook Apple shopping list included Twitter, but I think the service is a better fit with Google.  Twitter would inject a massive, active audience into the relatively moribund Google+ social network, with interesting synergy to Google’s ad hoc video conferencing Hangouts and its anticipatory real-time news/search app Google Now, which augments traditional search in the latest “Jelly Bean” release of Android.  Twitter has reportedly struggled to monetize its position, and its profitability would likely benefit greatly from Google’s advertising expertise and volumes, upside unavailable within Apple’s ad challenged ecosystem.   While privately held Twitter has previously rebuffed acquisition overtures, the Facebook debacle may open discussions, as an IPO that once seemed a slam dunk is now at serious risk.  Cofounder and Chairman Jack Dorsey appears to have focused his energy around his more recent start up, Square, potentially leaving Twitter more available to Google.  Twitter was valued at roughly $8B during a round of financing a year ago, but post Facebook, it is unlikely to have achieved much appreciation since.  It seems possible that a deal could be done in the neighborhood of $10B.

Quora: Largely built on the back of Facebook by former employees of the social network, Quora is a credible user generated question and answer site often compared to Wikipedia, in that groups of subject experts collectively build knowledge bases around specific topics.  However, Quora contributors are acknowledged by name and the entries are driven in response to questions posed by other members rather than by self-generated interest groups.  The user base is unknown, though AppData estimates 50K active daily users and 260K monthly users logging in via Facebook Connect. Quora is known for high quality Q&A as contributors’ identities are verified via either Facebook or Twitter – a new user cannot sign up without having friends or followers that use either social network.  The Quora business concept would extend Google’s search franchise, as it seeks to provide in depth explanations for questions that are not easily resolved via a simple review of existing web pages.  It also dovetails with the expert networks that have gained some foothold within Google+, with sponsored videoconference Hangouts with subject matter experts one of that social networks most popular features.  According to the Wall Street Journal, Quora raised $50M in funding with a valuation of $400M in May 2012.  Picking up the company for under $1B may not be that easy. Co-founder Adam D’Angelo (also Facebook’s former CTO) is said to have also contributed $20M of his own money into the company indicating the founders still have strong control.

Craigslist: No one knows if Craigslist would ever consider an acquisition given concentration of ownership with founder Craig Newmark, but the company has made little attempt to actually monetize the popular site. Craigslist thrived by co-opting traditional local newspaper classified advertising, laying waste to newspaper economics in the process.  Craigslist ads are generally free with the exception of certain categories of ads such as jobs postings by employers, brokered apartment listings, and therapeutic services, and the site dominates local person-to-person advertising.  The synergies with Google are obvious, tying to Google Search, Google Places, Google Offers and other local advertising initiatives.  Of course, Craigslist has a history of cantankerous relations with would-be acquirers.  eBay acquired a minority stake in 2004 from a former principal, Craigslist’s board to amend its corporate bylaws in favor of the founders shortly after eBay assumed its minority stake. Not surprisingly, eBay took Craigslist to court. While a Delaware court threw out Craigslist’s poison pill provisions in 2009, Craigslist sued in eBay California in 2011 for stealing confidential information. The case is still pending an outcome.  Estimates of Craigslist’s value are all over the map, ranging from $1B to as much as $5B, but it would seem that only an offer to the higher end of that scale would be sufficient to get the board’s attention.

Gilt: Google decided to take on the Amazon e-commerce machine indirectly as an aggregator for larger merchants in late 2011. Google Shopping is still essentially an advertising product: Google simply shows products to shoppers and then points consumers to a company’s e-commerce site. With Amazon and eBay leading the e-commerce marketplace, followed by brick and mortar companies with their own online presence, there are few pure play e-commerce companies left. Gilt Groupe, one of the first players in the flash sale space, has several e-commerce brands including Gilt, Park and Bond, Gilt City, and Jetsetter encompassing upscale fashion, food, and travel products. Gilt gets its product via B2B relationships and curates sales on its website. It typically commands a 50% margin on closeout products and has recently ventured into selling more full priced products. The company had about $500M in revenue in 2011 and about 5M subscribers to its newsletter, most of which are concentrated on the coasts and reflective of higher income brackets. The company also has two distribution centers in Nevada and Kentucky and operates the business mainly in the US and Japan. Gilt shied away from smaller cities such as Atlanta, Dallas, Houston, Philadelphia, and Seattle and shuttered its offices in those cities earlier this year. An acquisition of Gilt would give Google a footprint and brand in e-commerce. It would fit well into Google’s other portfolio of acquisitions including Zagat, Frommers, and ITA Software, as well as leverage Google’s local presence to grow users in secondary markets. Gilt’s most recent round of financing involved General Atlantic, Goldman Sachs, and Softbank raised $138M in May 2011 and valuing the company at $1B. The company remains largely controlled by CEO and founder Kevin Ryan, who incidentally was the President and CEO of DoubleClick, but left a couple years before its acquisition by Google.

VEVO: VEVO is an online video site jointly owned by Universal Music, Sony Music and Abu Dhabi Media, that has thrived as the primary distribution channel for music videos created in support of 3 of the big 4 record labels – only Warner Music is excluded.  Google has a longstanding deal with VEVO to carry the music video content on YouTube, and VEVO is the biggest traffic generator on the site, delivering 618 million views during the month of May alone.  While the deal is clearly synergistic for the two, with VEVOs exclusive content and YouTube’s unparalleled reach, squabbling over fees and such is at a fever pitch.  While stomping off and going to Facebook is an option that has been played out in the press, it is something of a self defeating move, as most of VEVOs traffic is still directed there from search or from the well established YouTube channel that is so easily accessible from most connected TVs and portable platforms.  A deal would monetize the relationship for the current owners – likely with long term fees or revenue sharing to assure content – while assuring that YouTube’s anchor tenant remains in place and in step with Google’s broader plans.  Google could also use VEVO content in context with its fledgling music streaming and distribution businesses, and might be able to juice VEVOs overall advertising trajectory as well.  While the Abu Dhabi investment in 2009 valued VEVO at $300M, a valuation would be much higher today, and of course it would have to come with some content licensing or revenue sharing agreement.

While it is easy to predict that Google will be shopping, it is more difficult to narrow it down to a specific list.  In my 2 and ½ years with SSR, I have written scores of research notes and blog posts on themes that are changing the basis of the technology, media and telecommunications industries, exploring topics like the future of advertising, the changing face of television, enterprise IT’s move to the cloud, data center design, portable device technology, the rise of wireless broadband, the power of new paradigm user platforms and the impact of the “app model” on future web opportunities.  Few of these pieces have been Google free – the company is nearly ubiquitous in its reach and broad in its ambitions.  In that, picking a specific Google target can be like finding a needle in a haystack.  Fortunately, this particular haystack buys a lot of needles.

For our full research notes, please visit our published research site.

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