Google Industry Analysis - Case Study Example

GOOGLE Preliminary Credit Assessment Company Background Form 10-K Report Google is a publicly listed company at the Nasdaq in the Internet Information Provider industry Founded by Larry Page, originally incorporated in California in 1998, reincorporated in Delaware in 2003, and listed in 2004 Operates globally by delivering cost-effective online advertising through its AdSense program Offers a variety of platforms such as Google Books, Google TV, Google Apps, including Gmail, Google docs, Google Calendar, Google Sites and others. Google is one of the leading internet technology and advertising companies in the world. The company specializes in internet search engines and related advertising services. It maintains a large index of websites and other online content, which are freely available through its search engine. Google generates revenue primarily by delivering online advertising. The company primarily operates in the US. It is headquartered in Mountain View, California and employs 24,400 people. (Datamonitor 2011) Industry Analysis Macro-environment Analysis Political issues Different policies of countries concerning the freedom of communication and information There are different policies given the different political regimes worldwide. Even in liberal countries, the threat of terrorism and international fraud have created regulations that tend to require web service providers to monitor and identify high risk content in their throughput. Social advocacy groups also urge censorship of pornographic and similar material over the web. Censorship issues in countries with centralized political systems Countries such as China and other politically restrictive countries impose censorship controls which tends to discourage parties from engaging in internet exchange, even for non-political purposes. Economic issues Internet ad spending increasing, with affordable costs providing advantages to small firms Even small business are benefitted by the far reach of internet advertising. Compared to print, broadcast and other advertising, internet advertising is relatively cheap, and results are strong Growing viability of e-commerce among markets With the advent of reliable and secure e-payment services such as paypal, e-commerce is becoming more acceptable to most business and customers, and provides greater viability to Google. Increasing recourse to online transactions More companies are establishing e-stores over regionwide operations from which shoppers may make orders or transact sales. Industry Analysis Macro-environment Analysis Social issues In some parts of the world, cultural and language barriers create preferences for local info providers Growing connectedness due to social networking opens doors to more people of all walks of life Technological issues New technology enables tracking and targetting of individual customers, improving customer relations R&D provides more powerful, less costly alternatives Industry Analysis Macro-environment Analysis Legal issues Infringements of intellectual property rights Concern for firm’s liability in providing access for internet fraud, terrorism, and other unlawful uses Privacy concerns in relation to content material Environmental issues Greenhouse gas emission has been associated with the electrical power, including the carbon footprint of digital information devices Sustainable disposal of such devices still a problem Industry Analysis Porter’s Five Forces Model Internal Rivalry High due to continuing impetus for innovation Strongest players are Yahoo, Google, AOL and MSN of Microsoft Threat from Substitutes High since substitutes include social networks, vertical search engines and dedicated e-commerce websites, standalone websites, and other forms of advertising since companies advertise in multiple media. Industry Analysis Threat from New Entrants Low due to slowing growth and consolidation among present players Low due to strong brand loyalties among present players Bargaining Power of Suppliers Low due to high number of information sources, blog writers, company info providers Bargaining Power of Buyers Low for the major players due to brand loyalties , higher for newer companies Competitive Advantage Sources of competitive advantage Search engine optimization remains unparalleled by competitors Strong brand loyalty among customers ensures company online advertising patronage Word-of-mouth popularity has established a regular following Themed interactive logo design changes with special occasions SWOT Analysis (Datamonitor, 2011) Strengths Strong brand image provides an edge over competitors The company is ranked fourth among the top brands worldwide. Google brand is valued at $43,557 million according to 2010 estimates, which is an increase of 36% compared to 2009. Also, according to industry sources, the company is the second most valuable brand in the world. Robust financial performance strengthens investors’ confidence and provides capital for future growth avenues In addition, the company holds strong market position. According to industry sources, Google Sites lead the US explicit core search market, followed by Yahoo! Sites and Microsoft Sites. The company also owns 90% of search market in Latin America. Google is also hugely dominant in Western Europe with more than 90% market share of the search sector. In Asia Pacific, Google owned 51% of the search market in 2010, followed by Baidu (23%) and Yahoo (18%). Wide portfolio offerings The company also has robust market share in social networking segment with Orkut, and webmail through Gmail. In addition, Android, the company’s own mobile operating system for smartphones, is the most used in the world with over 500,000 devices activated daily, and has about 34% of smartphone operating system market share at the end of 2010. The company also offers Google Instant, which starts searching with every keystroke, thereby saving users time on every search. As per the company, Google Instant has saved its users over 100 billion keystrokes. The companys application tools allow users to create, share and communicate user generated information. Some of Googles applications products include Google Docs, Google Calendar, Gmail, Google Groups, Google Reader, Orkut, Blogger, Google Sites and Google Maps. Strong cash flow to address crisis situations The company’s strong liquidity position and working capital is supported by a strong cash flow which keeps the company at a strong financial position even during the credit crunch. Debt ratios remain low as a result of strong internally generated earnings. Strategic acquisitions such as YouTube The companys YouTube online video services is a leading online media platform. YouTube serves over two billion videos per day from a selection of over 500 million. SWOT Analysis (Datamonitor, 2011) Weaknesses Patent infringement lawsuits may affect financial condition and operating results The company is involved in various legal complaints relating to patent infringement. In August 2010, Oracle filed a patent and copyright-infringement lawsuit against Google. In April 2011, MasterObjects sued the company, and further, in April 2011, the jury in the Eastern District of Texas ordered Google to pay $5 million in damages to Bedrock Computer Technologies for using versions of Linux that infringe on Bedrocks patents. In addition, Google has relatively low patent technology compared to its competitors. For example, as per the industry sources, the company was granted 282 US patents in 2010, compared to Microsoft’s 3,094 new patents and Apple’s 563 patents. Traffic of several thousand ads a day makes technical malfunction and downtime unacceptable Fluctuations in quarterly earnings due to seasonality of internet usage which slows during summer months. Acquisitions tends to spread resources and reduce focus Expanding too fast in so short a time may keep the company more competitive, but it tends to acquire fixed costs quickly which the company must ensure is sufficiently covered by the additional revenues, or else it may find that it has spread its financial resources among too many weak acquisitions, if it is not careful. SWOT Analysis (Datamonitor, 2011) Opportunities Strategic acquisitions to further strengthen the company’s portfolio The company has made certain strategic acquisitions in recent times. Google acquired The Dealmap, a source for people to find and share local and daily deals, in August 2011. In July 2011, the company acquired Fridge, a privacy-centric social networking website and Pittsburgh Pattern Recognition (doing business as PittPatt), a provider of face detection, tracking, and recognition software solutions. In June 2011, Google acquired Admeld, a provider of advertising network optimization technology, for approximately $400 million; SageTV, a provider of digital entertainment and placeshifting solutions; and PostRank (formerly AideRSS), a Canada-based company engaged in monitoring and collecting social engagement events correlated with online content in real-time across the web. In May 2011, the company acquired Sparkbuy, a provider of comparison shopping website for consumer electronics. In addition, during the first four months of 2011, Google acquired eBook Technologies, a provider of eBook products and services; SayNow, a provider of a free calling service to bands on Myspac; zynamics, a German security analytics software company; BeatThatQuote.com, a UK-based company which operates as a price comparison web site; PushLife, a Canada-based mobile media software company; and TalkBin, a provider of feedback platform to local businesses. Further, in FY2010, the company acquired about 25 companies. Rising popularity of Android to increase market share The Google Android OS for smartphone is gaining rapid popularity. With the acquisition of Android Inc. in 2005, and the subsequent launch of Googles mobile OS "Android" changed the competitive landscape of smartphone business globally. According to Andy Rubin, Googles Vice President of Engineering and one of the cofounders of the earlier Android Inc., over 500,000 Android smartphone are activated daily. Also, these numbers are growing by over 4% every week. By contrast, every day approximately 150,000 Apple iPhone’s are activated. Additionally, Android is fast emerging as the preferred mobile OS for OEMs with multiple OEMs using the platform for their devices. HTC and Samsung have been aggressively pushing new mobile phones based on the Android platform. Further, Sony and Motorola are also actively leveraging the Android platform. As per the industry sources, Android is forecast to capture 40% market share through 2011 and is forecast to increase its share to 46% by 2015. Moreover, the online application store for Android applications "Android Market" is growing at a rapid pace.The Android Market currently offers approximately 250,000 apps, compared to 350,000 offered by Apples App Store, although Android has been a late entrant in the market. Increasing popularity of Android will increase the market share of Google. Robust outlook for mobile advertising market provides growth opportunity Global mobile advertising market is forecast to recover and have a modest growth in near future. According to industry sources the mobile advertising market is forecast to reach approximately $25 billion globally by the year 2015, riding on the strong growth of smartphones in both developed and emerging nations. Entry into mobile payments market Google, Citi, MasterCard, First Data and Sprint partnered to offer Google Wallet, a mobile app that enables users to tap and pay at stores, in May 2011. This marks the company’s entry into growing mobile commerce market. Google Wallet will support payments with two payment solutions: a PayPass eligible Citi MasterCard and a virtual Google Prepaid card. It uses near field communication (NFC) to make secure payments by simply tapping the phone on any PayPass-enabled terminal at checkout. Google Wallet is built to work with the growing MasterCard PayPass network, a merchant point of sale service that enables consumers to tap to pay. As a result, Google Wallet will be accepted at more than 124,000 PayPass-enabled merchants in the US and more than 311,000 globally. SWOT Analysis (Datamonitor, 2011) Threats Intense competition may affect revenues and profitability Google operates in a highly competitive business environment characterized by rapidly change and converging, as well as new and disruptive, technologies. The company faces stiff competition in every aspect of its business, particularly from companies that seek to connect people with information on the web and provide them with relevant advertising. Google’s primary competitors include general purpose search engines, such as Yahoo! and Microsoft’s Bing. The company also competes with vertical search engines and e-commerce websites, including Kayak (travel queries), Monster.com (job queries), WebMD (for health queries), and Amazon.com and eBay (e-commerce). Some users will navigate directly to such websites rather than go through Google. Further, increasing popularity of social networks such as Facebook and Twitter also poses a significant threat to Google as users are relying more on social networks for product or service referrals, rather than seeking information through general purpose search engines. Web spam and content farms may decrease Google’s search quality The company’s business operations are subject to web spam and content farms. “Web spam” refers to websites that attempt to violate a search engine’s quality guidelines or that otherwise seek to rank higher in search results than a search engine’s assessment of their relevance and utility would rank them. Although English-language web spam in Google’s search results is less than half of what it was five years ago, and web spam in most other languages is even lower than in English, the company has experienced an increase in web spam in recent months. As part of Google’s efforts to combat web spam, it recently launched new indexing technology that makes it harder for spam-like, less useful web content to rank highly. The company has also improved its ability to detect hacked websites, which were a major source of web spam in 2010. Exchange rate fluctuations that distorts international costs and revenues performance Google is exposed to foreign exchange risk as it derives a major portion of its revenues from international operations. The company’s international revenues accounted for 52.1% of the total revenues in FY2010, compared to 52.7% and 51.2% in 2009 and 2008, respectively. The expansion of Google’s advertising programs and other products to international markets will increase the company’s exposure to fluctuations in foreign currency to US Dollar exchange rates. For example, in 2010, the general strengthening of the US Dollar relative to foreign currencies (primarily the Euro) had an unfavorable impact on Google’s revenues as compared to 2009.The company recorded $84 million of net translation losses in 2008, $77 million of net translation gains in 2009, and $124 million of net translation losses in 2010. Google TV’s failure to meet expectations Google TV is facing problems in meeting its expectations. In May 2010, Google launched Google TV, an open platform that integrates multichannel television with web media content. Google TV is facing problems related to its operating system (OS) and content owners. Many of the users feel that Google TV’s OS is an unfinished piece of software and reported some issues with video quality coming in from various websites. In addition, major US broadcasters blocked their web shows from being broadcast through Google TV. ABC, CBS and NBC have blocked access to their online video portals from the Google TV browser. Hulu.com and CBS’s TV.com are also blocked. However, among all these broadcasters, FOX is still permitting Google TV access. The blockage by many broadcasters will deprive the users from watching some popular TV shows on Google TV. However, Google is negotiating strongly to convince the broadcasters to allow their content on Google TV, the success cannot be guaranteed. Possible breach of security measures As with any online service, there is always the possibility of security threats to the integrity of software and databases. Corporate Strategy Alignment The following elements shows the presence of strategic alignment in the Google business: Business Strategy - Anchored on constant innovation and developing new services and applications Organizational Infrastructure – Corporate structure supports a culture of innovation, creativity and teamwork, although the increasingly complex hierarchy becomes a threat. Corporate Strategy Alignment Firm resources – Google’s products and services are dependent upon their users’ ability to access companies that link their offerings with it. Also, constant investment in R&D enhance the firm’s capacity to deliver content through the web. Distinctive competencies – Among the firm’s most important sources of competencies is its highly skilled and qualified personnel who drive the innovation and direction of mass market-oriented products and services, supported by a pool of technical consultants. Liquidity & Solvency Ratios Asset Utilization Ratios Profitability Ratios Googles profitability has also increased in recent years. The companys operating profit increased at a CAGR [compound average growth rate] of 25% for the period 2008–10 from $6,632 million in 2008 to $10,381 million in FY2010. Similarly, the net profit also increased at a CAGR of 42% during the same period from $4,227 million in 2008 to $8,505 million in FY2010. As a result, the companys operating and net profit margins have increased from 30.4% and 19.4%, respectively, in 2008 to 35.4% and 29%, respectively, in FY2010. Comparison with Competitors (Yahoo Finance, 2011) Revenue comparison Net income comparison (US$m) Z-score for predicting bankruptcy (Data for financials sourced from 10-K Report) 5-Cs of Credit Character – Strong record of on-time payments and mix of previous credit exhibiting low risk Capacity – Consistent and solid cash flows and substantial working capital enable ability to pay Capital – Sufficient retained earning and internally generated funds. Collateral – Company balance sheet shows strong, good-quality assets for collateral Conditions – Loan conditions also exhibit low risk and re not unduly burdensome Recommendation The company under consideration, Google, is a good credit risk and promises to be a reliable paying loan customer. It is thus the recommendation of this study for Google to be favorably consider among the list of Cap One Blue Chip Accounts. Read More