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Only Facebook Can Match Google’s Run

Posted on Monday, Jan 25th 2010

According to a recent comScore study, the global search market grew 46% annually to more than 131 billion searches in December 2009. The United States is the world’s largest search market with 22.7 billion searches or approximately 17% market share. China was ranked second with 13.3 billion searches, followed by Japan with 9.2 billion and the UK with 6.2 billion. Google sites dominated the global search market with 87.8 billion searches in December 2009, or 66.8% of the market. Google sites gained 58% in December 2009 from December 2008. Google was followed by Yahoo!, Baidu, and Microsoft sites. Microsoft sites gained 70% to 4.1 billion searches following the launch of the company’s new search engine, Bing.

In another report, comScore claimed that in December 2009, Americans conducted 14.7 billion core searches in December 2009, an increase of 2.2% over November 2009. Google maintained its leadership position with 65.7% of the market share, followed by Yahoo!, which dropped by 0.2% points to 17.3%, and Microsoft, gained by 0.4% to 10.7% over November 2009. The trend of secular growth in the search market seems to be continuing, and Google stands to benefit from this.

Google (NASDAQ:GOOG) announced its financial results for the fourth quarter and the fiscal year ended December 31, 2009, on January 21. Google reported revenues of $6.67 billion in Q409, an increase of 17% compared to $5.70 billion in Q408. Non-GAAP operating income in Q409 was $2.76 billion, or 41% of revenues, compared to non-GAAP operating income of $2.15 billion, or 38% of revenues, in Q408. Non-GAAP net income in Q409 was $2.19 billion, compared to $1.62 billion in Q408. Non-GAAP EPS in Q409 was $6.79, compared to $5.10 in Q408. Net cash provided by operating activities in Q409 totaled $2.73 billion, compared to $2.12 billion in Q408. As of December 31, 2009, cash, cash equivalents, and short-term marketable securities were $24.5 billion.

Google-owned sites generated revenues of $4.42 billion, or 66% of total revenues, in Q409, a 16% increase over Q408 revenues of $3.81 billion. Google’s partner sites generated revenues, through AdSense programs, of $2.04 billion and 31% of total revenues, in Q409, a 21% increase over Q408 network revenues of $1.69 billion.

Revenues from the United States were up 11% year over year to $3.2 billion. Revenues from outside of the United States totaled $3.52 billion, representing 53% of total revenues in Q409, compared to 53% in Q309 and 50% in Q408. Revenues from the United Kingdom totaled $772 million, representing 12% of revenues in Q409, the same as in Q408.

Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of its AdSense partners, increased approximately 13% over Q408 and increased approximately 9% over Q309. Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of its AdSense partners, increased approximately 5% over Q408 and increased approximately 2% over Q309.

Traffic acquisition costs (TAC), the portion of revenues shared with Google’s partners, increased to $1.72 billion in Q409, compared to TAC of $1.48 billion in Q408. TAC as a percentage of advertising revenues was 27% in Q409, compared to 27% in Q408.

AdWords launched a new front end and several new ad formats. DoubleClick is now fully integrated with Google, and Display is ramping up well. The Chrome OS and Android are seeing a lot of interest . Google is seeing a steady stream of small businesses, large enterprises, and schools moving to the cloud. YouTube is monetizing well. Although Google was positive about all of these businesses, it did not disclose numbers for them.

In this tighter economy, bigger companies like Staples, Volvo, Ubisoft, Abbott Labs, and so forth, use an increasing proportion of their ad budgets on what is a more measurable ROI of online advertising. Globally, Google saw a significant uptake in retail advertisers’ online spending.

According to the New York Times, Apple is considering making Microsoft’s Bing, the default search engine on the iPhone’s Safari Web browser. This could hurt Google’s mobile search business.

Though earlier in January Google had threatened to pull out of China, during the Q409 conference call CEO Eric Schmidt made it clear that Google likes the business opportunities in the country and is committed to being there.

Google had 19,835 full-time employees as of December 31, 2009, up from 19,665 as of September 30, 2009.

Google has been investing heavily in product and technological innovation. Seventy percent of these investments are in the company’s established business: search with emphasis on search quality. Google also introduced real-time search, which provides real-time updates (on any news or events from an earthquake to a football match) in Q4. It made more than 550 improvements to search quality in 2009 and 60 quality improvements in display ads. Twenty percent of investments were in newer businesses that fuel Google’s search business, like mobile. On Android, search traffic increased five times in the past two years. Android started 2009 with just one device and now has 20 in 48 countries. The remaining 10% are long-view investments like commerce and social initiatives.

Google plans to continue with its one acquisition per month spree and put its $24.5 billion in cash and cash equivalents to good use. Acquisitions will be a mix of both big and small companies, but mostly small ones to build upon existing businesses and also to bring in new talent.

Google has been steadily gaining share in the search market and stands to benefit from the recovery in the global economy and the rapid growth in the digital economy. Future growth will be driven by not only the company’s core business of search and online advertising, but also mobile advertising, monetization of YouTube, and new products such the Android, Nexus, GEO, Chrome, and Chrome OS. There are a number of new products and technologies that Google is working on, and even if it is able to monetize a few of them, this would present a significant opportunity for the stock.

I see no stopping for Google, especially given the competition’s lack of both strategy and execution so far. Only Facebook could pose an interesting challenge, if they follow the strategy I articulated in my recent Forbes column, Facebook’s Ideal Future.

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