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Technology > Tech Biz
Gunning for Google
The hype surrounding Google's IPO is starting to be replaced by questions about its future.
June 11, 2004: 5:34 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - When Google finally registered to go public back at the end of April, there was much rejoicing.

Google was going to lead tech to a new era of prosperity. Can I get a Hallelujah!

But six weeks after the IPO filing, there's starting to be some skepticism about just how well Google will do and if it really deserves to be pegged as a tech savior. Goodbye, euphoria. Hello, reality.

Don't get me wrong. Google will probably have a monstrous first day when it starts trading sometime later this year. It's tremendously profitable and dominates Internet search.

But it's reasonable to wonder whether Google truly deserves to be considered a superstar long-term investment along the lines of say, Yahoo! (YHOO: Research, Estimates) or eBay (EBAY: Research, Estimates). (For Money magazine's take on a possible valuation for Google, click here.)

In fact, Standard & Poor's put out a critical pre-IPO report on Google earlier this week, summing up its thoughts on Google with this less than stellar endorsement.

"Although we foresee a successful near-term future for Google, we are not as convinced as some about the company's long-term prospects, as it ventures beyond its core competency of search and faces increasing competition."

How loyal are Google users?

What's not to love about Google? Well, even though its financials look good now, Google is still a one-trick pony, depending almost entirely on advertising for revenues. Sound familiar? That was the knock on Yahoo! back in 2000 and 2001.

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Sure, Google is making attempts to become more competitive against Yahoo! and other rivals such as Microsoft's (MSFT: Research, Estimates) MSN and AOL, which like CNN/Money, is owned by Time Warner (TWX: Research, Estimates). And the perception of Google is that Web users love it because it's easy to use and is not cluttered with pop-ups or banner ads like other well-known Web sites.

So as Google introduces new online products, users should flock to them, right?

Well, a survey of 1,000 Internet users commissioned by S&P showed some surprising results about just how loyal Google users are.

Only 23 percent said they would sign up and regularly use a free e-mail service that had targeted advertising tied to it, which is what Google has proposed with its controversial Gmail offering.

And it's also worth noting that Google was not named as the favorite Internet company by most of the survey's respondents. It ranked third, with only 9 percent saying that Google was their favorite.

Who do you love?
Google did not rank as the top Internet company in a survey of Web users.
% saying it is their favorite
Cannot name a favorite35%
Source:Standard & Poor's

AOL was second with 12 percent and Yahoo! was first with 18 percent. Interestingly, more than a third of the users could not name a favorite Internet company. (So much for spending tons of money on brand awareness.)

With that in mind, Scott Kessler, an equity analyst with Standard & Poor's, said that the most daunting task for Google going forward will be to convince people that it is more than just a search engine.

"When you say Google, people automatically think of online search," said Kessler. "That's great for Google in terms of establishing and promoting a brand for search but the challenge for them is how can you make that brand more representative of other things as well?"

Can Google diversify?

Mark Mahaney, an analyst with American Technology Research, adds that unless Google can successfully diversify, then there's no reason why Google should command a valuation similar to that of Yahoo!, especially since Yahoo! is stepping up its search efforts. A not-so-small company called Microsoft is lurking out there as well.

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"Yahoo! and Microsoft have reminded investors that search is not a monopoly," Mahaney said.

And investors seemed to have quickly come to this realization as well.

Shares of Yahoo! did tumble 7.6 percent the day after Google filed for its IPO. At the time, there were several Internet stock observers who thought that Google's strong financials made Yahoo!'s look positively humdrum in comparison.

But Yahoo! investors are no longer running scared. The stock has surged 27 percent since the beginning of May.

Yahoo! has become a Wall Street darling again after falling out of favor with investors during the tech bear market because it has transformed itself from a search engine firm (or portal, if you still like Web jargon circa 1998) to a diversified Internet media company that generates fees in addition to ad revenue.

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By Paul R. La Monica

Can Google do the same? Mahaney is not so sure. "Who knows what Google's execution will be like?" said Mahaney. "The interesting thing is not Google's historical record but what happens going forward."

And somewhat paradoxically, the current success of Google makes it more imperative for the company to find new avenues of growth since search has gone from an Internet afterthought to becoming a business model that all online ad companies have adopted. Competition is now fierce and everybody's gunning for Google.

"The search category is becoming increasingly crowded and over time search offerings will become more and more similar," said Kessler. "The Google IPO just increases the size and brightness of the target that's on their proverbial back already."

Analysts quoted in this story do not own shares of companies mentioned and their firms have no investment banking relationships with the companies. and CNN/Money have a business relationship with Overture Services, which is owned by Yahoo!

The reporter of this story owns shares of Time Warner through his company's 401(k) plan.

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