Google: King of the Kloud Krewe

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February 6, 2014

Google: King of the Kloud Krewe

GOOG dominates the booming digital ad market – we expect Search, YouTube, local, AdSense, and other initiatives to keep the company in front, even with the shift to mobile, social and video, and in the face of able challenges from Facebook and Twitter. However, it is GOOG’s dominion over modern computer science that scaffolds this ad sales machine and that creates wholly new opportunities – in fields as diverse as robots, medical research, augmented reality, commercial hosting and the internet of things. The company has the world’s biggest, cheapest, and most powerful computing platform, and combining that extraordinary infrastructure with its world leading data management, algorithm development and deep learning software expertise puts it in prime position to attack the nearly limitless number of traditional businesses ripe for disruption from the cloud. In this context, GOOG’s seemingly out-of-focus moon-shot investments and acquisitions make perfect sense, even if they may be monetized by subscriptions, service charges, equipment sales, retail commissions, or transaction fees rather than ads. Ultimately, GOOG may be addressing a larger and more lucrative opportunity set than any other TMT player, with assets and skills that will make it difficult to beat as the cloud era plays out.

  • Advertising’s been very, very good to GOOG. After inventing a game-changing way to index and search a web-scale data base, then growing its search engine to dominance, GOOG began selling positions on its results pages as ads. Applying its ascendant computer science skills and massive data center infrastructure to the needs of advertisers has been an ideal monetization scheme for GOOG, which today commands more than 40% of the digital ad market. Along the way, the company took leadership in 3rd party ads, added YouTube’s top video ad platform, and pioneered the move to mobile. With digital still <25% of total US ad spending, and lower than that overseas, there is plenty of runway left, and it is little wonder that investors view it as an ad company at its core.
  • GOOG is a big data company at its core. Advertising is product born of GOOG’s dominant data processing core. As we have written (Google: The Biggest Hammer in a World Full of Nails), the company invented most of the key technologies underpinning modern data center architecture and data base management, contributing its well worn ideas to the open source community as it moves relentlessly forward. It has the biggest, fastest, cheapest, and most flexible data center infrastructure on earth, running the most sophisticated analytic software ever written, overseen by the deepest and most decorated staff of computer scientists in the industry. This is a profound advantage in pursuit of opportunities that go FAR beyond search and advertising.
  • GOOG invests to address new markets. Understanding GOOG as a transcendent data processing company puts its acquisitions and R&D initiatives into focus. Many of these investments have been entrees to new businesses where the data center leadership can be leveraged. Examples include Google Glass (augmented reality, wearables), self-driving cars, Calico (health research focused on aging), and Nest (networked home automation). Acquisitions in pursuit of new markets can also strengthen important skill sets – e.g. Nest brings former Apple design guru Tony Fadell.
  • GOOG invests to add complimentary skills. The $400M acquisition of AI start-up DeepMind fits right in with GOOGs own research into deep learning, which has informed existing products like search, improved capabilities like voice recognition and translation, and enabled new services like Now. However, deep learning is also key to new areas, such as medical diagnostics and secure payments. It is also highly complementary to another recent GOOG obsession, robotics. Robots are a physical manifestation of computer intelligence, forced to cope with the ambiguity and variety of the real world, and have found their way into a long list of commercial and industrial applications. By making robots smarter, more sensitive, more autonomous and better able to adapt, GOOG will be able to address an almost limitless list of new applications for its computing capabilities.
  • GOOG invests to protect itself. Motorola was a defensive acquisition, bought for patents and to halt the legal/competitive threats that it was posing to the Android ecosystem. Android itself was a defensive product, launched to counter AAPL’s possible domination mobile and assure a wide audience for Google Apps. Google Fiber is defensive – a show of force to the cable MSOs and telcos that dominate broadband and dictate the speed with which users can access GOOGs services. So far, these investments have been effective, and investors can expect more of them
  • GOOG will employ broad monetization tools for future products. Because advertising has been so effective, many observers mistakenly downplay GOOGs ability to monetize using other tools. Already, the Compute Engine IaaS service and Google Docs are generating monthly payments from enterprise customers, Google Play is generating commissions, and devices, like Chromecast and the Nexus line, are generating sales revenue. Non-advertising revenue ex MOT doubled in 4Q13, and, while still very small relative to ads, stands to grow dramatically. Expect serious enterprise IT services (hosting and SaaS applications), new devices of all ilk (including an expansion of Nest’s home automation line and the pending commercial launch of Glass), broader e-commerce initiatives (including 3rd party delivery & logistics, and a more comprehensive payments solution), technology licensing agreements (automotive, med-tech, etc.) and media distribution (YouTube, Google Play, Android TV, etc.) to become increasingly important drivers of future sales.
  • A LOT of room to grow. The markets that GOOG can address are massive. Advertising and promotion is a $1T global market and less than 15% penetrated by digital. E-commerce addresses the multi-trillion dollar global retail business. Electronic devices, personal financial services, medical diagnostic tools, enterprise IT hosting and SaaS, – all of these are, potentially, trillion dollar global markets. Further in the future, GOOG’s investments in AI and robotics could yield new opportunities, limited now only by our imaginations. All of this is possible because of GOOG’s towering excellence in big data, deep learning and data center architecture.

It’s Google’s World, We Just Live in it

GOOG makes most of its money from advertising. It boasts a better than 40% share of on-line advertising spending, generating more than $50B in ad sales for 2013, up 16% vs. 2012. In this context, it is easy to think of GOOG as an ad company, a perspective that has many observers scratching their heads as management pours investment into robots, machine learning, gerontology research, glucose monitoring contact lenses, self-driving cars, thermostats and smoke detectors, video compression algorithms, and augmented reality glasses. Advertising and promotion is a $1T+ global market and less than 15% is on-line today. It’s a huge opportunity – why not stick to your knitting?

Advertising is NOT GOOG’s core business. We wrote about this a year ago (http://www.sector-sovereign.com/2012/12/decemebr-4-2012-google-the-biggest-hammer-in-a-world-full-of-nails/), making our case for GOOG as the greatest data processing company in the world. It is responsible for almost all of the most important computer science innovations of the last 15 years, introducing unstructured data bases, big data analytics, and distributed data center architecture to the open source community, as GOOG’s all-star engineering roster pushed its own implementations generations ahead of the competition. With tens of billions in cumulative capex and R&D, GOOG has built the biggest, fastest, cheapest and most flexible computing infrastructure on the planet (sorry Watson). Feeding that beast with problems worthy of its power is GOOG’s core business.

Luckily, the opportunities to leverage omnipresent and increasingly affordable computing power to disintermediate existing business models and/or create entirely new ones are legion. In pursuit, GOOG is investing in three ways. First, it is buying and developing new cloud-driven businesses. Nest (networked home automation), Glass (augmented reality, wearables), self-driving cars, Calico (anti-aging medical research), and glucose monitoring contact lenses all gain greatly from GOOG’s extraordinary IT capabilities. Second, it is expanding its skill set – hence, the acquisition of 8 different robotics companies in the last 8 months, and the stockpiling of expertise in “deep learning” software. These capabilities will allow GOOG to extend its data processing leadership into the physical world and to make its services more responsive to the ambiguities of real life. Finally, GOOG also invests defensively. MOT added patents and pre-empted friendly fire toward the rest of the Android ecosystem. Android keeps AAPL from dominating web apps as a monopolist. Google Fiber is a reminder to broadband providers not to get too aggressive with their oligopoly power.

Investors can expect GOOG to continue to make investments like these. Undoubtedly, some of them will not work out, but the company’s track record on new businesses is good and the opportunities are huge. Digital advertising, e-commerce, electronic devices, personal financial services, medical diagnostic tools, enterprise IT cloud services, etc. all address trillion dollar plus global markets, to be monetized in a panoply of forms – whether via advertising, service fees, subscriptions product sales, commissions, or transaction fees GOOG can get paid for its towering computer science prowess. In this context, we believe GOOG is on its way to becoming the most valuable company in the world.

Exh 1: Key Google Metrics on a Quarterly Basis, 1Q03-4Q13

It’s a Search Company! It’s an Ad Company! NO, It’s a Computer Science Company!!!

What is Google? We tried to answer that question in a deep dive look at the company that we published a year or so ago (http://www.sector-sovereign.com/2012/12/decemebr-4-2012-google-the-biggest-hammer-in-a-world-full-of-nails/). Contrary to popular opinion, Google is NOT, at its core, a search company, although finding a solution to indexing and searching the web as it grew indescribably large was its genesis. It is not an advertising company either, although ads generate the large majority of its sales and profits today. At its heart, Google is a computer science company, responsible for almost all of the important inventions and innovations behind unstructured data base software, big data analytics, and distributed cloud data center architecture. Google’s breakthroughs, contributed ex-post to the open source community, underlie almost all modern cloud applications and Google’s own infrastructure is the biggest, fastest and cheapest computing platform on earth by a large measure. It is this legacy that allowed the company to solve and dominate web search, and to capture more than 40% of today’s digital advertising dollar (Exhibit 2). It is this legacy, pushed forward at breakneck speed by a star-studded engineering team and deep pockets, that positions Google against all of the opportunities that the cloud will bear.

Exh 2: Google and the Global Advertising Market, 2013

In Search Of …

Of course, Google began in 1996, as research initiative by then Stanford Graduate School students Larry Page and Sergei Brin, proposing to invent a superior way to index and search the fledgling World Wide Web. Search engines of the day – Alta Vista, Excite, and others – were slow and obtuse, rendering unsatisfying and woefully incomplete results. Page and Brin implemented a scheme of crawling the web, using programs that methodically followed from link to link to link and returned descriptive metadata about every page that they encountered. Sophisticated weighting algorithms would then match user search terms within the base of web page metadata to return the results most closely tied to the user’s query. The problem was that the rapidly growing web was already too large to be accommodated by the structured data base programs that dominated PC era computing. Moreover, the metadata being collected was unformatted random words in often ambiguous context, anathema to programs that demanded consistent, fixed fields of rigorously formatted information. Understanding the realities of “Web Scale”, Brin and Page set out to invent a different way to organize and parse their data.

Incorporated as Google in 1997, the fledgling company hired on scores of serious computer scientists and delivered those inventions (Exhibit 3). The evolving PageRank algorithm, which was the means by which the service determined the best possible answers to user queries became the company’s signature technology in the public eye as Google quickly gained adherents to its abundantly superior search engine, but the biggest advances were behind the scene. A technique called MapReduce was used to distribute the computational work of analyzing the massive data base across many clusters of servers. The data itself was stored according to a schema, called Google File System, that allowed for data security and integrity without imposing scale limits. These technologies were eventually contributed into the open source software community, where they became the basis for the cloud computing architectures and big data analytic tools that are now the basis for modern data processing. Google, which has long been the employer of choice for the cream of the world’s best computer scientists, has stayed generations ahead of the competition with its relentless R&D and data center capex investments.

Exh 3: Google Major Event Timeline, Founding to IPO

And Now, A Word From Our Sponsor …

Of course, scientists need to eat. The obvious way to monetize a search business is through advertising. In 2000, Internet advertising was still a blunt instrument of banner ads, bought from and placed on web sites promising a particular demographic. Google offered a more targeted approach, using its awesome analytic firepower to target ads to users specifically searching for a particular thing. It also introduced a computer-driven auction process for buying the ads, capturing the best prices for the most attractive search terms. This worked really, really well. As Google began maintaining historical profiles of the interests expressed by the many millions of people using its search utility, it could offer an even better basis for targeting advertising and, thus, earning better ad prices. This analytical approach was so successful, that Google turned its ad auction process toward ads sold to be displayed on other Internet sites, taking a commission for each placement.

Fast forward: Google has been very, very successful. According to e-Marketer, Google now has 40% share of the US digital advertising market, and it probably is even more dominant overseas, where its search engine has nearly 90% share. Google’s total advertising revenue was $50.6B in 2013, up 16% YoY, with advertising on Google’s own sites up 20% to $37.5B. Advertising was more than 90% of Google sales, ex Motorola Mobility (sold in principle to Lenovo). Arguably, there is also a lot more room for digital advertising to grow. Considering just “measured media” (TV, print, radio, digital, and outdoor) advertising, digital accounted for roughly 23% of the more than $500B global ad market (Exhibit 4). However, note that on-line also competes for “promotional” advertising spending (promotional events, sponsorships, product placements, coupons, in-store displays, viral campaigns, etc.) and that this pool may be as large as measured media on a global basis. This is a trillion dollar addressable market, and Google has established a dominant position as the shift to digital rolls on.

Exh 4: Global Measured Media Advertising Spend, 2013 vs. 2016

Exh 5: Google’s Non-Ad Revenue, 2010-2013

No wonder, then, that many analysts cut to the chase and identify Google as an advertising company at its core. This is convenient, but wrong. Advertising is by far the biggest, but not the only, cash register for Google. Non-ad revenues more than doubled in 2013 to nearly $5B, led by sales of Google branded devices (Nexus smartphones and tablets, the $35 Chromecast TV dongle, etc.), e-commerce on Google Play (apps, media, and other products), enterprise IT revenues (Google Compute Engine hosting, Google Docs license fees, etc.), and other miscellaneous sources (Google Fiber subscriptions, patent royalties, data licensing, etc.) (Exhibit 5). For Google none of this is a distraction from its core business, rather, all of it, including the advertising, is in service of its true core business, which is, according to the company’s mission statement, is “organizing the world’s information”.

We Can Build It, We Have the Technology

Since its IPO in 2004, Google has spent a cumulative $33B in R&D and $26B in capital expenditures, most of that on the massive data center architecture that underpins everything that Google does (Exhibit 6-7). Currently, Google shows PP&E assets of more than $16B with annual depreciation of more than $2.7B, most of that from data center infrastructure, compared to Amazon, Microsoft or IBM, which have less than $11B in PP&E. Google is known to have 36 primary data center locations world-wide, a significant step above Amazon (7), or Microsoft (11), and nearly a magnitude greater than would be rivals Apple (4) and Facebook (3) (Exhibit 8). Add in advantages in performance, flexibility and cost, stemming from Google’s multi-year lead in deploying true state-of-the art architectures, and the company has a powerful competitive weapon.

This shows in the quality of Google’s web applications. Despite Microsoft’s pretentions, Google search has no real rivals for the depth and accuracy of its results. Apple’s fumblings showed the superiority of Google Maps. YouTube is many times the size of its would-be rivals. Gmail blew past Hotmail in 2012 to become the world’s largest email service and never looked back (Exhibit 9). Chrome is the world’s number one browser, overcoming long odds against the embedded Internet Explorer and Safari (Exhibit 10). Google Now has become an indispensible tool for Android users, anticipating user needs while showing Siri how voice recognition is done. Google Translate is the world’s de facto document translation service. Google Earth, Google Goggles, Google Docs, Google Drive, Google Hangouts, even Google Plus – the connected archipelago of web applications is unassailable in the whole because of the awesome computing firepower it takes to deliver it, the data required to support it, and the engineering talent necessary to build it in the first place.

Exh 6: Quarterly Spending on Research and Development, 1Q2003-4Q2013

Exh 7: Quarterly Spending on CAPEX, 1Q2003-4Q2013

Exh 8: Known US Data Center Locations of Apple, Amazon, Facebook, Google, and Microsoft

Exh 9: Global Email Users by Service, December 2013

Exh 10: U.S. Web Browser Market Share Trends – 1996-2013

To Boldly Go Where No Company Has Gone Before

Sergei Brin’s dream for Google is a computer system like the one in Star Trek. Give it a command or a question and BOOM, the task is done or question answered. Arguably, the company is well on its way. It maintains the definitive index of the Internet and is able to parse through it with extraordinary speed and accuracy. It maintains detailed data on its hundreds of millions of registered users and familiar IP addresses, recognizing their profiles and history as they move from site to site. It employs sophisticated AI techniques to mine insights from its data, interpret media files, and assess the requirements of its users, dealing with the ambiguities and imperfections of the real world in a digital context. In these things, as in the scope and the power of its infrastructure, Google has no peers.

This leadership puts Google in position to do a lot of different things. While Google is renowned for its consumer cloud application franchises, and its market-leading digital advertising platform, its skills and assets are applicable to an extraordinarily wide range of uses. Maps are a case in point. Google released Maps in mid-2005, a competitor to the already well established MapQuest application, relying on the same licensed NavTech and TeleNav map data used by GPS device makers like Garmin and TomTom. Google’s first innovation was integrating satellite photo images from its Google Earth application with its Maps. Google then launched its own fleet of data recording vehicles to wean itself from the licensed map data, collecting a far more extensive data set along the way, including panoramic 360 degree images which were subsequently added to Maps as Street View. The proprietary mapping data was combined with comprehensive image files and meticulously scrubbed for errors and inconsistencies to create a data base that is reputedly more than 20 petabytes in size and updated on a daily basis. Recently, Google added data culled from its legion of mobile users to provide insights on traffic density, average speeds, and other real-time stats relevant to travelers, augmented by its acquisition of popular mobile app Waze. Maps has become a invaluable differentiator for Google’s integrated cloud apps and an important vehicle for local advertising, a promising new monetization channel for the company.

This is a template for new business development at Google. Find a data and computationally heavy problem. Acquire any needed special skills or market entries needed. Launch the product small. Iterate quickly and relentlessly, applying lessons learned and skills gained, while leveraging the infrastructure to the hilt. Acquisitions and investment initiatives that may seem extraneous to outsiders have a purpose in pursuit of these “Google-y” opportunities to disrupt business models and define new consumer experiences by exploiting the company’s towering core competence in the cloud.

Exh 11: Notable Acquisitions by Google, Last 9 months

The Next Opportunity Set

Many of Google’s investment moves are clear advances on specific new business ideas. The YouTube acquisition in 2006 was an obvious example of this – adding an iconic web brand with a fast growing database of video files to be stored, indexed, searched and streamed from Google’s dominant distributed data center platform. In retrospect, the success of this combination is a no-brainer, but many observers of the time expressed skepticism that Google would get value for its $1.6B purchase.

The same skepticism has been raised for other Google initiatives and acquisitions (Exhibit 11). The company’s investment in self-driving cars was a joke for detractors – until it wasn’t a joke anymore. Today, every major automaker is working on self-driving technology, but Google is ahead of the pack with a head of steam and the advantage of its computing leadership. The Google Glass experiment was also looked on as something of a joke, until every consumer electronics company on the planet began launching e-watches and other “wearable” devices. The Calico initiative – lightly mocked as Google’s war on death – will apply big data muscle toward unlocking the secrets of aging, a noble goal and a high value use of those vaunted computing resources.

The Nest acquisition was easier for outsiders to parse – networked devices in the home leveraging shared data to make families safer and more secure. Of course, many observers then looked to link it back to Google’s presumed core business and posited value in using data about personal movement within the home to sell ads. Not only is this creepy, but it is almost certainly NOT Google’s intention for Nest. Rather, Google will leverage its infrastructure to make Nest’s products more useful to consumers and businesses within their intended purpose, extending this by applying the Nest approach to a broader set of opportunities in home and facility management – the internet of things boosted by thoughtful device and human interface design, along with the anticipation of user needs, situation assessment, and cross-device coordination that Google can bring to bear.

Domo Arigato, Mr. Roboto

Google also invests to build its institutional skills – which may then be used to attack a wider set of opportunities. A clear example of this is the $3B deal for DoubleClick in 2007, which greatly enhanced Google’s ability to capture data on user behavior and use it to target ads – obviously valuable in building its dominant position in digital advertising.

The recent acquisition of DeepMind Technologies brought global thought leaders in the field of “deep learning” computer systems into the Google fold, adding to the company’s already impressive roster of computer scientists specializing in aspects of Artificial Intelligence software. Deep Learning already underlies Google Now, and has begun to permeate most of Google’s other services as the company moves to anticipate user needs and evaluate ambiguous conditions without human prompting. These techniques will have wide applicability in data driven approaches to medical research, health care diagnostics and delivery, energy management, product marketing, security, personal financial services, and many other potentially lucrative fields. Other companies, notably IBM with its Watson project and Facebook, are also making aggressive investments in deep learning with their eyes on these same opportunities, but arguably Google, which has been the employer of choice for the best of the best in computer science for more than a decade, already has a serious leg up.

Google’s interest in robotics – it has acquired 8 different robotic companies over the past 8 months – has also drawn curious glances. Under former Android head Andy Rubin, the Google robot initiative incorporates a wide range of robotic disciplines – machine vision, precise object manipulation, autonomous movement, environment sensors, etc. The advanced nature of Google’s robots – a robot from its Schaft recently dominated a Pentagon sponsored contest for humanoid robots designed to test their ability to replace humans in dangerous situations – makes the area particularly fascinating. Combined with deep learning and other AI techniques, and leveraging the data and processing power of the Google infrastructure, an almost limitless set of opportunities is available. Indeed, imagine a self-driving vehicle combined with an autonomous unit able to sort and deliver packages. Good luck with those helicopter drones Mr. Bezos.

Not in My House You Don’t

Google also invests to counteract future threats. The Motorola Mobility deal, widely panned at the time, can only be understood through this lens. Taking on a venerable mobile device brand while simultaneously promoting the Android platform to its rivals was always a conflict, and the cable set-top-box business was seriously at odds with Google’s cloud-first philosophy. Three years later, both of those units are gone – sold off for almost half of the original purchase price for the business. Why do the deal then? First, Motorola’s patents propped up Google’s defenses against litigation by rival platforms. Second, it has been widely rumored that Motorola was primed to pursue its own litigation against other members of the Android ecosystem and perhaps, to shift its allegiance to Microsoft’s Windows Phone platform. Buying the company kept all of this under wraps, kept peace in the ecosystem at a crucial competitive juncture and stiffened the defense against Apple and Microsoft. Given the sale price of the device businesses, the cash on hand, and Motorola’s tax loss carry forwards, the real price paid for this security was likely less than $3B, and probably well worth it.

Exh 12: U.S. Smartphone Market Share Trends – March 2009 – December 2013

The original Android acquisition can be seen in this light as well. Given that Google gives the operating platform to its ecosystem partners for free, Android itself is a clear loss leader for the company. Still, without Android, Apple may have built sufficient control of the smartphone market to force alternatives to Google’s lucrative mobile apps on its users (Exhibit 12). A billion Android users are a nice fall back if Apple decides to launch its own search engine. The same logic is behind Google’s investments in fiber networks for a handful of regional markets – offering gigabit/second internet and TV for a big discount and prefunding the build-out with installation contracts gets the attention of the cable MSOs that monopolize broadband services in most parts of the country. The recent court action invalidating the FCC rules on net neutrality may spur Google to make more such investments going forward, including possible bidding for wireless spectrum in upcoming auctions alone or in partnership.

Money – That’s What I Want

Contrary to popular opinion, Google is not wedded to advertising as its primary monetization device. In 4Q13, Google generated $1.65B in non-advertising sales (ex MOT), up 99% YoY and constituting more than 10% of quarterly revenues. In that number are non-MOT device sales (primarily Chromecast, and Nexus), Google Play revenues (largely app purchases, media downloads, and All-Access streaming), Enterprise IT sales (cloud hosting, Google Docs), and other direct revenue streams. We expect all of these categories to grow well above Google’s ad revenues for 2014.

Exh 13: US Ad and Promotions Market Forecast, 2013-2014

This is NOT to say that we expect ad sales to tail off this year. To the contrary, we believe that the shift to digital observed in overall 4Q13 ad spending is a real trend that will accelerate rather than plateau, and that Google is well placed to capture its share of that growth via mobile platforms (search, YouTube, Maps, etc.), on-line video (YouTube), social networking (plus) and local services (Maps, Local, Search). We have noted that measured media advertising is a better than $500B global market, with marketing and promotions perhaps doubling the addressable market to more than $1T (Exhibit 13). With the total worldwide digital ad spend still less than $120B, we see a long runway ahead of Google and its peers to continue to reap share from traditional advertising and promotion budgets.

However, the non-advertising opportunities for monetization are equally exciting. Within devices, smartphones and tablets are already a $200B market, with ample growth coming at the low end of the price range (Exhibit 14). Throw in home electronics, residential/commercial security and control systems, notebook computers, health monitoring systems, and other device categories both extant and imaginable, and Google’s addressable device market may be doubled, depending on where and how it chooses to compete. E-commerce is another potentially fruitful area – strong growth in the universe of Android users is rapidly expanding the ranks of potential Google Play customers, while the list of available products continues to improve and broaden. Google has also explored taking its e-tail ambitions broader, partnering with traditional retailers to offer delivery in selected markets as a channel alternative to big, bad Amazon. Down the road, we suspect self-driving vehicles and robots may play a big role in Google’s future plans for this service (Exhibit 15).

Exh 14: Global Smartphone Shipments by ASP range

Enterprise IT is also very promising for Google. Amazon Web Services (AWS) has established clear leadership in providing cloud hosting the enterprise market, with Microsoft an able competitor, but Google has an enormous weapon in its best-in-class infrastructure, and if it decides to make Compute Engine a strategic priority, it has the potential to build a hosting business that could bring in tens of billions of dollars in annual revenues several years down the line (Exhibit 16). Along the way, Google could make more of its unique market leading analytics tools available to commercial customers on a SaaS basis, a clear and present danger to the $14B business intelligence software industry. At a more direct level, Google Docs, Chromebox video conferencing, and other business productivity applications could also gain further traction.

Exh 15: Selected Google Market Opportunities

Google is well positioned to address a wide variety of cloud-delivered consumer services, from streaming video, to telemedicine, personal financial services and many other seemingly farfetched opportunities. The near ubiquity of Google branded services (search, Android, Chrome, etc.) and the company’s infrastructure and software skill set leadership are big advantages in levering into such disparate market opportunities. While there are obvious competitive and regulatory hurdles to overcome in pursuing any of these sorts of opportunities, Google has shown that it is willing to play the long game and has the resources needed to stick it out to the end.

The moon-shots may also play out to Google’s favor. Google Glass may be offered as a commercial product before year end. Self-driving vehicles seem likely to appear before decade end, and many of the safety and convenience subsystems associated with autonomy may be available in high end cars before then. Sophisticated robots, Google-style, may find a place in industrial and public safety markets sooner rather than later, with consumer applications waiting for the imagination needed to discover them. Glucose monitoring contact lenses may be the start of a market for health-related micro-sensors and personal monitoring systems. Calico may find viable pathways toward retarding the aging process – imagine the value in that.

Exh 16: Worldwide Cloud Infrastructure Services Forecast, 2010-2020 CAGR: 42.6%

What is Google?

A year ago, we labeled Google “the biggest hammer in a world full of nails”, but it is more than that. It is the company with the best positioning and the most valuable assets to address the opportunities being created by a massive TMT paradigm shift. Along the way, we expect Google to grow its revenues to several times its current size and to continue its exceptional profitability and cash flows. Before too long, we believe Google can be the most valuable company in the world. Will it last forever? Nothing does, and undoubtedly, years from now, some other company or companies will do to Google what Google is doing to others now. But until then, investors should sit back and enjoy the ride.

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