Pondering Google 2.0: How will it get to $100 billion in revenue?

Pondering Google 2.0: How will it get to $100 billion in revenue?

Summary: Google is projected by Wall Street to have annual revenue of $15.7 billion in 2008 and $19 billion in 2009.

SHARE:

Google is projected by Wall Street to have annual revenue of $15.7 billion in 2008 and $19 billion in 2009. But the ambitions are higher--more like $100 billion in annual revenue. The big question: How will Google get there?

That question is being addressed in a report by Stephen Arnold, of ArnoldIT. Arnold made the rounds at Bear Stearns providing briefings about his report. In the report, Google 2.0: The Calculating Predator, Arnold analyzed Google's patent pipeline and linked them to business strategies. Simply put, Arnold is trying to figure out what Google wants to be when it grows up.

We haven't read Arnold's report entirely (it'll cost you $640) but enough details have emerged for discussion. We also conducted a brief interview with Arnold to fill in some gaps.

Arnold wrote in the report's preface:

"My main thesis is that Google’s technology is special, and it makes the company a supra-national entity. Soon lawmakers will realize that Google will be challenging to regulate and control. Google’s biggest vulnerabilities are its own management who must prove it is equal to the task of creating a billion dollar company without self-destructing. Meanwhile, competitors, unable to respond technically, are making an effort to crush Google with litigation. "

A few takeaways for discussion:

 

Extrapolating Google's potential business strategies takes guesswork.

In a brief about his report Arnold wrote the following:

"Traditionally, it has been difficult to get to grips with what Google is. The company is not specifically secretive; rather, it is unforthcoming about its aims, plans, strategies and ambitions. "Provide access to the world's knowledge" is about as focused an articulation of mission as one can get from the Google people. And, from a quick outside perusal, the company seems to dabble in all sorts of technology areas and buy up all sorts of high-tech companies, which makes measuring progress or evaluating strategic orientation somewhat difficult."

Arnold then set forth with a look at Google's patents to try to divine a strategy. He looked at Google's mathematics-based business, a Web-based OS, database patents, tracking technology, text processing and brokering between advertisers.

This discussion quickly puts me in a circular argument. Are Google's potential businesses (and all the patents that go with them) the result of excess capital or some divine strategy? If the answer is yes, is it possible that Google doesn't have this huge strategy beyond selling ads in as many nooks and crannies as it can find? If Google really has this uber strategy wouldn't it have been articulated? A few years ago, an executive knowledgeable of Google said to me that the company often does things just to keep people (notably Microsoft) guessing and on its toes. Those comments come back to me as this Google 2.0 discussion begins.

Will math rule the world?

After an Arnold briefing, Bear Stearns analyst Robert Peck talked of how Google is trying to build a "hypercube." "While Google is attempting to build a 'hypercube,' people generally see only the cube representing search and advertising," wrote Peck in a recent research note. The general idea is that Google is building this Borg-ish thing that no one quite understands. The leap of faith is this: This cube will be big--really big.

This approach has given Google anywhere from a 9 to 24 month technology lead over its competition, said Arnold in an interview. "I don't see much technology competition for them," said Arnold. "If they can avoid fighting among themselves they're good for 15 to 20 years. Just like Microsoft replaced IBM Google is replacing Microsoft."

Here's Arnold's diagram outlining Google's better mousetrap.

arnold.png

Arnold in his brief about the report said Google boils down to arithmetic. In one passage Arnold wrote:

"Google is a company of engineers and mathematicians, not a company of sales, promotion and legal wizards. Mathematics is the foundation of Google's wizardry and, as analyzed by Arnold in this new study, the Googleplex is a wondrous construct that gives Google a major competitive advantage in a wide variety of possible fields: enterprise services and computing, web and enterprise search, publishing, banking, advertising, telecommunications. The Googleplex can crunch, analyze and extrapolate rapidly, intelligently and economically from extremely large quantities of data. The owners of such a machine can test and probe a variety of markets, and their existing base income from advertising gives them billions of dollars to use in their probes and explorations."

In a press release, Arnold said:

"Google has superb engineers, but it has better mathematicians than any of its competitors. Math makes a crucial difference in how Google operates and how it delivers certain services better, faster, and more economically than its competitors at this time."

Arnold continued:

"Google is perhaps today’s best example of a company built on calculative thinking. Characteristics of calculative thinking include efficiency and logic, not emotional reactions. An elegant proof of a theorem bundles intelligence and beauty into a construct of great beauty. Google obviously needs revenue to expand; therefore, markets with inefficiencies that can be made more efficient with Google technology are logical targets. Analog telecommunications companies, for example, become prey to Google’s more efficient technology. Like a grand master in chess, Google uses strategic feints to obtain its objective—winning the game."

Will Google dominate the world due to its math prowess? I'm skeptical and here's why: Quantitative black boxes can blow up. In fact, quantitative hedge funds are blowing up all over the place. These guys--astrophysics types managing money--thought they had risk licked. The stock market begged to differ.

Now let's extrapolate that event to business strategy. Google may be wondrous and able to boil everything down to an algorithm. The problem: Business is based on human interaction. Sales, promotion and legal stuff matters. Emotional intelligence matters. Good management matters. Are Google's algorithms infallible? Today, it sure doesn't seem like it. Long term, everything is fallible. It's telling that Google's math skills have scared as many partners as they have landed.

Google's big initiatives bring big competition.

Peck summed up Arnold's report as the following:

"An analysis of Google's patents suggests there are six areas Google may be focusing on, including telecom (looking at wireless applications, including search-without-a-search, relationships with KDDI, Sprint, Apple, talk of 700 MHz bid), entertainment (online video), publishing (in a position to disintermediate publishers), enterprise applications, e-payments (poised to become a transaction/exchange environment on top of CheckOut), and next-gen advertising (multimedia ad widget that can be delivered on any platform)."

For those following Google closely none of those business strategies are news. But it is very early in the game. Have Google's radio and print efforts yielded much yet? How about its nascent TV ad efforts? And enterprise applications? Most folks have Microsoft Office. Wireless hasn't played out at all yet. E-payments? eBay's PayPal is formidable. Of those key areas, the only slam dunk is widget advertising.

Can Google sell its technology? Sure. Would it be successful? Maybe. Arnold wrote about Google's Bigtable database, which was "designed to overcome the limitations of databases now available from IBM, Microsoft, and Oracle." Sounds very interesting. But to be a business Google would have a tough time usurping the big database vendors.

So how will this play out? I followed up with Arnold on his views about Google tackling new markets. The big question focused on how much of a stretch was the $100 billion in revenue target. Arnold argues it's not a massive stretch. He reckoned that each of those six primary markets along with Google's organic could represent $30 billion in revenue. Using that logic, Google would only have to be successful at two of those six new markets to get to $100 billion in revenue in a few years.

"There are six areas of focus for Google and each area is good for $30 billion in revenue. If Google knocks off two of the six it will be in the $100 billion range in four fiscal years. By the end of 2010 Google would be in shouting distance of $100 billion in revenue and hit it in 2011," said Arnold.

Bottom line: If Arnold is correct Wall Street is seriously underestimating Google's future revenue.

Another wildcard is whether Google could take its technology, say Bigtable, and turn it into a product. Arnold said it's possible with a few caveats.

"Officially Google would say no when it comes to making Bigtable a product. But it's really a no, maybe. Google may get pulled into something. They will do whatever the clicks tell them," said Arnold.

Arnold explained that Google's product launch would be a pull approach. Say a big partner or government agency asked Google about Bigtable capability. Google would probably do something as a pilot. And Bigtable could evolve into a service. "If it feels good and others ask for it Google would do it," said Arnold.

Execution must be near perfect to get to $100 million in annual revenue.

To tackle those aforementioned big markets, acquire companies at a rapid clip, keep its technology lead and expand into market outside of search and advertising Google will have to execute well. Google's business today is advertising. In the future, new businesses will share that advertising link, but bring new complications.

In many respects, this Google discussion reminds me of Microsoft in the mid-1990s. At that time, Microsoft was assumed to thrive in any market it entered--game consoles, business intelligence, databases, music players etcetera. Microsoft has made inroads in new markets, but hasn't dominated by any stretch.

Can a company grow at such a clip without growing points? Can a company evolve without hitting an awkward adolescent phase? Can Google, which hired too many folks in its most recent quarter, install the processes and people to be nimble even as it becomes a bigger company?

In an interview Arnold acknowledged the math as management hurdle for Google. "Mathematicians are not good at management. That's the number one reason they may fail. Who's your worst enemy? It's you. This is a big issue where Google has to manage the science of management as well as mathematics," said Arnold.

If Google stumbles rivals could close a competitive gap, but it won't be easy. Another point open for discussion: Business strategy worship tends to follow market cap. Cisco's business model was worshipped in 1999 and then the bust happened. Suddenly, there were stories on how Cisco's model wasn't so hot. Today we're loving Cisco again. Pick your company (Dell for instance) and that ebb and flow plays out over time. If Google stumbles in a few years, we'll be reading how a bunch of math wonks led it astray.

Topics: Cisco, E-Commerce, Google, Microsoft

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

18 comments
Log in or register to join the discussion
  • Google must write its own OS

    Or possibly invest heavily in a Linux desktop OS. If they followed Apple's lead by putting a great GUI (no friggin command line anything) on top of Linux as Apple did BSD they could completely change the competitive landscape.
    No_Ax_to_Grind
    • They could be a force.

      They have money to spend. A concerted push to put a complete alternative OS on tier one OEM machines could have a huge impact. They are probably contemplating it. There is a drawback though, adblock on FF goes to the heart of their revenue stream.

      I see the gPhone (if it comes to pass, and will likely be wide open for development unlike the iPhone) taking off. I don't trust web apps, especially since their latest GMail security problems, but they seem to have the resources and talent to maybe get a portion of the business pie.

      In any case, they certainly have shaken up the marketplace, keeping everyone (MS, Yahoo, etc) on their toes.

      5Xs revenue, it's going to take a while.

      TripleII

      P.S. PCLinuxOS, you won't ever need to use the command line unless you want to. Full multimedia out of the box. Google would do well to start with that as a base (or Mandriva, off which it is based).
      TripleII-21189418044173169409978279405827
    • Apple has Terminal....about as command line as you can get! (NT)

      NT
      nomoremicrosoft
    • Something like the Windows Run->cmd (C:\Windows\system32\cmd.exe)?

      [b][/b]
      B.O.F.H.
    • Why must power and money include the desktop?

      They are already in control of something MUCH more powerful and important, which
      will always be relevant and important, unlike the desktop which will likely be
      something entirely different within a few decades.

      Information.

      Not strange at all that they are being scrutinized by so many.
      Mikael_z
      • Contrary to what you have heard

        The desktop is not going anywhere for a very long time.
        No_Ax_to_Grind
  • Acquisitions

    Google is already a huge company. But to reach epic standards where they're raking in $100 million is obviously going to take more than just monetizing existing or new markets. Acquisitions are obviously going to have to play a major role along the way. And I'm not just talking little Web 2.0 startups, I'm talking hardware manufacturers and/or telecoms (I think Google is headed in the latter direction moreso than even the former.)

    And even a Google making all the right moves could take a LONG time to reach that level of revenue. Despite it's stock moving at a glacial rate relative to much smaller (but still giant) companies, Microsoft's earning power is as strong as ever raking in over $44 billion last year with projections of around $50 billion this year. So we're talking about a company more than double the size of a strong Microsoft (making it one of the largest companies in the world alongside energy/chemical companies, auto manufacturers, etc.) Lofty projections indeed.
    RustyShackleford
  • How do all huge corps become mega corps?

    Acquisition, acquisition, acquisition. And when you're done with that, trim the deadwood and start all over.
    jasonp@...
  • RE: Pondering Google 2.0: How will it get to $100 billion in revenue?

    Okay. Now I fully understand how Google will get to $100 billion in revenue. But more importantly, I get how Arnold will get to a $10 million bonus soon:

    Step 1: Come up with an outrageous revenue number for Google.
    Step 2: Become famous. Drive business for the company (or better, start his own.)
    Step 3: Well, there is 2 paths.
    Step 3a: If Google gets to $100bn in revenue, this guy becomes the biggest genius ever (in retrospective analysis). And gets to make probably much much more than my conservative $10 million estimate.
    Step 3b: If Google fails to get to $100bn in revenue, he follows Henry Blodget and writes a book.

    So, here is what I am predicting. Arnold makes $10 million in personal income before Google makes $100 billion in revenue.
    anshu_sharma@...
    • LOL

      Good one
      john.gerard@...
    • Bad analysis

      Arnold's analysis assumes they are like every other business, then he states they need to hire business types so that they can reach $100 billion. Is it just me or do I detect a flaw in his logic.
      shanedr
  • RE: Pondering Google 2.0: How will it get to $100 billion in revenue?

    I think that unless online ad spend increases to greater
    than $100 billion online, that Google will not make
    those numbers any time soon. This guy's report tries
    to make it sound like Google is a bunch of geniuses
    that have a master plan.. However, I think many of
    these new Google inventions post-financing are them
    grasping at straws to try and recreate additional
    serveices that can match their search and adsense
    programs, which are the true backbone of Google's
    revenue model. I would pay $10 to read that guy's
    report LOL.

    <a href="http://aoleonthemartiangirl.com">Anime
    Girl</a>
    G Brent LeVasseur
  • RE: Pondering Google 2.0: How will it get to $100 billion in revenue?

    Excellent article. Google will not rule the internet or the world. They will get VERY big but will follow the same route as all the other VERY big companies. History is a very good window in to the future.
    john.gerard@...
  • RE: Pondering Google 2.0: How will it get to $100 billion in revenue?

    It won't, Larry.

    Not without a radical change in direction, leadership, business tactics, corporate ethics ... and a renewed, and serious, respect for copyrights.

    I'll bet you on this one. The cat is getting out of the bag on these issues and the mice are getting restless.

    Did you read the report made this week by the Public Policy and Ethics group (NLPA). They have learned Google's evil game plan as well.

    Tsake a look at the response I sent to Mary Jo Foley at ZDNET earlier today.

    George
    gpaine
  • RE: Pondering Google 2.0: Not the goal

    It's the journey, not making money that matters. Advertising support is how they pay the bills. Acquiring and cataloging data and doing it better than anyone else is what drives Google. What appears to be obvious to those at Google and not to the crowd is that the more data mining works the more money they make and the more data mining they can do.

    The worse thing that could happen to Goggle is to hire business types. Then they will be just like everyone else and concerned with the bottom line. Google is concerned with the top line; and that top line is why Google grows and grows.
    shanedr
  • Short answer:

    They won't.

    Long answer: Mathematical economics is illegitimate.
    Omch'Ar
  • Top 3 Issues for GooG

    1- Google should invest in providing cheaper(almost free) high speed access especially wireless (the dark fibers project is a good move) because this will allow them to create a platform where them and third parties to deliver richer and newer set of apps.

    2- Position 'Search' as the next OS: This must be understood in light of the semantic web and how key search will be to next-generation apps

    3- A more aggressive and pervasive partnership drive (with telcos, PC sellers, on the web and with governments initiatives, etc.)
    Basheir Hashim
  • GoogleSimple

    The Economist recently wrote a study of Google which highlighted the company's:
    - Investment in a large, flexible, infrastructure base;
    - Revenue-generating leadership in on-line marketing; and
    - Broadly-based technical expertise and development directions.

    It costs a lot less than Arnold's $640.

    It is pretty clear from what has been said about Arnold's report, and from the Economist, that Google has four Strategic thrusts:
    - Use the infrastructure to try SaaS developments out and see if they work;
    - Acquire interesting technology companies that play to their SaaS / Web Services, strengths - and experiment;
    - Expand into adjacent markets as a priority; and
    - Look for new niches (as they found with search) that will respond to technical innovation.

    It is also pretty clear that this is a woolly strategy. But that is surely par for the course when a company is run by technologists rather than seasoned managers?
    Stephen Wheeler