Taking Stock After Google's Dizzying Drop

Search, Regardless of its Recession-Proof Reputation, Is Still a Supply-and-Demand-Driven Market

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Google, the seemingly infallible, can't-lose, everybody-wants-to-be-it company, has lost almost $100 billion in market capitalization since Oct. 31. Its stock has dropped from a high of $747 four months ago to $440 today.

Should you worry?

Not unless you bought the stock at $700. Google's not so much the internet ad industry's canary in the coal mine as it is, well, to advance the aviary analogy, an ostrich or a peacock -- it resembles no other in its category.
John Battelle, chairman-CEO of Federated Media
John Battelle, chairman-CEO of Federated Media Credit: Bart Nagel

"I don't think there's any company that's valued so highly that they could have a commensurate drop," said John Battelle, chairman-CEO of Federated Media and author of "The Search." "It's already an outlier so probably not indicative [of any greater interactive-media woes]."

However, he said, it indicates how emotional people can be about what Google's stock represents. "They hope this whole industry will go to the moon, and they put that hope into the stock," he said. "Then they worry they've been overly optimistic, and they take it out on the stock."

It's true that Google has represented the resurrection of an interactive advertising industry from the ashes of the dot-com rubble. (Google was born in 1997 but didn't start ramping up its revenue model until 2001 and 2002, when the economy began to recover.)

What exactly is to blame for Google's drop in value has been debated over the past several weeks. In late February, a ComScore report suggested paid clicks were dropping; shortly after, measurement companies and search-engine-marketing firms disputed that. (ComScore did a little backpedaling after its report moved the market.)

Then there are the ever-increasing worries about whether Google is starting to feel the pinch of an economic downturn. Search marketing has long been touted as recession-proof, but what few initially realized was that while demand might grow, supply doesn't necessarily increase in the face of recession.

Search, like all advertising, is a supply-and-demand-driven market. The demand in this case is the marketer dollars most assume will be increasingly reallocated to areas such as search, where sales are easily measured. But the supply is clicks and conversions -- and if people cut down their purchasing, that could very well decline.

Late-game adjustments
Google doesn't offer guidance to the Street but has said it is working to show fewer but more-relevant ads and reduce the clickable areas around the ads. The idea is that such tactics will result in higher ROI for advertisers and increases in price.

The drop likely is due to a combination of factors; for one thing, the stock was too highly priced in the first place. (That recent $100 billion loss in market cap is the equivalent of Disney's and Yahoo's market caps combined.)

The Street has a mean stock-price target of $689, according to Barron's, which itself is bearish. And the search market continues to look strong over the next few years: Search marketers expect to drop almost $16 billion on search ads in 2008, up from just over $12 billion last year, according to the Search Engine Marketing Professional Organization. And more than three-quarters said they could tolerate further rises in keyword prices.

Kevin Lee, chairman of search-marketing agency Didit, said eventually search dollars will have to plateau, but that's why the major engines continue to add other forms of advertising to their arsenals. Google, for one, is adding video, graphical and search-within-a-site boxes to its search results in an attempt to squeeze more ad dollars from the typical search.

Company staying on course despite bumps in road

No matter what happens with Google's stock price, the company is sticking by the message in its 2004 IPO Founders' letter: It will not let outside pressures tempt it into sacrificing long-term opportunities to meet quarterly market expectations. In other words, a little lagging stock price won't keep it from realizing its multimedia ad plans.

A few weeks ago, Google President-Advertising Tim Armstrong gave agencies a glance at part of those plans: an online dashboard that would let agencies track and aggregate data from all the places their ads were running -- the portfolio approach to media buying. Google is also working to build products that ease agency pain points such as online-ad trafficking and local spot media buying.

While Google's vision to help streamline much of the inefficiency and paper pushing involved in ad buying probably sounds pretty good to a holding-company chief concerned about the bottom line, it looks decidedly different to the rank and file employed because of such inefficiencies. However, Penry Price, VP-North American sales, said agencies just need to adopt a new model, and should look to the financial world for inspiration.

Like Goldman Sachs, agencies should see their future roles as "trusted advisors to solve complex problems and make recommendations," he said.

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Contributing: Bradley Johnson
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