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Full Text: Open Debate

Is Google overrated? Tapped out? Due for a fall? Two experts take sides.

Donna Bogatin

“Digital Markets” blogger at ZDNet; founder of VIPOffers.com and UrbanSavings.com

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Danny Sullivan

Editor-in-chief of SearchEngineLand.com; Internet-search market analyst for 11 years

Resolved: Google is overrated.

Bogatin: By its own acknowledgement, Google is not a well-rounded company. Google declares it does “one thing really, really well”: Search. Google is dependent on search for 99% of its revenues, inspiring Wall Street to deem it a “one-trick stallion.”

Google’s search stallion has driven GOOG to a 400%-plus appreciation in just two years. Google’s stock price is not sustainable long term, and neither is its domination in search.

Google touts its PageRank software is “democratic,” retrieving the most “relevant” information on the Web. New, valuable Websites, however, are relegated to Google’s penalty “sandbox,” far from searchers’ eyes.

Search advertisers are put in the Google “black box” dark with AdWords auctions prompting them to bid up their own advertising rates. Google grows its oversized profit margins, and its market cap, at the expense of customer ROI.

Advertisers will not stay blinded by Google indefinitely and users will seek more comprehensive search results, elsewhere.

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Sullivan: I suppose TV stations aren’t well rounded for only broadcasting TV. One product is fine if it grows and has limited competition. Search is growing, moving into devices like phones and PVRs. Google’s a “search utility company” providing search services. It’s hard to compete–just ask Microsoft, which still has yet to catch Google.

Comparing democracy statements to how results can sometimes be gamed is fun. But other search engines share similar weaknesses in what they say and how they operate.

The proof is in the results. Google’s results are as good or better than the competition. Good is also good enough. If the results are good enough– and they are–people won’t seek alternatives. Beyond results, they trust Google and won’t seek out “stranger” competitors easily.

Black box pricing is disturbing. But oversized profit margins? Search ad ROI is far above other forms of advertising. Search marketers aren’t fools. They won’t buy what they can’t afford.

Bogatin: Google claims the “perfect search engine” and a pompous mission to “organize the world’s information.” Google’s ambitions are unrealizable, but dangerous. People may “trust Google” now, but “Google 2084” is close at hand.

Google is aiming for its “computer in the cloud” to house “the information that you use everyday” and is targeting every piece of data worldwide, including personal, private communications. Google has dibs on our email, office correspondence, financial spreadsheets, health records…and wants to hoard it all, “forever.” The vaunted Google “search utility” will know more about us than we will know about ourselves!

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Google’s manifest destiny takes aim at intellectual capital worldwide, or “all books in all languages.” Google envelopes its “Library Project” in “fair use” bravado, while seeking to “digitally scan every book in the world” for archiving at Google in perpetuity.

Google is en route to becoming the world’s librarian, and every individual’s data keeper.

Sullivan: Google as scary big brother is a fun debate but entirely different from this one–is it overrated and overvalued?

Still, if the scaremongering or pessimism is true, then Google’s plenty valuable. Having so much data opens up huge possibilities for commercial products and services.

Overall, people want to find things on and off the web. Google its helping them do that. That’s largely a good thing. Ask the millions who voluntarily depend on Google every day.

There are indeed real concerns about the sanctity of our data. Those concerns potentially may slow Google’s growth, especially if there’s a serious data spill or leak. Then again, plenty of other companies have had leaks and not been devalued.

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Google could do more to address concerns. But we really need laws to better protect our search privacy and other data. Despite its power, Google can’t provide those laws.

Bogatin: People are eager to dismiss talk of Google’s encroachment on the intellectual and personal assets of the world as “scaremongering,” and that is what Google is banking on, literally.

GOOG is fueled by an unsustainable business model: The selling of ads against content that it does not own, that it has not compensated IP owners for and that it has no explicit legal right to exploit commercially. The “millions” of businesses and individuals “voluntarily” forking over their proprietary content and personal data to Google “every day,” sell themselves and their assets short, while Google’s market cap balloons.

Google’s free ride is being challenged by content owners around the world. Google corporate AdWords customers are challenging Google’s dominion over their own properties, protesting that Google has become a “toll keeper” on brand names.

If “search marketers aren’t fools,” then Google’s growth is destined to slow, along with its share price.

Sullivan: Google’s “free ride?” Flip it around. Google’s the lifeblood of many sites, sending them huge amounts of traffic at no cost.

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Google ads have made some sites possible economically, even allowing them to graduate to selling advertising directly. A miniscule number of content owners are seriously “challenging” Google. The vast majority are part of the Google ecosystem, riding the Google bus. That’s entirely sustainable.

If you rent your land to a billboard company, is that company exploiting “content” it doesn’t own? No. There’s a partnership that both sides earn from. Google’s an Internet billboard company, a pretty efficient one.

The real worry isn’t that content owners will burn their billboards in protest at Google. Rather, they may seek other companies willing to pay more. That could slow Google’s profits. But I still expect Google to find plenty of companies to rent it space, plus find space in new areas.

Bogatin: Google tells Wall Street it can find “new ways to monetize all the time,” claiming no “obvious ceiling” to growth, its share price says otherwise, however.

GOOG trailed the S & P in 2006; Google shares appreciated 11% versus 14% gains for the S & P 500 index. In 2007, GOOG will be negatively impacted by a continued decline in the growth rate of Google’s earnings per share. Analysts forecast a 36% growth in EPS for Google in 2007 ($12.63), versus its 78% rate in 2006 and a 172% rate in 2005. As Google’s earnings growth slows, its share price to earnings ratio will also fall; GOOG’s 2006 PE of 50 is likely to dip to 36 in 2007.

A GOOG 2007 fair value of $454 (36 PE X $12.63 EPS) is below its 2006 closing price. Bottom Google line? Search for a better investment opportunity in 2007.