Is it that you don't see a "margin of safety" or a "moat" protecting the economic castle.
Internet based businesses follow what is known as a "power law" function and I believe what one fails to see with Google is a network effect, but not in the same way as Ebay's network effect. Google has, in fact, tremendous pricing power for ads since the more people who use Google to search, the more valuable Google's search engine becomes to advertising.
Next, Google's business model is not very capital intensive, but it is op. ex. expensive. As such, incremental amounts of capital can be invested in this business at extremely high Returns on Capital.
The reason why Google got to where it is today is thanks to Yahoo!. Yahoo! pursued a portal strategy and, as such, let Google handle its search functionality. Much like the barbarians eyeing the Roman Empire, Google saw the returns and entered this business also. What one fails to see is that the advertising market is huge and that more people are spending more of their time on the Internet rather than other forms of media such as Tv, Radio, Newspapers, and the value chain is shifting and with that shift, more value will flow online. |
