Google (GOOG) Operating Division Valuations, Undermining Market Cap

GoogGoogle (GOOG) has a market cap of $150 billion. The company runs twenty properties each of some significant size from YouTube to Google Earth. Some of these operations probably add to Google’s overall value.  However some divisions sharply decrease the value of Google by bringing in very little revenue, increasing the search company’s expenses, and narrowing its margins. 24/7 Wall St. looked at their twenty divisions to determine how much each of these are likely to add or subtract from Google’s market value based on their estimated income and expenses. Google’s corporate administration and sales staff costs are calculated at a $1 billion a year for the purpose of this analysis. These costs push down Google’s market cap by about $7 billion based on the stock’s expense to market cap ratio of 1 to 7.5.

Hitwise, the audience measurement company, recently posted the percent of Google’s overall traffic that went to each of its twenty major properties in June. Google’s search segment got almost 69% of visits followed by YouTube at 10.3% and Gmail at almost 8%.

Google bought YouTube in 2006 for $1.65 billion. It is not clear that it is worth that much now in terms of a contribution to Google’s overall market cap. The Wall Street Journal recently wrote that YouTube would have about $200 million in revenue this year. But, it is certainly an expensive property to maintain, due to its bandwidth, storage costs, and legal expenses.

Some of Google’s properties are not listed among the company’s most visited properties, or if they are, they are relatively small. Google bought Doubleclick for $3.1 billion earlier this year, so we have valued it at its purchase price even though display advertising growth has slowed significantly over the last two quarters. Google’s online payment property, Checkout, also has a value. Its modest market share and short time in the market compared to Ebay PayPal probably means it is not worth more than $1 billion.

Google would make the argument that many of its properties help keep users loyal to Google as a company by offering visitors a number of services. This is based on the belief that the Google search business is helped by the fact that it supplies some products for free. That may be true, but it is hard to prove. This  view of the value of Google’s other businesses is not taken into account here.

The analysis of Google properties starts with the smallest and goes to the largest.

The list:

Docs1. Google Docs and Spreadsheets is a little less than one-tenth of a percent of Google’s traffic. This answer to paid products from companies like Microsoft has a number of useful and free features. The spreadsheet product is probably as good as anything on the market. A product like this requires a modest amount of server space for Google to support it. If its expenses are .1% of Google’s annual operating costs of about $6.8 billion, it probably knocks down Google margins by a few million and costs the company $50 million in market cap based on Google’s expense to market cap ratio.

2. YouTube UK is approximately 1% of YouTube’s overall share of Google’s visits. Since YouTube has very high costs for video storage and bandwidth, it probably costs $500 million to operate. That would put YouTube UK costs at $5 million. A rounding error when looking at overall value.

3. Google Finance should be a nicely profitable operation. According to comScore it has over one million unique visitors a month. It is about .1% of Google’s overall visits according to HitWise. But, Google Finance does not run any advertising, not even Adsense, Google’s own targeted text ad product. Google Finance is paying for stock quotes and data from several sources. Storing the charting features for historical data is not cheap. Running this unit probably costs $15 million and dings the parent company’s market cap by $110 million.

Pack4. Google Pack includes the Adobe reader, Star Office, Skype, Spyware Doctor, Norton Security Scan and several of Google’s own desktop products. Most, if not all of the software in the “pack” that comes from other vendors is probably offered Google free for promotional purposes. This section of Google is about one-tenth of one percent of all visits. Server and download costs are probably minimal to Google. Not much to help or hurt Google’s market cap here.

5. iGoogle Partnership Page is .14% of Google’s visits. It is a section of the company which cannot be cheap to operate. The individual items in this product that allows people to set up Google “personal homepage” number in the hundreds. Each of these has to be stored on Google servers for access. Meshing and distributing all of these tools has to be computation intensive. Running this part of the Google operation could easily cost $50 million and cut Google’s market cap by $350 to $400 million

Earth6. Google Earth is about .15% of the parent company’s visits, but it is almost certainly a much larger portion of the firm’s cost base. Google claims that over 400 million people have activated this product worldwide. Google Earth has a number of complex software features which are expensive to maintain on servers. These include 3D renderings of a tremendous number of buildings around the world, swoop navigation which allows 360 degree views of buildings and streets, and the ability to watch sunrise and sunset from almost any position in the world. The storage and rendering of all of this satellite and photo data has to be immensely expensive, probably at least $150 million a year. Shave $1 billion of Google’s market cap for Earth.

7. Orkut is just short of .2% of Google’s visits. It is Google’s social network. Orkut traffic is tiny compared to Facebook and MySpace but does well in some countries outside the US including Brazil. The costs of maintaining a modest-sized social network are probably not much more than $50 million, a $350 million hit to Google’s market valuation.

8. Google Book Search also accounts for just less than .2% of Google’s overall visits. The expense associated with Google’s book and library digitization and categorization project is probably more for the process of scanning paper text in than in storing the data. Books in the public domain can be downloaded in full. The service will take years to build and the physical work is exceedingly expensive. With an estimated cost of running this unit of $25 million, it shaves about $200 million off the company’s market cap.

9. Picasa, Google’s web photo storage and editing systems, probably does not cost much to operate. Most of the tools were created over the last few years. The process of sharing and editing  photos is fairly simple. Storage for photo images is relatively cheap. This business may cost Google $15 million to operate, costing the company about $100 million in market cap.

10.  Google Calendar is another inexpensive operation which accounts for .2% of Google’s visits. The software is unusually simple and requires modest server storage on Google’s part. An annual expense of $10 million to $15 million costs Google $75 million in market value.

11. Google Accounts is probably one of the least expensive of the Google properties. It is simply an aggregation and management point for Google subscribers who use AdWords, Blogger, Gmail, Talk, Groups, or one of the other Google services. Supporting this probably costs no more than $10 million, a $75 million market cap subtraction.

12. Google Groups is a section of hundreds of thousands of topic discussions, sophisticated message boards which cover subjects from universities to Fiji to health. The service has about two million members. The technology behind message boards is fairly simple. Google Groups is just much larger than most similar operations. Storage and web access costs for hundreds of thousands of people discussing hundreds of thousands of subjects could cost as much as $40 million, or close to $300 million in market cap.

Blogger13. Google Video is just below .5% of Google’s visits. The content tends to be more professional that what a user will find at its larger stable mate YouTube. The videos at this site are often much longer, some running over two hours. The service is about one-twentieth the size of YouTube, which would put our estimate for Google Video costs at $25 million, taking about $175 million off the company’s total value.

14. Google News now pulls information from over 4,500 news sources. The data base is indexed and updated every fraction of a second. The news archives are huge, and growing. The indexing process by keyword and Google page rank must be immensely complex. This section gets over 1% of Google’s visits. Based on the size of Google News and it ability to update information on almost any topic real-time, the cost of this operation could easily be over $100 million, taking Google’s market value down by as much as $700 million.

15. Blogger may be Google’s single biggest profit center after its core search business, although it makes the money indirectly. Depending on who is counting, there are as many as 150 million blogs in the blogosphere.  Blogger, because it is free and easy to use could certainly have a third of these. That would require Google to offer substantial storage space. Offsetting that, Google promotes its AdSense service as a way for bloggers to make money. A modest number of the blogs  which use the Blogger platform actually use Adsense. The number could be as low as a million. Since most of these blogs get very modest traffic, Google probably gets no more than $50 from the average blog. But that is $50 million a month, or $600 million a year. If Blogger costs $100 million to operate, Google clears $500 million. That would add about $3.5 billion to Google’s market cap

Maps16. Google Maps has to be terribly expensive to operate. The service gives users access to Google satellite and terrain products. Google Maps also has a complex system for reporting traffic flow on streets, roads, and highways.  This process requires getting remarkably detailed information, and for traffic data, it is close to real-time. This is over 2% of the traffic to Google and could easily cost $125 million to run which would take $1 billion off the company’s market cap.

17. Google Image Search allows users to look through millions of indexed photos and drawings. It also searches images by size. Photos do not take up a huge amount of storage space and the search technology behind the property has been in place for some time. This operation is over 6% of the traffic to Google, and that means that the server use is very high. Put operating costs at $50 million and the subtraction to market cap at $350 million.

20060226gmaillogogoogletm 18. Gmail should be one of Google’s few revenue-producing properties. It represents nearly 8% of Google’s traffic. The service uses the company’s AdSense service extensively. Gmail gets about 75 million unique visitors a month, which sounds high. Not all of these people have Gmail accounts, but most are likely to. If the AdSense eCPM on the Gmail users is $1, Gmail brings in nearly $10 million a year. The costs to store all of that mail, maintain the database, and serve 75 million people for multiple visits is probably very high. Put that number at $100 million. Gmail loses $90 million costing Google nearly $700 million in market cap.

Youtube19. YouTube brings in about $200 million in revenue, according to several sources.  It represents over 10% of Google’s traffic. Storage and bandwidth costs for the operation must be huge.  24/7 estimated the costs of YouTube at $500 million in its description of the value of YouTube UK. That means YouTube loses at least $300 million and costs $2.25 billion in market cap.

20. Google, the search business itself, has a great deal to overcome. With the market cap subtraction for overhead at $7 billion, the text advertising business which drives almost all of Google’s revenue has to make up that hit. The market cap substractions driven by Google’s other properties total $7.8 billion. That is offset by a $3.5 billion improvement from Blogger, $3.1 billion from Doubleclick, and $1 billion from CheckOut. The net takedown in market cap from Google’s properties, excluding search, comes in at $200 million. Add overhead and the number reaches $7.2 billion. That leaves the value of Google’s core business at over $157 billion, or 105% of the company’s total market value.

The market has been concerned that Google’s free services and other non-search applications do the company little good if it cannot charge for them. Based on how they undermine the shareholder value of Google, that is abundantly clear. Google has one business and a number of hobbies.

Douglas A. McIntyre

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