Could Google disappear? Analysts warn of Google’s demise if the search engine fails to improve mobile advertising

  • Google shares dropped nearly 10 percent over  the course of two days, wiping out more than $24 billion from the company’s  value
  • Plunge in share prices followed weak  earnings report showing a 20 percent decline in profits compared to the same  quarter last year
  • Analysts say the drop in earnings is driven  by a an advertising problem that will continue to worsen for Google

By Hayley Peterson, Hugo Gye, Louise Boyle and Peter Campbell

PUBLISHED:10:21 EST, 20  October 2012| UPDATED:10:43 EST, 20 October 2012

 

As Google suffers a catastrophic nose-dive in  its market value, analysts are already predicting its demise as the world’s lead  Internet search engine.

‘[Google] could disappear in five to eight  years and disappear in the sense that Yahoo used to be the king of search,’ said  Eric Jackson, the founder and managing member of Ironfire Capital, a  technology-focused hedge fund. ‘Now, for all intents and purposes, Yahoo has  disappeared,’ he said on CNBCFriday.

Google’s stock value plunged a hair-raising  10 percent this week — wiping out more than $24 billion from the company’s  value — after its third-quarter earnings report, which revealed a 20 percent  drop in profits over last year, was accidentally released three hours earlier  than planned on Thursday.

The profit losses were driven by a decline in  advertising revenue, according to its earnings report. The amount that  advertisers paid Google on a click-per-click basis fell 15 percent.

Advertising revenues are falling — and will  continue to fall — for Internet companies because consumers are increasingly  migrating to mobile applications and advertisers aren’t willing to pay as much  for a mobile ad.

‘I keep saying Facebook isn’t the only one  that has a mobile issue — Google does, too,’ Colin Gillis, an analyst for  Boston Consulting Group, told CNBC.com. ‘If you are  an investor in Facebook, mobile is priced into earnings. I don’t think mobile in  Google is priced in.’

Advertisers aren’t willing to pay as much for  mobile advertising because the platform is not as effective as advertising on a  desktop or laptop computer, analysts said.

Other companies, such as Apple, will get  ahead of Google in attracting advertisers to their mobile applications and  Google’s dominance will eventually start to shrink, Jackson predicted.

‘I think that there is a big opportunity  right now for someone to step forward and assert themselves for a new way of  getting people information for doing search in a mobile world,’ Jackson said. ‘I  don’t think typing in a blue box is the ideal format for a mobile world. And I  think the best opportunity out there to displace Google in this area is probably  Apple’s Siri.’

For now however, despite its drop in  earnings, Google remains dominant in online advertising with a 74.5 percent  share of the U.S. search ad market, according to data from eMarketer.

Shares in Apple, the only technology company  larger than Google in market value, fell by around 2.8 per cent during trading  on Friday.

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Tumble: After crashing on Thursday, the share price fell even further when markets opened on Friday 

Tumble: After crashing on Thursday, the share price fell  even further when markets opened on Friday

Facebook, which is another technology stock  heavily dependent on advertising for its revenues, saw its shares fall by 0.5  per cent during trading.

The Dow Jones index of trading on Wall Street  dipped more than 200 points.

 

Google blamed its printers for releasing the  results by accident. Speculation was mounting on Friday night that Google could  make a legal claim against R.R. Donnelley, the company it pays to put out its  financial results.

Blunder: A press release was prematurely issued on Thursday with the line 'awaiting quote from Larry' in reference to Google co-founder Larry Page 

Blunder: A press release was prematurely issued on  Thursday with the line ‘awaiting quote from Larry’ in reference to Google  co-founder Larry Page

It was quickly obvious that a mistake  had  been made – the second paragraph of the filing said ‘PENDING LARRY  QUOTE’  instead of an actual quote from Google CEO Larry Page – but it  was not clear  why.

The company could have a negligence  claim to  recover any additional costs it incurred in responding to the  incident,  according to Reed Kathrein at U.S. law firm Hagens Berman.

But any shareholders looking to  recoup lost  investments would not have a legal case because there was ‘no fraudulent intent’ in the early release, he added.

Google’s troubles  were shared by the markets  as a whole – the Nasdaq market of technology  stocks fell by more than two per  cent, while the Dow Jones index was  down 1.5 per cent.

The  contagion also spread to Europe, with  Britain’s FTSE 100 closing 0.3 per cent lower and the leading French and German  markets both down nearly  one per cent.

Google later said on its blog that Donnelley had filed a draft of the document  without authorization.

Respected financier David Buik, who  has  studied the stock markets for 50 years and works for investment firm Cantor  Index, said: ‘Nothing has ever come remotely close to this.

‘The bubble has burst. After Google’s  meteoric rise something like this was always bound to happen.’

Trading in Google stock was halted when its  shares fell by nine per cent in  just eight minutes following the release of its  disappointing earnings  report.

Analyst at GFT Markets Fawad Razaqzada, told Mail Online: ‘The closing price was around $695 a  share – the  last time it was this low was as recently as September 13. So, assuming a  shareholder had bought before this date they would still  be in profit.

‘But if they had bought in the last  five  weeks they would now be sitting on a loss. Google’s shares also  traded around  these levels in November 2007, reaching a high of  $747.24.’

WHY WAS SO RELEASE OF  THE  RESULTS EARLY SUCH A DISASTER?

There’s an old saying that markets don’t like  surprises, and negative results being published early is a prime  example.

Even though the statistics are bad for Google  whenever they are published, the early release did not give the internet giant  the opportunity to explain why the figures were so disappointing or manage  market expectations.

Usually earnings reports come with a numerous  conference calls and briefings between the firm’s management and investors,  traders and journalists to give content to the figures an reassure the markets.

Without the briefings, the numbers are left  to speak for themselves.

The plunge prompted worries that a  second  dot.com crash could be on the way.

Google’s troubles coincided  with a steady  fall in Facebook’s share price and the ongoing struggles of newer start-ups such  as Groupon and Zynga.

Tech industry experts warned that the stark  fall in advertising rates could hit other Internet giants.

‘It was just too rapid a deceleration,’ said  Brian Wieser, an analyst at Pivotal Research Group commenting on  Google.

He said the results pointed to a weakening  online advertising environment  that would affect many ad-based internet firms,  adding: ‘Many of the  same underlying trends drive Facebook  advertising.’

The Google disaster came as Mark  Zuckerberg  openly acknowledged last month that Facebook’s stock market  launch damaged the  company’s image.

He told a tech conference in San Francisco:  ‘The performance of the stock has obviously been disappointing.’

One of the mistakes that Zuckerberg  pointed  out was that Facebook spent too long focusing on their HTML  platform for the  web as opposed to adapting and improving the product  for mobile devices which  he now firmly believes is the future of the  network.

He said that they underestimated ‘how  fundamentally good mobile is’ for their growth.

 

Larry Page graphic

THE PRINTING FIRM THAT COST  GOOGLE $24BILLION

R.R. Donnelley has become the world’s  large commercial printer in the last two decades, having bought up a string of  other businesses.

The Chicago-based firm has published Penguin  Classics and paperbacks from the Twilight vampire series as well as the  best-selling Idiot’s Guide books.

R.R. Donnelley & Sons Co handles  thousands of securities filings a year for corporate clients in a routine  process that is invisible to most investors.

Google issued a statement blaming Donnelley,  its filing agent, after the Internet search company’s quarterly results were  released by the U.S. Securities and Exchange Commission hours ahead of  schedule.

Donnelley shares lost more than 5 percent  after Google started pointing the finger.

The company did not respond to a call for  comment, but issued a statement to CNBC in which it said it was investigating  the circumstances of the release.

Best known as a provider of printing  services, Donnelley is also the top SEC filing agent in the country, handling  more than 75,000 submissions this year as of mid-October, according to  SECInfo.com.

Filing agents like Donnelley take paper  documents and convert them for submission to the SEC in the appropriate format.  The company also owns the filing portal EDGAR Online.

It ranks 249 in the list of Fortune 500 of  America’s largest corporations with about 58,000 employees.
Can they be sued?

‘Everyone is trying to figure out if there’s  any legal issue with respect to R.R. Donnelley. Google is halted, Donnelley is  down big-time on the news since they’re allegedly not supposed to have released  the information,” said Michael Matousek, senior trader at U.S. Global Investors  in San Antonio.

But one plaintiffs lawyer who sues companies  on behalf of investors said shareholders would not have a claim against either  Google or R.R. Donnelley because the earnings disclosure was likely a  mistake.

‘There’s no fraudulent intent here,’ said  Reed Kathrein with Hagens Berman.

R.R. Donnelley may not be entirely off the  hook with Google, however. The company could have a negligence claim to recover  any additional costs it incurred in responding to the incident, Kathrein  said.

Any potential damages against R.R. Donnelley  could be limited, though, by the contract between the two  companies.

‘I basically live on my mobile device,’  Zuckerberg said. ‘You know the  founders letter in the S-1? I wrote that on my  phone. I do everything on my phone.’

Analysts blamed the poor performance by  Google on its $12.5billion (£8billion) acquisition of  Motorola, the struggling  cellphone manufacturer which has been left  behind by its more fashionable  rivals.

Another problem for the company, which is  overwhelmingly reliant on  search-based advertising for its revenue, is that  advertisers have  slashed payments to the search giant as consumers turn towards  mobile  devices.

‘The core business seems to have slowed down  pretty significantly, which is shocking. I  don’t think anybody saw this,’ said  Sameet Sinha, analyst at B Riley.

‘The only conclusion l can look at is – search is happening more and more  outside of Google, meaning people are  searching more through apps than  through Google search. That could indicate a  secular change, especially  when it comes to e-commerce searches.

‘The big fear has always been – what if  people decide just to go straight to Amazon and do their searches? And  potentially that’s what could be  happening.’

Digital  marketing analyst Gary Buchan warned  that Google’s struggles could  continue over the short term, saying: ‘There are  probably a few ugly  reports in the pipeline yet.’

He told MailOnline: ‘Around 95 per cent of  Google’s income comes from its  advertising services, and while many big brands  are maintaining their  budgets and are being aggressive to win new customers in  the current  economic climate, a large proportion of the search engine’s  advertisers  are small businesses who are more exposed.

‘If they’re feeling the pinch, small  businesses have to cut costs somewhere and often the first thing to go is  marketing.’

But Mr Buchan insisted that such a ubiquitous  company would recover  eventually: ‘Bing might be dreaming otherwise, but this  is nothing more  than a blip.

Google’s third-quarter profits fell  20 per  cent on a year earlier to $2.18billion (£1.35billion) – well  below analysts’  expectations.

The dire results were due to be issued after  the markets had finished trading for the day.

But because they were released early,  investors were able to dump their stock and send the shares into a  nosedive.

Adding to the chaos, a major trading website  appeared to have crashed as investors sought to make sense of the  situation.

Google’s stock fell $68.19, or nine per cent,  to $687.30 before trading was halted to give shareholders a chance to digest the  news amid fears of a massive crash.

Troubled: The press release which sent Google's shares plunging - it was quickly obvious that a mistake had been made - the second paragraph of the filing said 'PENDING LARRY QUOTE' instead of an actual quote from Google CEO Larry Page 

Troubled: The press release which sent Google’s shares  plunging – the ‘PENDING LARRY QUOTE’ can be seen in the second paragraph of the  filing

Internal workings: Behind the scenes at Google's data centres. The company suffered a stock market plunge today after years of growth 

Internal workings: Behind the scenes at Google’s data  centres. The company suffered a stock market plunge today after years of  growth

The firm was losing more than $45 million for  every second it was being traded before the shutdown, which was  requested by  Google itself.
It is unclear how much of the plunge  was attributable to  the surprise leak of the report, as the  exceptionally poor results would almost  certainly have triggered some  fall in the firm’s value.
When trading  reopened around two hours  later, the share price failed to recover  significantly, crawling up one  percentage point to $695.00.
The fiasco  brings to an end an  incredible growth story that has seen the company’s worth  balloon to  become the most valuable technology firm after iPhone maker  Apple.The company did not explain why its  earnings had been so disappointing.

Surprise: The company's profits fell by 20 per cent year-on-year - way below analysts' expectations 

Surprise: The company’s profits fell by 20 per cent  year-on-year – way below analysts’ expectations

The report comes at a crucial juncture for  Google, which is preparing to  embark on a number of high-profile new projects  such as Google Glass, a  tiny computer fitted to a pair of spectacles, and the  $250 Chromebook  laptop which was released today.

The stock market disaster  overshadowed the  Chromebook launch in San Francisco with several  reporters running out of the  event to cover what had happened.

Google’s earnings report had been scheduled  for release at 4.30pm on Thursday, after the end of regular trading.

The PENDING LARRY QUOTE’ at the beginning of the premature press release, quickly went  viral.

It became a hashtag on Twitter as jokes ran  riot, along with #google and #oops.

Adding to an appalling day for the company,  YouTube, the video-sharing site  owned by Google, appeared to crash completely  for several minutes on  Thursday afternoon.

WHERE DID IT ALL GO  WRONG?

The main reason for Google’s fall in profits  is its $12.5billion purchase of Motorola, the struggling cellphone  manufacturer.

The division lost more than $500million over  the quarter, prompting aggressive cost-cutting measures.

However, the web giant is also suffering in  its core business, search-related  advertising, as the income received for every ad clicked on fell by 15  per cent in just three months.

The future may be no brighter for the firm,  as it is set to plow millions into new  ventures such as virtual-reality glasses and driverless  cars.

And some analysts have predicted a bleak  outlook as web users turn away from Google and start using alternative  search methods such as Facebooks and mobile  apps.

Mr Page later issued a comment  arguing that  the company had enjoyed ‘a strong quarter’, adding: ‘We had a strong quarter.  Revenue was up 45 percent year-on-year, and, at just  fourteen years old, we  cleared our first $14billion revenue quarter.

‘I am also really excited about the progress  we’re making creating a  beautifully simple, intuitive Google experience across  all devices.’

Google issued a statement blaming R.R.  Donnelley, the Chicago-based company that  prints its financial documents, for  the early release.

‘Earlier this morning RR Donnelley, the  financial printer, informed us that they had filed our draft 8-K earnings  statement without authorization,’ the  Google statement read.

‘We have ceased trading on NASDAQ  while we  work to finalize the document. Once it’s finalised we will  release our  earnings, resume trading on Nasdaq and hold our earnings  call as  normal.’

Donnelley’s shares fell by more than  five  per cent following the blunder as the firm blamed its screw-up on ‘human error’  and promised to launch an  investigation to ‘determine how this event took  place’.

Reed Kathrein, of law firm Hagens Berman,  said Google could have a  negligence claim against Donnelley to recover any  costs it sustained in  the incident.

The  Chicago-based firm has printed Penguin  Classics and paperbacks from the  Twilight vampire series as well as the  best-selling Idiot’s Guide books.

Over the past two decades, it has bought up a  string of other firms to become the world’s largest commercial printer.

On its website, Donnelley boasts of working  with more than 60,000  customers worldwide ‘to develop custom communications  solutions that  reduce costs, drive top line growth, enhance ROI and ensure  compliance’.

It ranks 249 in the list of Fortune 500 of  America’s largest corporations with about 58,000 employees.

Grim news: Google is attempting to turn its fortunes around with projects such as the driverless car and the digital glasses worn here by co-founder Sergey Brin 

Grim news: Google is attempting to turn its fortunes  around with projects such as the driverless car and the digital glasses worn  here by co-founder Sergey Brin

R.R. Donnelley also reported a downturn in  business earlier this year as more readers chose digitial devices over books.

It has closed plants and laid off workers but  share prices have slumped since 2007. Between May 31, 2011 and February stocked  dropped from $21.34 to $11.25.

In a regulatory filing, Google said it earned  $2.18billion, or $6.53 per share, during the three months ending in September.

That compared with net income of  $2.73billion, or $8.33 per share, last year.

The earnings would have been $9.03 per share,  if not for Google’s  accounting costs for employee stock compensation and  restructuring  charges related to the acquisition of Motorola.

Google’s filings with the Securities &  Exchange Commission  also revealed a worrying drop in the amount of money the  technology  giant receives for each advert users click on its  websites.

Its average income per click fell 15 per cent  over the three months to the  end of September, sparking fears that it is losing  traction with  advertisers.

Google has been working on non-search products such as its Google Glass concept for augmented reality spectacles.

 

Burden? But some analysts blame the expenditure on these  non-core projects for the firm’s fall in profits

The slowly growth in ad revenue is driven by  the growing use of smartphones and tablet  computers to access the  internet.

The ads are more difficult to see on  smartphones, in particular, so  marketers are not willing to pay as much for  those commercial messages  as they do for ads that are seen by people on  personal computers.

And people relying on mobile devices tend to  use specially designed  applications that are not as receptive to Google’s ads  as web browsers  are

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