Microsoft’s Don Dodge has a very interesting post on the value of each share of market in search, concluding that in fact, 1% of market share in the search market translates to $1B in market cap.
I’ll start off by saying that Don - who does not necessarily post every day - has some of the most insightful stuff off any blog, and as a member of MSFT’s emerging team and having been on five successful startups, is always full of unique and interesting comments and observations.
This post is no different, but one thing is slightly incomplete. When I first saw the numbers, I did some cross-multiplication to see what this all projected as value for MetaMojo.com’s business - both the vertical search and the video meta-search - and the number seemed a bit too high. Clearly it was off because despite the growing search query (via the growth of the Mojo Supreme network and the flagship WatchMojo.com property growth), we don’t have the ad network that Google has.
Obviously, a market leader like Google commands a hefty premium from the market…
Don uses the comScore data as well as Google’s financials. He does add that “for Google, 1% of market share translates to $3B in market cap, and for laggards, it’s $1B,” but while the post is really fantastic, that would in fact imply that Yahoo! - with 27% market share - generates $27B out of its $38B market cap due to search, the display business, the email accounts, Flickr, Del.icio.us, the relationships with the Top 200 advertisers in the world in the display business, all of that, that’s less than $11B.
I think Don is right (both in the post and in the comments) to argue that a #1 in the most lucrative market in online advertising commands $3B in market for every 1% of market share, but that number tumbles quite fast.
Post:
Each 1% of market share is worth at least $1 Billion in market cap. Google has 50 points of market share and a stock market cap of $150B, or $3 Billion for each 1% of search market share. Other competitors don’t win the same revenues and market multiples, but even at the low end, 1% of market share is worth over $1 Billion.
Comments:
Shan, That is precisely why 1% of search market share for Google is worth $3B, while 1% for the smaller competitors is worth *only* $1 Billion.
I did the math several different ways; bottoms up to show how you get to $1 Billion, and tops down with Google market cap divided by market share to show how they get to $3 Billion for each point of market share.
Of course, the reason why the premium tumbles very fast is the monetization, for one, and not so much the technology. Google’s monetization is heads and shoulders above Yahoo!’s, and the market knows that.
All to say, very interesting stuff, and reiterates why players like Wikia, Powerset and company are trying to compete in search despite Google’s near monopoly. Oh, in that same comment he adds, you almost get a sense that he’s trying to justify MSFT’s repeated attempts, largely in vain, to gain traction in the space:
So, your strategy is to fold up the tent and go home because you only have 5% market share? Typical management thinking. That is exactly why I wrote this post…to open people’s eyes to the huge revenues and profits available even for smaller competitors in search.
And, if we were speculators, you’d almost think that he was laying down the foundation to explain MSFT’s run at a major search engine to boost market value. Of course, I’m biased, as a YHOO shareholder.
Finally, his next sentence is critical in explaining the value of smaller players, be it in vertical or local search:
I agree that just slogging it out doing the normal things won’t change much. But, any of the smaller players could make a few key strategic acquisitions, roll up some smaller local search companies, spin out their stock as a separate tracking stock, and then marvel at their multi-billion dollar jewel.
Fantastic stuff. I sometimes wished more bloggers did posts like this…
Related:
:: 2020: US online ads = $100B and Google’s $375b market cap.
:: Will Google bypass MSFT in market cap by 2010.
:: Head to head: MetaMojo vs. the Other Search Engines
:: Google’s SOAP Search API Shutdown: A Lesson for Entrepreneurs
:: Yahoo!’s Credibility Problem with Geeks (or, why we stopped using Y!’s API, and they did not care)
:: Official Launch of Domain Specific, Vertical Search Engine MetaMojo.com
:: Google Borrows Page from MetaMojo.com (Really!)
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May 27th, 2007 at 2:36 pm
If you read his post carefully, one way he justifies the $1 billion is that each 1% is worth $100 million in revenue, and the market awards 10x that in capitalization.
I had a serious case of deja-vu-all-over-again when I read that. This is bubble thinking at its finest. There is no law of physics (or even law of economics) that tells you that search revenue is “worth” 10x in market cap. That may be the temporary metric of the day, but in 2003, the market didn’t think that. Arguably, given what lay ahead, the 10x revenue was even retrospectively justifiable, but today, with keyword prices saturating, it is a lot harder to justify that.
This is not to argue with his fundamental point. I want competition in search (and I would add, in operating systems, in office suite, in …) so I want more companies trying. But his valuation arguments are based on having imbibed a little too much bubbly.