net.wars: Buffetted by Google
by Wendy M Grossman | posted on 07 May 2004
Ordinarily, Warren Buffett and high-tech IPOs go together like Coke and carrot juice. Buffett famously does not invest in technology because he finds it too difficult to predict which companies and technologies will win out. Technologists in return generally turn up their noses at cutting-edge Buffett investments like brick, carpeting, and paint.
And then there's Google.
The Google IPO is providing a wonderful occasion for financial pundits. It heralds the start of a new bubble. Or it's a Sign that the serious part of the technology market has arrived. Or it's a bad investment because anyone - Microsoft, Yahoo!, AOL - could grab all of Google's users just by providing better search results. Or the Dutch auction method the company intends to use will signify a big change for Wall Street in general.
Many articles about the IPO complain that the IPO is hyped; I have yet to see anyone suggest that Google will be a good investment. It's as if all the Wall Street pundits are offended, probably because they won't get to report on/profit from a first-day run-up. The auction method Google - and Alibris and before them, Salon - is using, is intended to stabilise the initial price so that if people are willing to pay more the company gets the benefit, rather than first-day flippers.
Where Buffett comes in is that apparently he and his partner, Charlie Munger, are models Google wants to emulate, at least in terms of shareholder relations. Google has copied Berkshire Hathaway by issuing a shareholders' manual, and the prospectus talks about investing for the long term.
At last Saturday's Berkshire shareholders' meeting, Buffett and Munger, who take unedited questions from all comers for an entire day, were asked about the Google IPO. "These are two of the smartest young men in the country," said Munger, "and it's much nicer to be copied by people that smart." Pause. "And we now think they're a lot smarter." (Munger has the timing of a professional comedian.)
Buffett was careful, however, to explain the unlikelihood of finding really good bargains in an IPO that is conducted this way because it is a negotiated price. By contrast, the market, because it is subject to bouts of irrationality, may significantly undervalue a stock for a time. It is impossible to assess whether Google might be a good investment without knowing the price - and that won't be known until the auction has taken place.
So there are two separate questions. One: will Google's technology survive? Two: is the company a good investment?
Taking the first question first, I think the pundits who insist that Google's market share could be easily diverted to some other provider with better search results, are probably wrong. The game isn't about who has the best results any more - they're all pretty good now. I, like a lot of people, stick with Google because it has a clean interface, and the doodles make me laugh. And because it has so many other useful features. The game now is not about raw search results; it's about what can be done with those results.
As a business, like a TV channel, Google is a mechanism for delivering audiences to advertisers. Lots of other companies are doing paid search now, of course, but I can't think of one that has the persistent discipline Google has of ensuring that the ads don't annoy the customers. The difficulty of adhering to that principle when new shareholders enter with a lot of clout and demand a different strategy is why I think the company is wise to devise a share in which they retain control.
Where I think Google is going to have a hard time is in retaining trust. People have been suspicious of Google since around the time it bought up the Deja News Usenet archive. Even though that archive had been online and searchable for years, Google's acquisition of it became the occasion for a lot of people to complain about the potential privacy invasiveness of it. Google responded by making it possible for people to delete their own old postings. (And in fact, you have long been able to block your postings from the archives by using the X-no-archive header, brought in when Deja News and other services set up the archives.) The advent of Orkut and Gmail have spurred the voicing of many more fears about the power of linking search logs to detailed personal information about individuals. (I know I usually come down on the side of the privacy advocates, but the hostile reaction to Gmail has me frankly baffled. No one's forced to use it and, like the CFPer said when told he was free to encrypt his email, "Thanks for the storage.")
But these are problems Google faces as a technology company. The bigger it gets the more hostile and suspicious people will be. It will know it's achieved true success when people hate it as much as they hate Microsoft or used to hate AT&T.
As for the stock, wait and see if the eventual price has the built-in margin of safety that Buffett and his teacher, Benjamin Graham, always talk about. But at least we know we're not in Kansas any more: the company is, we now know, profitable, oh, frabjous day.
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net.wars: Buffetted by Google