Saturday, March 18, 2006

Google Growth

The past few weeks have seen some interesting stories about Google surface.

First, their CFO announced that revenue growth may indeed slow. Then some internal forecasts appeared in analysts' packages by mistake, causing the stock's price to tumble again. There were all sorts of comments from the Street about how fast growth is perhaps causing mistakes in execution at the firm. Though minor, the ones that appeared were cited as perhaps portending more serious problems at the firm.

I don't know that I agree with all of gravitous inductive reasoning. However, something else occurs to me about Google. As my partner and I discussed the recent company gaffes, he commented about their extraordinary growth and pioneering so many world-shaking information-handling initiatives.

Railroads in the 1800s, and airlines in the last century were both known for causing great turmoil as they rose to prominence. They also were known for having been terrible investments, in the aggregate. A lot of British investors lost a lot of money building and owning American rail lines. Similarly, many investors lost bundles in the fashionable business of airlines.

My point is, companies which participate in truly landscape-changing initiatives sometimes cause so much havoc, and require such vast amounts of capital to do so, that they wind up being mediocre investments. While being fashionable, and drawing competitive responses, sometimes investors continue to assume a later payoff, when, in fact, all the changes have drained value from the entire competitive landscape.

Radically new approaches to problems, like rail, air, and Google, sometimes seem to be so efficient that they fail to earn consistently superior returns themselves, even as they gut older business models and their value-adding structures.

The next few years should be quite interesting, as we see how Google performs over the longer term.

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