Long-Term Investment Decision 4 pages

Long-Term Investment

Google operates in the online advertising business. However, when the company had its moment with regulators it was in the “search engine” business. This effort was undertaken by both U.S. And EU regulators (Crawford, 2012). The issue at hand was not whether Google had legitimately come to dominate Internet searches — it built its dominance on technological superiority rather than through acquisitions — but whether or not the company was using this dominance to promote its other ventures. This is still an odd question, given that these other features are still not where Google or any other company earns money. However, the case is similar to that which Microsoft faced for bundling Internet Explorer in with Windows. While many companies offer browsers, nobody can make any money on them anymore.

Crawford (2012) notes, however, that Google is moving towards using personalized technology, vertically-integrated ecosystems (using the Android operating system and Chrome browser) and other techniques to win business. The rapid change in technology in the industry means that there is considerable room for new entrants to get into the business with an innovative product.

It is also worth noting that online advertising is what Google does for a living. This is the source of the vast majority of its earnings, and in this industry Google does not have a monopoly. It is the largest player, but Facebook has a large and growing market share, and Yahoo, Microsoft and others are still strong competitors. Furthermore, Google wins its business through superior collection and management of data, not through abuse of monopoly power. This is why the antitrust moves against Google have failed thus far in the U.S. (CBS, 2013).

If Google was to try to merge with another major competitor in online advertising, however, it is likely that it would have that blocked. The reason is that while there are other competitors, Google’s market share means that there is some concentration in the online advertising business. Google’s 2013 market share is estimated to be 48.2%, with Facebook at 15.3% and smaller amounts for the other firms in the industry, including YP, Pandora, Twitter, Apple, Millennial Media and others (eMarketer, 2013). The Department of Justice uses a measure of industry concentration known as the Herfindahl-Hirschman Index as one of its main measures to determine whether a merger can go through. This measures the concentration in the industry.

The current HHI for online advertising is 2598.7, which makes the industry a “highly concentrated market.” Thus, it depends on the takeover target as to whether anything would be done. Changes of less than 100 of HHI are not usually scrutinized. If Google purchased Millennial Media, which has a 1.1% share, the new HHI would be 2705.99, so even this would not receive an automatic pass. But this increase is just above the 100 point threshold and might be allowed to pass, particularly if evidence suggests that Google is losing market share and that going forward there will not be much change in the market position of the combined firm. A purchase of, say, Pandora, would result in an HHI of 3042.78, which would almost certainly not be allowed. Thus, what we see is that the industry is just over the threshold of being highly concentrated, which brings about a high level of federal scrutiny (DOJ, 2013).


The rationale for government intervention in the markets is that the markets work best for the consumer when there is competition. The idea of antitrust laws was introduced in response to the abuses of companies that had bought their way to monopoly power. A company with a monopoly, especially where there are high barriers to entry, is apt to abuse its monopoly position to the detriment of the consumer. Thus, the consumer will be compelled to pay high prices and the company will have no incentive to innovate. Antitrust legislation was introduced to maintain properly functioning competitive markets.

Capital Project Expansion

Given that Google is unlikely to engage in a merger within its own industry do to antitrust considerations, capital expansion seems the most likely. There is actually not much risk to Google here. There are about 56 billion reasons on the company’s balance sheet that it does not have the same risk characteristics as normal firms with respect to capital expansion. It is not that the risk isn’t there — all projects face risk relating to the economy, the market, the regulators and competitors — it is just that Google can undertake any project it wants. If the project fails, there is almost no impact on the company’s financial health. One of the biggest challenges for many companies — finding the right people for a new project — is not even a big concern for Google since it is one of the most desired employers and has all the money in the world to attract talent.

Convergence of Interests

Profitability is achieved when management understands the different factors that affect the company, both in terms of its internal dynamics and the external environment. Google has generally pursued success via technological leadership, and that strategy is supported by strategic human resources policies that allow it to attract the best talent. Heavy investment allows the company to remain in a position of technological leadership. The major question for Google is whether it can continue as a company with basically only one revenue stream. Essentially, Google dominates the online advertising business, but if it lost competitive advantage then it might well lose the business. For the stockholders, this would be devastating. Thus, Google has tied itself strictly to the one strategy and the one industry.

Management works on behalf of the stockholders in order to pursue a high level of performance, and this is why Google is searching for ways to extend its market leadership. By developing a web browser and mobile operating system, Google has found new ways to acquire data that will help its advertising business. This is actually the area where the antitrust regulators should have been looking. While the company does not make any money on Chrome or Android it has in those two products market leadership in two of the tools that consumers use to interface with the Internet. Google offers these products for free, something it can afford to do because of its enormous supply of cash. Using the ability to undercut competitors on price to build market share that in turn helps to reinforce its dominant market share in online advertising is if nothing else against the spirit of antitrust legislation. However, at this point the threat from the U.S. Of antitrust action is limited, so the company is merely acting in the best interests of the shareholders when it does this. Should antitrust actions emerge from the Google business model, then it is quite likely that the management would need to take defensive action in order to preserve shareholder wealth. With a stock price over a thousand dollars (the IPO was $85 in 2004) it looks like Google’s managers have done a pretty good job of enhancing shareholder wealth.


CBS. (2013). FTC: Google does not violate antitrust laws. CBS News. Retrieved December 12, 2013 from http://www.cbsnews.com/news/ftc-google-does-not-violate-antitrust-laws/

Crawford, S. (2012) Is Google a monopoly? Wrong question. Bloomberg. Retrieved December 12, 2013 from http://www.bloomberg.com/news/2012-07-08/is-google-a-monopoly-wrong-question.html

DOJ. (2013). Horizontal merger guidelines. U.S. Department of Justice and the Federal Trade Commission. Retrieved December 12, 2013 from http://www.justice.gov/atr/public/guidelines/hmg-2010.html#5c

eMarketer. (2013) Google, Facebook solidify hold of U.S. mobile ad market. eMarketer.com. Retrieved December 12, 2013 from http://www.emarketer.com/Article/Google-Facebook-Solidify-Hold-of-U.S.-Mobile-Ad-Market/1010172

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