ComScore released their April 2007 search market share numbers showing that Google increased its market share lead to about 50%. Yahoo has about 27%, Microsoft 10%, AOL 5%, and Ask.com has 5%. That got me thinking. Should AOL and Ask just give up...hopelessly behind with only 5% market share? In a word...NO!
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.
Lets do the math - That was easy at a macro level, but there is more to it. Lets dig deeper. First lets look at the ComScore data for total searches performed (USA) in the first quarter of 2007.
- January 2007 - 6.9 billion searches - Google did 3.3B of them
- February 2007 - 6.9B searches - Google did 3.3B
- March 2007 - 7.3B searches - Google did 3.5B
So, Google did 10.1 billion search queries in the US in the first quarter of 2007. Now lets look at Google revenues of $3.66 Billion for the first quarter of 2007. The simple math is $3.66B in revenue divided by 10.1B search queries equals $0.36 per search. But, that would be comparing US searches to total revenue, so we need to do a little more math gymnastics.
Breaking down Google revenues
International revenues were $1.71B or 47% of the total. So, US revenues can be estimated at 53% or $1.95 Billion. OK, we are almost there. We also need to break out the AdSense advertising revenues.
AdSense serves ads to other web sites. When a user clicks on an ad the advertiser pays Google a CPC fee and Google splits the revenue with the site owner. Google’s partner sites generated revenues, through AdSense programs, of $1.35 billion, or 37% of total revenues. Here we need to make an assumption that AdSense revenues were evenly distributed across the US and international markets.
US Search related revenue - We know that US revenue was 53% of the total, or $1.95 Billion, and we know that AdSense accounted for 37% of total revenues, leaving 63% related to search. So, search accounted for 63% of the $1.95 Billion US revenues or $1.23 Billion.
Revenue of $0.12 per search query - Now we can compare total US search revenue of $1.23B to total the 10.1 billion US searches, which yields $0.12 for every search performed. You could argue that all of Google's revenues derive from search. If they didn't have search they wouldn't have ANY of the other revenues. Taking that approach and comparing US revenues of $1.95B and dividing by total US searches yields $0.19 in revenue per search.
Each 1% of search market share is worth over $100M in revenues - Here is the math. There were 7.3 billion searches performed in March of 2007. One percent of that is 73 million searches times $0.12 revenue per search or $8.76M per month. That translates to $105.1M in annualized revenue.
The stock market values 1% market share at over $1 Billion - Google (NASDAQ: GOOG) stock sells for more than 10 times revenues. There have been several acquisitions over the past few months that have also been valued at in excess of 10 times revenues. Using this multiple, that 1% of market share that generates $105M in revenues is worth over $1 Billion in market cap. Google gets a higher market multiple, so their 1% of market share is worth $3 Billion.
So now we all understand why Yahoo, Microsoft, AOL, Ask, and a host of others are fighting hard for every 1% of search market share. The search business generates huge revenues and profits...even for competitors with just a small market share.
VCs are investing big bucks trying to find the next Google. New comers like Powerset and Hakia would be quite happy with 2 or 3 percent market share although they have aspirations of much bigger things. Do the math...it is staggering.
UPDATE: Be sure to take time to read the comments to this post. Readers have contributed lots of interesting points and insights. Please join the discussion and add your comments too.