Silicon Valley's next big thing

Google is now such a large beast that you have to dig deep into its earnings to really understand the incredible job it is doing in terms of digital advertising revenue.

Google, which released its Q1 earnings overnight, reported respectable year-on-year growth of 19 per cent resulting in $15.4 billion in revenue for the three months ending March 31. Much of the growth is being driven through Google’s owned and operated properties -- namely Google.com and YouTube -- which combined saw revenue growth of 21 per cent.

Network revenue -- revenue Google generates from serving advertisements on third-party websites -- continues to demonstrate sluggish growth, just 4 per cent for the quarter, as the company moves away from relying on external parties for revenue and continues to grow a stronger business within properties it controls.

The challenge Google faces is that it is now simply so large in terms of scale of revenue, its growth rate can underestimate the amount of advertising revenue it is managing to gobble up. A 19 per cent growth rate in comparison to Facebook’s 45 per cent-plus, or Twitter’s 60 per cent-plus, may seem low. It isn’t. When it comes to growing advertising share, Google is without competition.

Over the last 12 months Google has generated $57.99 billion in revenue. In the prior year, it generated $48.35 billion. What this means is that over the past year, Google has managed to pull an extra $9.64 billion out of the global advertising market.

To put this into perspective, this increase alone double the total revenue for the past 12 months for Yahoo! and more than number two player Facebook generated in the same period.

This means each year Google is adding revenue on a scale never before seen in the media world.

It also means that Google is responsible for a large component of total digital advertising revenue growth. EMarketer estimated that digital advertising would increase in value by 15.1 per cent in 2013, up $16.4 billion to $102.83 billion. Based on these estimates, Google is responsible for 55 per cent of total digital advertising revenue and is responsible for 58 per cent of the entire category’s growth.

There is no other media channel in the world with so much share concentrated in the hands of one company.

The digital advertising growth story is a positive one but the upside is firmly concentrated in the hands of a chosen few. In 2013 Facebook managed to pull an additional $2.71 billion out of the market compared to the year prior. If you add Facebook’s revenue gains to Google’s, between the two of them they have extracted $12.35 billion in new money. Based on EMarketer’s estimates between Facebook and Google the two companies are responsible for 75 per cent of the entire digital advertising industry’s current growth.

The market’s lukewarm reaction to Google’s earnings demonstrates the unreasonably high expectations investors place on the company’s performance. Some $9.6 billion in revenue gains over the past 12 months and the stock drops 3.2 per cent in after-hours trading. The day before, Yahoo posts a 1 per cent revenue decline (with total revenues just over $1 billion for the quarter) and the stock is up 6.2 per cent (admittedly in large part due to Alibaba).

Investors seem to be constantly looking for the next Silicon Valley growth story. In my opinion it’s still right in front of them. It’s Google Inc.