Google: With Great Branding Comes Great Risk
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
From Merriam-Webster Dictionary
Not many companies reach the point of market dominance that their names become added to the English dictionary. Back in 2006, Google Inc (NASDAQ: GOOG) reached that threshold and the word “google” was added to both the Merriam-Webster and Oxford English Dictionary. Google (lowercased) became a transitive verb and people can now properly go googling. How is that for brand recognition? Yet, being added to the dictionary carries a very dangerous risk.
Escalator, Zipper, Aspirin...
Chances are when you hear the word “escalator,” you think of moving stairs and not the company Otis Elevator. Similarly, people associate the word “zippers” with fasteners and not BF Goodrich, and “aspirin” with a pain killer and not Bayer. However, there was a time when you would have thought of Otis, when you heard the word “escalator.” The word “escalator” is a former trademark of the company Otis and, formerly, other companies who were in the business of making escalators could not name their products escalators. They had to use names like Moving Stairs, Motorstair, or Electric Stairway. However, a process called genericity took place and Otis lost an important trademark. According to Harvard University,
“Trademark rights can also be lost through genericity. Sometimes trademarks that are originally distinctive can become generic over time, thereby losing its trademark protection... A word will be considered generic when, in the minds of a substantial majority of the public, the word denotes a broad genus or type of product and not a specific source or manufacturer.”
Why is this important? Trademarks are essential for businesses. It provides a way for customers to associate a product with the source and a way for companies to retain customers. Successful companies often carry the majority of their value in trademarks. For example, Coca-Cola, McDonald's, and Microsoft (NASDAQ: MSFT) thrive on strong trademarks. People associate Coke with Coca-Cola, McDonald's with, well, McDonald's, and Windows with Microsoft. According to Interbrand, Coca-Cola, McDonald's, and Microsoft have estimated trademark values of $71.9 billion, $35.6 billion, and $59.1 billion, respectively.
How is this relevant to Google? Google also has a strong trademark. When people think of online search they think of Google. According to Netmarketshare, Google has a dominant 80% global market share in search. Baidu, Yahoo (NASDAQ: YHOO), and Bing have 7.71%, 6.67%, and 4.75% market share, respectively. However, why is Google so dominant? Is it due to Google’s superiority or reputation? I say reputation. Google arose when most search engines were still clunky. I still remember using Ask Jeeves for school projects and hoping for a relevant result. Eventually, Google came about and I have not switched since using it.
Yes, Google is also a superior search engine. Comparing search results for “Mars,” Google, Bing, and Yahoo came up with 1.18 billion, 663 million, and 658 million results, respectively. However, the leading results were almost the same. Put it this way, if someone switched the layouts of Bing or Yahoo and Google, most people would probably not notice the difference in search results. Hence, Google is reliant on its trademark for its market dominance.
Thus, Google is facing a big risk. If the public starts to associate the word “google” to mean a general internet search not necessarily using the Google search engine, Google could end up following other genericized trademarks like escalator, kerosene, and zipper and lose all trademark protection. I can already picture a company like Microsoft running advertisements like “Bing, a place to google information.” Google depends greatly on its brand for search and losing its trademark will likely result in lost search dominance.
I should probably address the idea that this is old news. Yes, the fact that Google was added to Merriam-Webster and Oxford English Dictionary is old news. However, the risk of losing trademark protection and genericity (especially for a successful brand) increases with time. For example, dictionary.com defines google as “to search the Internet for information about (a person, topic, etc).” Oxforddictionaries.com defines google as “search for information about (someone or something) on the Internet, typically using the search engine Google.”
Furthermore, the whole danger of genericity is important to Google investors. Google is a great company and its dominance in the internet is very strong. However, when analyzing the company, investors should take into account the danger of genericity. As time passes, the probability of genericity, especially for successful companies, increases. Google is already at risk because it was added to Merriam-Webster and Oxford English Dictionary.
Currently, the internet has plenty of room to grow because only about one third of the world population is using the internet. While this is good news for Google, investors should resist the urge of projecting Google’s growth rate too far into the future. Moreover, even if Google does not lose its trademark protection, if the public begins to use “google” generically, Google’s brand value will erode. Thus, when using discounted cash flow analysis for Google, investors might want to consider incorporating declining revenues after 20 years. Currently, the word "google" is still associated with Google. However, as time passes there is a greater probability that the trademark "Google" will become genericized and lowering revenue estimates in later years would take that risk into account.
Google is a very strong company. However, due to the popularity of the Google search engine, Google faces a very high risk of genericity. Google relies heavily on its brand and reputation in internet search and losing the Google trademark carries a high probability of also losing search dominance. When valuing Google using discounted cash flow analysis, investors should take into account the probability of genericity. This probability increases with time.
Currently, Google’s trademark is estimated at $55.3 billion (Interbrand). Even if Google does not lose its trademark protection, any generic use of the word “google” adopted by the public will erode this value. Google is a very good company (one that I might invest in the future), but investors should take into account its genericity risk.
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