Why Google Seems Wired and IBM Seems Tired

NEW YORK (TheStreet) -- One great way to analyze Google (GOOG) is to contrast it with IBM (IBM).

Both companies dominate a niche.

IBM dominates in mainframes, which are still sold for high-volume applications such as transaction processing. The relative value of that dominance, however, has been falling and will continue to fall, as the move to cloud computing accelerates.

Google dominates search, which means it dominates advertising. The relative value of that dominance keeps growing, and it's Google that has led the move to the cloud.

The impact of this has only come to investors in the last few years.

Both companies more than doubled in value from the depths of recession in early 2009 to the start of 2012. But since the first trading day of 2012, Google's shares are up 70% while IBM's are up just 4%. Investors are now willing to pay about 31 times Google earnings for a share of its stock. IBM's P/E is a market-trailing 13.

Google's money machine lets it engage in speculative development ventures such as  Google Glass. I laughed when co-founder Sergey Brin first started showing these, but they're starting to turn into a real product, with this week's Consumer Electronics Show appearing to be a "wearable electronics" festival.

Wearables are the next step beyond devices, and Google aims to dominate devices by being the low-cost provider. Although more than 80% of Americans now use the Internet, market researcher Asymco notes, only one in three do worldwide. 

By being the low-cost provider of both Internet services and devices, through its Android line, Google hopes to catch the largest share of global Internet growth. Outside China, which still tries to remain closed to Google's embrace, the company brings $1.20 to its bottom line from each Internet user every quarter, Asymco says

Just as IBM's marketing-first approach made it vulnerable to the first "kid with a clue" in the 1990s, the kid then being named Bill Gates, so that same approach, applied to software and services, has made it vulnerable to another kid with a clue in this decade, a kid named Larry Page, who turned 40 last year.

IBM's Watson supercomputer, which is designed around cloud analytics, can profit from Google's growth, but that's just a niche. Google itself is the main stream.

All this dominance comes at a price. Google's motives are under constant suspicion, much like those of the U.S. government. It's the same treatment given Coca-Cola (KO) two generations ago and, later, to IBM itself. Google's "Don't be evil" mantra, detailed on its company philosophy page, turns out to be impossible to put into practice.

Thus, nations such as France keep trying to enforce local laws on Google's global presence. Thus, China continues to discourage its people from using Google, supporting home-grown alternatives. Thus, Google regularly faces law suits over things its users do, such as the suit from an Iowa executive over what someone did on Google's Blogger service recently.

But these are the problems of leadership, problems IBM would dearly love to have. Step into a new model car and the amount of electronics in it will boggle the mind. Google wants to own that, too.

It's the kind of audacious move IBM can't even dream of making, because its field of dominance is smaller, and shrinking, while that of Google is enormous, and growing. Which is why Google earnings are worth more than twice what IBM's are, and the gap should continue to widen in 2014.

At the time of publication the author owned shares of GOOG and KO.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

 

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