• Global transition towards an on-line world; Google is positioned to take advantage both domestically as well as abroad with a strong brand name and impressive product list

• Strong leadership and management that have maintained company culture since inception

• Innovative and new to market products that will offer high profit potential in future years

HOLD

CONS

• With sites like Facebook and LinkedIn, Google has a high number of competitors that could steal customers from them

• Unfavorable regulatory rulings could greatly increase Google’s costs and have a material effect on earnings

• With nearly 90% of revenues coming from advertisement, Google faces the risk of Ad blocking software eliminating their business strategy

Porter’s Five Forces

Analysts: William McNamara & Chris Casel June 19, 2015

Recommendation

PROS

Brief Summary

Google Inc. is a global technology company that designs and offers various products and services. The company is primarily focused on web-based search and display advertising and tools, desktop and mobile operating systems, consumer content, enterprise solutions, commerce, and hardware products.

Threat of Competition: Moderate Threat of New Entrants: Low Threat of Substitutes: Moderate Power of Suppliers: Low Power of Buyers: Low

Table of Contents Original Purchase Rational ............................................................................................................................ 4

Company Overview ....................................................................................................................................... 6

Management ............................................................................................................................................. 6

Company History ....................................................................................................................................... 7

Google Revenue Segments ....................................................................................................................... 7

Advertising Revenues ............................................................................................................................ 7

Other Revenues .................................................................................................................................. 10

Geography ........................................................................................................................................... 12

Mergers and Acquisitions ....................................................................................................................... 12

Waze ................................................................................................................................................... 13

Nest ..................................................................................................................................................... 13

Dropcam .............................................................................................................................................. 13

Skybox ................................................................................................................................................. 13

Titan Aerospace .................................................................................................................................. 13

Disposal of Motorola Home and Motorola Mobile ............................................................................ 14

Collaboration Agreement ....................................................................................................................... 14

Industry Analysis ......................................................................................................................................... 14

Industry Terminology .............................................................................................................................. 14

Click Fraud ........................................................................................................................................... 14

Click-through ....................................................................................................................................... 14

Cost-Per-Click ...................................................................................................................................... 14

Paid-Per-Click ...................................................................................................................................... 14

Keyword Queries ................................................................................................................................. 14

Vertical Search .................................................................................................................................... 14

Industry Overview – Information Technology (IT) .................................................................................. 15

Internet Search and Content in the U.S .............................................................................................. 15

Smart Technology Market ................................................................................................................... 17

Key Drivers and Metrics .......................................................................................................................... 18

Positive Trends .................................................................................................................................... 18

Number of Mobile Internet Connections ............................................................................................. 18

Risks .................................................................................................................................................... 19

Overall Industry Outlook ......................................................................................................................... 20

Porter’s Five Forces ..................................................................................................................................... 20

Threat of Competition – Moderate ........................................................................................................ 20

Threat of New Entrants – Low ................................................................................................................ 20

Threat of Substitutes - Moderate ........................................................................................................... 20

Bargaining Power of Suppliers - Low ...................................................................................................... 21

Bargaining Power of Buyers - Low .......................................................................................................... 21

Investment Recommendation .................................................................................................................... 22

HOLD ....................................................................................................................................................... 22

Pros to Recommendation ................................................................................................................... 23

Cons to Recommendation ................................................................................................................... 24

Approach ................................................................................................................................................. 25

Valuation Assumptions and Model Overview ............................................................................................. 25

Assumptions ............................................................................................................................................ 25

Revenue Growth ................................................................................................................................. 25

Costs of Revenue ................................................................................................................................. 26

Income Taxes & Interest/Other income ............................................................................................. 26

Weighted Average Shares ................................................................................................................... 26

Balance Sheet Assumptions ................................................................................................................ 26

Price-to-Earnings ................................................................................................................................. 26

Beta ..................................................................................................................................................... 26

Risk Free Rate ...................................................................................................................................... 27

Market Risk Premium .......................................................................................................................... 27

Pro Forma Income Statement ..................................................................................................................... 27

Ratio Analysis .............................................................................................................................................. 28

Profitability.............................................................................................................................................. 28

Liquidity ................................................................................................................................................... 28

Debt Utilization ....................................................................................................................................... 28

Asset Utilization ...................................................................................................................................... 29

Valuation Ratios ...................................................................................................................................... 29

Dupont Analysis ...................................................................................................................................... 29

Altaman Z-Score ...................................................................................................................................... 29

EU Demands Major Changes to Google’s Search Rankings .................................................................... 30

Relevant News Articles ............................................................................................................................... 30

Internet of Things Market to Reach $1.7 Trillion by 2020: IDC .............................................................. 32

Table 1

Google was originally bought on February 15th, 2012 at a price of $612.49 per share. On April 2nd, 2014, Google announced a 2 for 1 stock split in the form of a stock dividend. As a result, the EIF currently owns both Class A, GOOGL, and Class C, GOOG, shares of Google. As of 6/16/2015, the price of Google’s Class A shares, $544.87, represents a 79.8% return for the total equity holding period. Year-to-date the stock has had a modest return of 2.68% compared to the Technology SPDR Fund (XLK), which has produced a 3.24% return YTD.

When the EIF originally purchased Google in 2012, the rational stemmed from a desire to gain access to the software industry within the Information Technology Sector. This purchase also allowed the EIF to meet their allocation goals for that period. Google was chosen because it had strong internet publishing and broadcasting technology as well as a strong brand name. Additionally, Google had several products under development

that the EIF though offered exciting growth potentials in a variety of emerging industries within the technology sector. The EIF currently owns a total of 5 stocks in the Information Technology Sector. As of 6/16/2015 the technology sector represented 19.1% of the Fund’s total holdings, which is only .01% away from the Fund’s target of 19.2%. Google currently makes up 3.0% of the 19.1%, while both Apple Inc. and Cognizant Technology represent 3.4%, Oracle represents 3.3%, Qualcomm Inc. has 2.6%, and recently purchased Intel has 3.3%. Cognizant Technology Solutions Corporation is a provider of information technology consulting. With practices in four major areas: Financial Services, Healthcare, Manufacturing/Retail/Logistics, and other, Cognizant Technology is one of the larger IT Consulting firms. Cognizant Technology also offers enterprise information management services, such as strategic, advisory, and management consulting1. Cognizant was originally purchased in November 2013 for $91.61 per share (645 shares). The rationale was based on the desire to diversify the technology sector, to add a holding in the IT consulting industry, and to replace the SPDR Technology Fund (XLK). Oracle Corporation develops, manufactures, markets, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems, and related services globally. The company also offers software designed for mobile computing as well as application based software

1 https://eresearch.fidelity.com/eresearch/goto/evaluate/snapshot.jhtml?symbols=CTSH&type=o-NavBar

Original Purchase Rational

Chart 1

such as customer relationship management, financial management, and financial management, among others.1 Oracle was originally purchased in March 2007 to replace the sale of Dell during February of the same year. The purchase rational a combination of Oracle’s market leadership, Excellent strategic acquisition strategies, and as a replacement for the SPDR Technology Fund (XLK) that was purchased following the sale of Dell. Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, watches, and portable music players. In addition, the company also sells related software products, services, accessories, and third-party content1 Originally purchased in 2008 for $92.34 per share (234 shares), Apple has returned over an 800% return during its holding period. The rational for the original purchase was to both properly allocate funds to the Information Technology Sector and to expose the Fund to the Computer Hardware and Electronics industry within the Information Technology Sector. Operating in China, South Korea, Taiwan, and the U.S. Qualcomm designs, develops, manufactures, and markets digital communications product services. Qualcomm is divided into three segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI). The QCT division develops and supplies integrated circuits and system software for voice and data communications technology1. The QTL division is given the responsibility to license out Qualcomm’s large intellectual property portfolio. Finally, the QSI division invests in early-stage companies that support the design and introduction of new products. The EIF originally purchased Qualcomm on February 18th, 2011 with the hope that Qualcomm would offer a potential to capture the growth of the mobile market. Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. The company operates in a variety of different segments, including, the PC Client Group, Data Center Group, Internet of Things Group, Mobile and Communications Group, Software and Services Group, and all other segments. The company’s products and software are used in a variety of computing technologies ranging from personal computers to global navigation services. The EIF chose to purchase Intel on 6/12/2015 to gain exposure to the Semiconductor and Semiconductor Equipment industry within the Information Technology Industry. Additionally, EIF felt that Intel was positioned well to take advantage of the growing data center market. Overall, the companies that the EIF currently own offer the portfolio sufficient diversification within the Information Technology Sector. This is illustrated with the below correlation matrix, with the highest correlation being between Qualcomm and Intel at 0.352.

2 Bloomberg

Table 2

Company Overview Management Larry Page CEO and Co-Founder Larry Page is responsible for the firm’s day-to-day operations as well as leading the company’s product development and technology strategy. He co-founded Google with Sergey Brin in 1998 while perusing a Ph.D. at Stanford University. He was the first CEO until 2001, growing the company to more than 200 employees and profitability. From 2001 to 2011 Larry was President of Products Eric E. Schmidt Executive Chairman Since joining Google in 2001, Eric Schmidt has helped grow the company from a Silicon Valley startup to a global leader in technology. As executive chairman, he is responsible for the external matters of Google: building partnerships and broader business relationships, government outreach and technology thought leadership, as well as advising the CEO and senior leadership on business and policy issues. From 2001-2011, Eric served as Google’s chief executive officer, overseeing the company’s technical and business strategy alongside founders Sergey Brin and Larry Page. Under his leadership, Google dramatically scaled its infrastructure and diversified its product offerings while maintaining a strong culture of innovation. Sergey Brin Co-Founder Sergey Brin co-founded Google Inc. in 1998. Today, he directs special projects. From 2001 to 2011, Sergey served as president of technology, where he shared responsibility for the company’s day-to-day operations with Larry Page and Eric Schmidt. Sergey received a bachelor’s degree with honors in mathematics and computer science from the University of Maryland at College Park. He is currently on leave from the Ph.D. program in computer science at Stanford University, where he received his master’s degree.

Ruth Porat New CFO Ms. Porat joined Google from Morgan Stanley, where she served as the company’s Chief Financial Officer. Ms. Porat began her job with Google on May 26th. She will be compensated $65 million in stock grants, a $5 million signing bonus and a yearly salary of $650,000, with another $25 million stock grant that will vest between the end of this year and the end of 2017. Company History Founded in 1995 by Larry Page and Sergey Brin, Google Inc. started off as a simple search engine that used links to determine the importance of individual webpages. This simple software was named BackRub and wasn’t changed to Google Inc. until 1998. In 1998 Google Inc. received its first large investor in the form of Sun co-founder Andy Bechtolsheim, who, gave Google Inc. a check for $100,000. In 2000, Google first introduced its wildly successful advertisement service, AdWords. In 2004 Google both introduced Gmail and went public. The IPO raised $1.67 billion and gave Google a market capitalization of just over $23.0 billion. Through several acquisitions, heavy R&D spending, and brand dominance, Google has grown to what it is today. With investments in a wide variety of areas, Google has transitioned from a simple search engine to a “does-it-all” type of company. Although Google does have investments in a wide variety of areas, their main sources of revenue include their Google website advertising, Google Member Network advertising, and other revenues, with other revenue making up a wide variety of their other product offerings, such as Google play, Android, and Google Market Place. Google Revenue Segments

Because almost 90% of Google’s revenues are a result of advertising, they break up their revenues by two main segments: advertising revenues and other revenues. Advertising revenues are then split into two more categories: Google Websites and Google Network Members’ Websites. In 2014, the largest portion of revenue was earned through Google websites at roughly 68%, followed by Google Network Members’ Websites at 21%, and finally other revenues finishing out the final 11%. Management has forecasted the overall percent

allocation of revenues to change in the coming years due to high spending in R&D, which will produce non-advertising revenue streams. Advertising Revenues Google Websites Vs Google Network Members’ Websites Google develops, manufactures, and licensees out advertising software to other companies and advertising agencies as a major part of their business. As a result, Google has two main sources of revenue for advertisement. For the network members’ websites Google will license out its software so that these companies can have advertisers bid on the advertising space on their webpages. Google is able to earn revenue streams through the licensing of the software, however, the costs are often much higher. For member websites Google enters into agreements that state that they do not get paid unless a user actually clicks on the advertisement. This is what’s called paid-per-click. Paid-per-click, like the

Figure 1

name sounds, is simply the idea that Google does not get paid unless a user actually clicks on the link. For this reason, Google spends a large amount of time trying to match individual websites with relevant advertisements. Google websites, however is more based on Google’s search engine. Utilizing their AdWords software, Google has companies develop an advertisement they want to appear relative to certain words or phrases. These companies then set daily budgets that bid against others who are also trying to appear with similar words. In addition to AdWords, Google has a wide variety of advertisement software including AdSense, AdMob, DoubleClick, and AdExchange. Google Advertising Services AdWords3 As previously discussed AdWords is an online auction arena where companies compete daily for words that they want their advertisements to be associated with. Advertisers are able to create text-based ads that appear next to relevant searches on Google’s search engine. Taking advantage of their global network, Google has been able to connect millions of businesses with customers through the use of AdWords. This is Google’s primary auction advertising platform and is one of their main sources of revenue. AdSense4 AdSense is software more geared to Google’s Network Member relationships. The software enables companies to create space on their website by adding a piece of code to their HTML. Google then takes the new space on their website and brings it to market. Advertisers bid on the space and Google ensures that their customers receive the highest price while remaining appropriate for the individual website. Within the AdSense software Google offers a variety of mediums: search, video, mobile, and games. Search, within AdSense, is designed for companies that operate their own search engines. Google combines Google Custom Search and AdSense Custom Search Ads to provide the company’s users customized advertising. Video, allows qualified publishers to display viewer friendly advertising on their videos. AdSense also offers mobile and gaming advertising that allow companies to take advantage of the growth in mobile usage. AdMob5 A third advertising product that Google offers is called AdMob. AdMob is a software that is designed to help improve businesses’ apps. Through the use of Google Analytics, users are able to gain a better understanding about their customers, possible app improvements, and are able to segment their audiences to better serve their customers. AdMob also offers users the ability to monetize their apps through the usage of Google’s vast advertising network. Like other software Google offers, they auction off advertising space in individual apps to advertising companies. This allows the customers to receive the highest in-app advertising revenue. Finally, AdMob offers a way for applications to promote usage through Google’s integrated advertising platforms for both mobile and online. DoubleClick and AdExchange6 Google uses the combination of DoubleClick and AdExchange to offer customers with a complete advertising experience. DoubleClick offers a wide variety of offerings to help users design the

3 https://www.google.com/adwords/ 4 https://www.google.com/adsense/start/products.html#tab=mobile 5 https://www.google.com/admob/promote.html 6 https://www.doubleclickbygoogle.com/solutions/digital-marketing/ad-exchange/

appropriate advertisement for their company. With the advertisement created, Google offers the AdExchange as a platform for the companies to bid for advertising space on desirable websites. This allows their users to only bid on websites that their target audience would visit. Paid-Per-Click (PPC) & Cost-Per-Click For the majority of Google’s advertising revenue, they recognize it on a cost-per-click (CPC) and paid-per-click basis (PPC). Like cost of goods sold and revenues, the cost-per-click is the actual cost to have a customer click on an advertisement, while the paid-per-click number is what you are actually paying for the user to view the ad. Figure 2 illustrates the year-over-year growth rate for paid clicks as well as the quarter-over-quarter growth %. Looking at the quarter over quarter portion of figure 2 it is easy to see the seasonality within Google’s advertising revenues. This is due to internet usage slowing during summer months, as people begin to go outside more often, and the increase during Q4 as a result of an increase in consumer spending and poorer weather. Figure 3 illustrates the year-over-year growth for Google’s cost-per-click services as well as the quarter-over-quarter growth. One trend that has been present more recently is the increasing costs associated with getting users to click on advertisements. Google’s management acknowledges this as a threat and projects that profit margins in the future from advertising revenues will decrease substantially. As a result Google has been trying to reduce their traffic acquisition costs (TAC), or the cost of revenue. Traffic acquisition costs are the fees associated with matching advertisers with proper websites, running advertising auctions, advertiser fees, and any other costs that they may incur. The TACs generated from Google network members’ websites are significantly higher than those generated from Google’s own websites. This is because Google and their network members split the advertiser fee,

Figure 2

Figure 3

Chart 2

however, Google often has to pay for more of the costs because it is their software. Over the past few years Google has done a good job of reducing their TAC as a percentage of total revenue. Chart 2 illustrates the recent decline as well as the EIF’s projection for years 2015 through 2017. This is due to a combination of increasing the efficiency of the advertisements as well as the higher percentage of revenue being generated from “other revenue.” Other Revenues Google categorizes all revenues from anything non-advertising as “other.” For the fiscal year 2014 other revenue represented approximately 11% of Google’s total revenue. Over the past 5 years Google has tried to increase their other revenue segment so that they have more diversification away from advertising revenues. With high spending in R&D designated to non-advertising products, Google and the EIF expects this trend to continue and for other revenue to begin to take a larger percentage of Google’s total revenue in the future. Google’s other revenue segment is made up, primarily, from the sale of digital content products, hardware sales, and licensing agreements. The major products that Google sells in this segment are Google play, Android, Google+, Google wallet, Chromebook, Google Maps, and Google Glass. Google Play7 Google Play is the android equivalent to the Apple store. Google Play offers a marketplace for apps, music, video, and books. Originally launched in 2013, Google Play has been gaining market share both domestically and internationally. In Germany, for example, the Google Play market grew by 150% from the end of 2013 to the end of 2014. Growth in this segment is expected to continue in the future because Google is well positioned to take advantage of growing mobile market. Android8 Originally purchased by Google in 2005 for their mobile arsenal, Android has allowed Google to take a large market share in the mobile marketplace. Launching 7 years ago Android has been able to sell almost a billion total devices, with an average rate of 1.5 million devices being activated each day. The software itself is an open, free, platform for mobile devices. Android allows developers to easily develop apps for mobile devices as well as for the manufactures of these devices to easily install the software. With a 78.0% global market share Android is by far the market leader in mobile software. The next highest competitor is IOS with roughly 18.3% of the global market.9 With the popularity of Android and Samsung continuing to increase the management and EIF sees Android continuing to be a vital source of “other revenue.”

7 http://venturebeat.com/2015/02/26/google-play-is-finally-making-more-money-than-apples-app-store-in-germany/ 8 http://arstechnica.com/gadgets/2014/06/building-android-a-40000-word-history-of-googles-mobile-os/ 9 http://www.idc.com/prodserv/smartphone-os-market-share.jsp

Chart 3

Google+10 Google+ is Google’s take on a social media platform. Google+ offers a wide variety of ways for users to stay connected with each other. Allowing users to share photos, videos, have conversations, join and leave groups, and several other online social interactions, Google+ offers users a complete online experience. With such an immersive online environment, Google+ has been able to capture 38% of the US online population as of 4/15/2015. Although Google+ has been able to capture a decent size of the US market they have not been able to keep users on the site with the average monthly time spent on Google+ only being 7 minutes long. Because Google+ is a relatively low cost platform, Google will continue to offer it in the future, however, the EIF does not see it as being a large source of revenues. Google Wallet11 Google Wallet is Google’s all-in-one payment service. Acting like a combination of Venmo, Apple Pay, and a regular debit card, Google Wallet offers a wide variety of ways to pay. Like Venmo, the service allows users to send money directly to any other user who has a Gmail account. Google Wallet also allows users to pay for purchases, in-store, by simply tapping their phone on the in-store kiosk or by using their wallet card. Google’s wallet card acts just as any debit card would and allows users to spend up to the balance in their Google Wallet account. With Android’s large market share, Google Wallet can be expected to grow in popularity and allow Google to take a large market share in the mobile pay segment. Chromebook12 In an effort to combine Google’s software with a personal computer platform, Google released Chromebook in May of 2011 by partnering with Acer Inc. and Samsung. With Samsung and Acer controlling a dominant combined market share of roughly 86% of the netbook market, Google is positioned well to increase its sales of the Chromebook. Google has also launched additional products that pair with the Chromebook software like Chromecast (their TV streaming software), mobile phones, as well as tablets. Google Maps & Waze13 Since its launch in 2005 Google Maps has continued to gain popularity for its accuracy and convenient features. Google Maps has become so popular, users on other software devices, such as Apple’s IOS, download Google Maps and use it over the default program on their operating system. With the acquisition of Waze in 2013, Google has continued to improve the user experience and has been able to capture even more market share. Waze has offered Google a variety of new features such as intense user involvement with user reported traffic updates as well as the ability for users to report where police are sitting on highways. Google Glass14. Google’s recent attempt at the wearable, fully-integrated, computer, Google Glass has seen a strong early following from early adopters. Launching in 2012 as a beta prototype, Google Glass was available for purchase for $1,500. With limited success, Google announced that it would discontinue the sale of Google Glass on January 15th, 2015, however, it would continue the development of the product 10 http://expandedramblings.com/index.php/google-plus-statistics/ 11 https://www.google.com/wallet/ 12 http://www.cnet.com/news/chromebook-sales-set-to-nearly-triple-by-2017-gartner-says/ 13 http://www.forbes.com/sites/petercohan/2013/06/11/four-reasons-for-google-to-buy-waze/ 14 https://en.wikipedia.org/wiki/Google_Glass

Although Google has discontinued the product, the EIF believes that Google’s continued investment into the wearable computer segment will position Google well to take advantage of the recent shift to wearable technology. Other15 Because Google is such a large company with huge stockpiles of cash they are able to spend heavily in R&D. Although this takes away from possible dividends, the EIF thinks that Google’s R&D spending will lead to greater capital appreciation in the near future. With an experienced research team, all with very diverse backgrounds, the EIF believes Google will be able to create new-to-market products that will shape the consumer market. A few examples of Google’s investment into new-to-market products include a home automation project, geared towards making a “smart home,” smart cars that drive themselves, clean energy, as well as several investments in pharmaceutical companies aimed at curing cancer and other major illnesses. Geography Google is an international company and operates all across the world. The majority of Google’s revenues, however are generated from the U.S. and the U.K. In 2014, revenues generated from these two geographic locations represented approximately 53% of total revenues. Google has acknowledged the risk of such large percentages of their revenue streams coming from these two geological areas, however, have stated that they see these percentages decreasing in the future. Due to a globalization of technology, Google views a new market in developing countries opening up and allowing them to expand their “rest of world” revenue percentage. The EIF also acknowledges this trend and expects Google to be able to increase their “rest of world” revenue streams and move away from large revenue buckets in the U.S. and U.K.

Mergers and Acquisitions16 From its inception Google has been very active in the Information Technology sector in the form merger and acquisitions. Through strategic M&A activities Google has been able to expand its product offerings and improve existing products. Some notable recent transactions were the purchasing of Waze, Nest, Dropcam, and skybox as well as the sale of Motorola mobile and Motorola home.

15 http://www.cio.com/article/2401997/internet/google-future-tech--10-coolest-google-r-d-projects.html#slide6 16 Google’s 2014 form 10-K

Chart 4

Waze In June of 2013, Google complete the acquisition of Waze for a total cost of $969 million, all in cash. As previously discussed, Waze is an app that allows users to report traffic accidents, police locations, and construction delays. Google purchased Waze with the hopes that it will improve the user experience of their Google Maps platform. Currently, Waze is still a separate app from Google Maps, however, some of its features have been implemented to improve Google Maps. Nest In February of 2014, Google completed the acquisition of Nest Labs Inc. for a total of $2.6 billion. Prior to the transaction, Google owned a 12% equity ownership in Nest. Nest is a company that focuses on creating smart devices for the home. A few notable products that are already to market include a smart thermostat, a smart-cam to monitor the home while away, and a smart fire alarm. With the acquisition of Nest, Google has broadened its suite of products and offerings as well as added another key component that will help Google’s positioning in the smart home market. Google’s management team sees the smart home market as a key area for future growth and has stated that they are committed to future investments in this market place. The EIF views the smart home as a huge future potential for revenue growth and feels that Google is positioning itself well, through M&A transactions and heavy R&D spending. Dropcam In July of 2014, Google completed the acquisition of Dropcam for a total of $517 million in cash. Dropcam is a company that enables consumers to monitor what is happening at home while they are at work or away. Google has already taken full advantage of the company’s product offering at time of acquisition with its implementation of Dropcam into Nest’s product offering. The acquisition of Dropcam illustrates Google’s continued investment into the smart-home market. Skybox In August of 2014, Google completed the acquisition of Skybox Imaging Inc. for a total compensation of $478 million, all of which was paid in cash. Skybox is a satellite imaging company and was purchased to help improve Google’s Google Map platform. Google believes that Skybox will help them continue to be a market leader with accurate, up-to-date, imagery in the digital maps segment as well as help improve internet access and disaster relief in future years. Titan Aerospace17 During the beginning of 2014, Google acquired Titan Aerospace for an undisclosed amount. Titan Aerospace is a drone startup company that focuses on solar-powered machines. This acquisition came after Facebook Inc. announced their acquisition of a Titan Aerospace competitor, Ascenta, based out of the U.K. for approximately $20 million. Titan Aerospace provides Google with an entry into the growing drone market. With large companies like Amazon and Facebook also investing in the drone market, Google’s acquisition of Titan Aerospace allows it to compete in the space. 17 http://www.wsj.com/articles/SB10001424052702304117904579501701702936522

Disposal of Motorola Home and Motorola Mobile In April of 2013 and October of 2014, Google complete the disposal of Motorola Home and Motorola Mobile for $2.4 billion and $2.9 billion respectively. The transaction resulted in equity ownership in both Arris and Lenovo as well as a 3-year interest free pre-payable promissory note for $1.5 billion from Lenovo. The transactions resulted in a net gain of $757 million and $740 million respectively. Collaboration Agreement In September of 2013, Google announced the formation of Calico. Calico is a life sciences company with the mission of capitalizing the advances in technology to gain a better understanding of the biology behind the human lifespan. In September of 2014, AbbVie Inc. and Calico announced a research and development collaboration that allows Calico to us its scientific and technologic expertise to establish a world-class research center where AbbVie will provide scientific and clinical development as well as help in bringing products to market through their industry knowledge. The agreement states that both companies will share the costs and profits equally.

Industry Analysis Industry Terminology Click Fraud Occurs when a person or automated computer program with no actual interest in an advertisement clicks on an ad for the purpose of charging that advertiser for the click. Click-through Rate A common productivity metric used for online advertising, the click-through rate is used in many search engine pricing algorithms. CTR measures the fraction of users that click an ad after viewing it. Cost-Per-Click One of the main pricing models used for online advertising, cost-per-click is combined with paid-per-click to establish a revenue and cost of revenue system. Cost-per-click represents the actual cost to the company to have a user click on a customer’s advertisement. Paid-Per-Click One of the main pricing models used for online advertising, paid-per-click is combined with cost-per-click to establish a revenue and cost of revenue system. Paid-per-click represents the actual amount of money that the advertiser pays to have a user click on their advertisement. Keyword Queries Any string of text entered by a user in to a search engine. The search engine returns results that are related to the query. Vertical Search A search that specializes in a specific kind of online content (ex. Business Loan or Vacation).

Industry Overview – Information Technology (IT) Innovation and creativity are the core drivers of the technology industry, and customers and shareholders demand that Google consistently reinvent itself by developing or acquiring new services and products to remain relevant. Due to its consistent pivoting and positioning, Google operates in a variety of subindustries within the technology sector. Primarily known for its namesake search engine, Google has branched out to provide Web Services like Mail (Gmail), Maps (Google Maps) and web browsing (Google Chrome) to boost traffic to its core search business. In addition to its web service offerings, Google acquired the Android mobile operating system for smart phones and tablet products to obtain a significant presence in mobile software. Google Play, a native retail store for apps, music and movies on the Android system serves as Google’s mobile retail outlet and an attempt to develop a true alternative ecosystem to iOS. Google has also made significant acquisitions in imaging (Skybox Imaging, Waze), drone hardware (Titan Aerospace), and the Internet of Things (Nest Labs) to advance their goal of providing organized information to every human on earth. Internet Search and Content in the U.S18 Overview Google primarily operates in the Internet Search industry, with the purpose of directing users toward sponsored advertisements. Search engine companies typically provide free search capabilities and rely on income received from advertisements as users click on sponsored links, known as a paid clicks. Click revenue is a substantial proportion of revenue for internet search firms. Although the core differentiator of the Internet Search industry is the unique algorithm that delivers the most relevant results to the user, competitors tend to develop an ecosystem around their search function by offering email hosting, photo sharing, multimedia content, social networking and mobile features to drive user engagement. The Internet Search industry is in the Growth stage of its life cycle, as revenue is expected to grow at an annualized rate of 7.3% to $31.0 billion into 2019. Advertisers view Internet Search as an attractive channel because it is more cost effective and more efficient when compared to traditional media. Major competitors in the industry are Google, Microsoft and Yahoo! with ancillary competitors in more specific vertical search categories. Historically, these niche competitors have served as valuable takeover targets. Risk Analysis To assess overall risk, IBISWorld analyzes risk on a measure of industry structure (structural risk), expected future performance (growth risk) and economic forces (sensitivity risk). Based on a scale of 1 to 9, with low values indicating low risk, and higher values indicating higher risk, IBISWorld produced an overall risk rating for the Internet Search industry of 2.86. Structural Risk Despite its relatively low rating, structural risk ranked highest in the evaluation. Over the outlook period of 2015-2019, the main driver of the MEDIUM-LOW rating is a high level of competition within the industry. Business that compete for market share are forced to incur expenses to differentiate their

18 http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1982

Table 3

products, creatively market to the same consumer as their competitors and consistently reduce prices to remain attractive. Competition will result in decreasing revenue, declining margins and increased customer acquisition cost across the industry. Because Google holds such a large percentage of the internet search market, the structural risk for Google is higher than the industry average, as competitors Yahoo! and Microsoft frequently partner to drive traffic away from Google. Despite heavy competition, the industry is expected to remain in the growth stage, counteracting a downward force that competition has placed on margins. Sensitivity Risk The industry sensitivity risk outlook is rated VERY LOW, based on the upward trend in mobile Internet connectivity and increased advertising expenditure. As more users come online for the first time, search advertising becomes a more attractive option to advertising firms, who are able to reach a larger customer base. Advertising expenditure, which is directly tied to consumer spending, is also predicted to increase in 2015. Generally, advertisers realize the superior cost effectiveness of internet advertisement compared to traditional media. Therefore, search engines generally experience smaller declines in ad revenue than traditional media outlets in a financial downturn. Growth Risk Growth risk for the Internet search industry is rated VERY LOW over the outlook period, as Bloomberg forecasts that annual industry revenue will grow 14.1% to $25.5 billion in the next year, compared to a growth rate of 7.3% between the 2012 and 2014. Major Markets Because the internet search industry is driven by advertisement revenues, it makes sense that firms relying on e-commerce and internet sales spend the highest percentage of the $22.4 billion annual sales to reach their customers. Advertisers traditionally bid on words and phrases relevant to their business, creating a capital market scenario of supply and demand for highly sought after words in heavily saturated industries. Retail The retail sector was the largest purchaser of advertising in 2014, accounting for roughly 21% of all revenue. As consumer preferences continue to shift towards an online sales experience, retailers that sell items like clothes, toys, games, appliances, and jewelry are quick to observe the benefit of online advertising through tools like Google Analytics, a service that allows the advertiser to monitor the effectiveness of their online campaign. The retail sector is expected to remain the leader in advertising spend as large companies like Amazon and Walmart continue to expand their offerings of products and services available online. Financial Services Financial services include commercial banks, investment banks, insurance companies and other financial institutions. The segment comprises 13% of Google’s advertising revenue. It is important to note that

Chart 5

the phrases containing the words “insurance”, “mortgage” and “loan” are the three most expensive categories in Google’s AdWords service. As competition in the financial services space intensifies, customers are driven to compare costs and benefits of similar services over the internet. Previously the highest contributor to advertising revenue, the financial services sector saw a decline in paid clicks following the recession. The financial services sector is expected to hold steady as the second largest contributor to Google’s advertising revenue Automotive Advertisers Similar to the financial services sector, automotive advertisers find great value in reaching their audience online. Potential customers have the ability to compare financing rates, car specifications and information regarding local dealerships quickly through search features. Because of the sheer size and competitive landscape of the automotive industry, 12% of Google’s advertising dollars are derived from the automotive industry. This figure is expected to grow over the course of the next 5 years in line with auto purchases. Telecom This industry is comprised of cellular data, voice and Internet providers, along with television conglomerates. In 2014, the telecom industry contributed to 9.0% of Google’s advertising revenue. A quick search of the phrase “cell phone” on Google yields adds from top spenders Sprint, Walmart, T-Mobile and Samsung. Although the telecom industry is expected to decrease its percentage of market share over the next 5 years due to heavy saturation, some firms will increase their advertising spending to gain a competitive advantage. As a result, spending is expected to level out and become flat. Other Included in the other sector are industries such as leisure travel (8.0%), consumer packaged goods (7.0%), computer product producers (6.0%), pharmaceutical and healthcare (5.0%), media (5.0%) and entertainment (4.0%), along with a few others. As travelers continue to source out deals and plan vacations online, they are experiencing much more efficient, effective tools to do so though search. It makes sense that as vacation planning becomes easier for the consumer, travel advertising spending will grow as a percentage of revenue for Google. Furthermore, computing products are inherently useful to those using computers to search. As more health-conscious customers begin to use online resources for comparative medicine and remote diagnosis, healthcare sector spend on advertising will increase. In terms of media, entertainment and other discretionary spending, a significant amount of advertising is required in order to attract and retain customers. Smart Technology Market19 Although this is an emerging industry, the smart technology industry (often called the “internet of things”) is important to consider while valuing Google as a company. Over the past couple decades, technology has become quicker, smaller, and more immersive. With the consumer becoming more reliant on technology, the move towards both an online world and a connected reality have begun to speed up. Because this is a new market, there are a wide variety of competitors racing towards the ultimate goal of full technological immersion. The major competitors in this industry consist mainly of large technology firms with excess cash on their balance sheets. This excess cash allows them to spend heavily in R&D as they produce revolutionary products. The three main companies that are involved heavy R&D spending for a “smart world” are Apple Inc., Amazon.com Inc., and Google Inc. Products,

19 http://www.wired.com/2014/11/the-internet-of-things-bigger/

although most still being developed, include smart cars, smart homes, wearable technology, cloud computing, and drone technology among others. The EIF, as well as the overall market, believes that these investments will be the future of computing and the Information Technology sector. Key Drivers and Metrics As Internet search technology becomes more refined, providing increasingly bespoke results to the individual user, we expect the scope of content and tailored advertising to follow suit. With advancements in machine learning and the organization of big data, advertisers now have access to more information than ever to learn about their customers and tailor specific content to what they may be searching for. As the number of internet connections and mobile users increase, search engines and advertisers alike are given cues as to how users search for products and services through different internet devices. As sites grow and user traffic increases, paid through clicks on advertisements will translate into higher free cash flow for Google. This relationship illustrates why Google is so keenly interested in bringing the remaining 4.4 billion people around the world who do not have access to the Internet online. Positive Trends Number of Mobile Internet Connections Simply put, the solution to significant revenue growth for the search engine industry is to bring Internet access to people who do not have it in the most efficient manner possible. Growth in the mobile market has lowered the barrier of entry by reducing the need to install physical landline connections, and we have seen explosive growth in developing countries as a result. Roughly half of all users that came online over the last 10 years have come from BRIC + U.S. countries. Trends like the expansion of mobile network coverage and increasing mobile Internet adoption, urbanization, shrinking device and data plan prices and the increasing utility of the Internet has fueled growth in the online population.

Chart 6

Shift to Mobile Advertising A key shift in the $135 billion advertising industry will be observed within the next 3 years, as mobile advertising is set to outpace display advertising, the second largest category of advertising. Mobile advertising revenue is predicted to grow at rate of 23.1% CAGR, compared to a 7.9% CAGR of display advertising. As consumers in developing countries gain more disposable income, they will require more from their technology. As a result, mobile sales will increase, thus, driving the mobile advertising market even further. In addition, as users transition their online world to the mobile world, mobile traffic will increase significantly, which will be an additional driver for mobile advertising. Mobile advertising is expected to outpace its traditional digital peer in 2018. Consumer Spending The industry is impacted by general economic conditions, at least with respect to advertising expenditure. When consumers reduce their spending, businesses typically respond by pull back their advertising efforts, reducing industry revenue. Fortunately, consumer spending is expected to increase in 2015. Risks Capital Intensity The Search Engine industry operates with a large amount of capital intensity. IBISWorld estimates that for every $1.00 spent on wages, the industry will allocate $.49 in capital investment. Labor costs in the industry are extremely high, as specialized, skilled programmers, mathematicians, quantitative analysts, sales staff and management are among the most expensive employees to employ across any industries. Google in particular places a large emphasis on a detailed, time intensive hiring process. Capital expenses related to computing requirements require search engines to constantly upgrade hardware, software and bandwidth to index search results and keep the most recent results relevant and up to date. Dedicated data centers that house tens of thousands of servers need to be constantly maintained by skilled IT professionals and replaced every three to four years on average. Heating and cooling of these data centers is a large, necessary expense to ensure that the machines are not overworked. Regulations & Policy Shifts Google has faced allegations that its search engine has favored its own products and services over its competitors since 2012. In Google’s 2014 Form 10-K, management stated that they were working with numerous domestic and international regulatory agencies to ensure that their actions do not violate any laws or restrict competition. Concerns over data security and how consumer’s information is collected and used over the internet has spurred activism and investigation in the EU for Google’s AdWords platform. Google holds approximately a 90% market share in the European zone, making it the place to be for advertisement. The European Union has threatened to levy heavy fines for squeezing out competitors in the European space.

Chart 7

Seasonality Google’s business is affected by both seasonal fluctuations in Internet usage and traditional retail seasonality. Internet usage generally slows during the summer months, and retail queries typically increase significantly in the fourth quarter of every year. Rapid user growth tends to mask the cyclicality and seasonality of Google’s business, but as growth rate slows, cyclicality becomes more pronounced and has caused a shift in operating results to become more visible. Overall Industry Outlook The Search Engine industry, as stated above, is in the growth stage of its economic cycle, characterized by rapidly changing technological landscape along with growing product acceptance from the end user and downstream markets. The industry is expected to grow at 8.1% per year at an annualized rate into 2019, compared to US GDP growth at 2.5%. As mobile devices with internet connections continue to proliferate the United States, advertisement firms will continue to compete to attract users in a brand new marketplace. Growth in the mobile market, along with an increasing amount of services offered online will drive industry growth, particularly in the small to medium business space.

Porter’s Five Forces Threat of Competition – Moderate With Google controlling over 75% of the total market share for the search engine industry, the next closest being Yahoo! Inc. at 11.%, the EIF does not see competitors being a significant threat to Google’s future growth. Additionally, within the search engine industry, 94.7% of the market is made up of a combination of Google, Yahoo, and Microsoft. The main risk of users shifting from Google’s search engine to that of a competitors is Google not being able to provide relevant search results. To prevent the materiality of this risk, Google spends large amounts of money in R&D as well as labor acquisition. It is critical to Google’s future success that the company continues to hire talented individuals with the knowledge to both edit and create new algorithms for improving the search engines functions. Because of Google’s perforable market position and policies with R&D as well as talent acquisition, the EIF only views the threat of competition as moderate. Threat of New Entrants – Low The threat of new entrants is considerably low for Google. With high market share and an extremely concentrated market the costs for a new competitor to enter the market far outweigh the benefits they could achieve. Some specific barriers to enter are high initial costs to set up the computational hardware, a low supply of talented workers with the necessary capabilities for competitive software design, and the already concentrated market. The EIF views the threat of new entrants very low due to companies having to spend a significant amount of start-up costs to gain access to the search engine industry. Threat of Substitutes - Moderate As websites begin to expand online and offer more products for their customers, the threat of them creating a search platform similar to Google’s platform is moderate. Companies like Facebook Inc. and Twitter are two examples of larger companies who have begun the transition to “all-encompassing” websites. The goal for these companies is to eliminate the search engine entirely and allow users to search the web for anything they desire right on their website. Facebook has made the most progress, with their in-website search engine being able to search for a wide variety of items. Although these

companies are evolving their websites to be “all-encompassing,” the EIF does not see this trend having a material impact over Google’s search engine traffic during the short to medium term. Bargaining Power of Suppliers - Low Because the market is so highly concentrated, with three main competitors, supplier have very few options to sell too. Because Google owns such a large portion of the market, as well, they have even more power over suppliers. As a result, the EIF does not see the bargaining power of suppliers having any material impact on Google as a whole. Bargaining Power of Buyers - Low Due to the concentrated search engine industry, barging power is relatively low. There are only 3 major companies that advertisers see worth advertising with and as a result have very little bargaining power. With Google controlling 75% of the market, companies essentially have zero bargaining power with Google and purchase online real estate through open market auctions. In addition, because of Google’s brand equity and large array of product offerings, they are able to charge a premium to Yahoo and Microsoft’s advertising space. The EIF does not see this trend altering in the near future and as a result sees the bargaining power of buyers as low.

HOLD Analysts Opinion: William McNamara & Chris Casel

Investment Recommendation

• Google’s large market share in the search engine industry (75%) has allowed for it to take full advantage of their advertising software and this can be expected to continue in the future.

• With heavy R&D spending in a wide variety of outlets, Google has made strategic moves to position itself in the world’s most innovative and evolving markets. With Google expecting these investments to continue, they will be positioned very well to take full advantage of the next major shift in the consumer markets.

• With an incredible list of highly talented individuals, Google’s labor force is one of the largest drivers for its success. With impressive employee packages and compensations, Google has consistently been ranked as one of the best places to work. With this being a key driver of revenues, Google is expected to continue spending in talent acquisition.

• Google’s global brand equity is matched by very few other companies. Google has become a household name across the globe and has become synonymous with online searching. Google has become so synonymous, in fact, that in September of 2014 Google successfully defended a lawsuit about how the “Google” trademark had become too similar to the word search and that the courts should make a generic word so that people can use it freely20.

20 http://www.forbes.com/sites/ericgoldman/2014/09/15/google-successfully-defends-its-most-valuable-asset-in-court/

Pros to Recommendation

• Since the general adoption of the internet in the early 2000s, the online environment has constantly involved. As the online world evolves, regulatory agencies will begin to better understand its workings and ways for them to police online activity. This is a large threat to any technology company because these possible policies are un-know and, as a result, hard to predict. A recent ruling involving the founder and operator of the online narcotics, weapons, human-trafficking, and other illegal item marketplace, the Silk Road, was the first time a person had gone to jail for hosting a website platform21.

• As websites evolve online, companies will begin to have all-encompassing platforms. With companies like Facebook and Twitter offering users a way to interact with friends, search for news stories, and keep up-to-date with popular social trends, Google will have to continuously innovate and offer its users a more unique, relevant, and beneficial experience to keep them from transitioning.

• In the near future, profit margins for the search engine industry, advertising revenues specifically, are expected to fall. As a result, if Google cannot find ways to make their revenue generating costs cheaper they may see revenue declines in this market place.

• Currently almost 90% of Google’s revenue stream is a result of their advertising platforms. As the profit margins for these services decrease Google will have to find alternative sources of revenues. In addition, if a new service is introduced that has a more efficient approach online advertising, Google could see a large decline in overall revenues.

21 http://www.forbes.com/sites/ericgoldman/2014/07/18/silk-road-ruling-will-hurt-online-commerce/

Cons to Recommendation

Approach For the valuation of Google Inc. the EIF did a top down approach. Starting with Google’s 2014 form 10-K the EIF was able to gain a better understanding of the company’s revenue segments, costs, products, M&As, and management’s evaluation of both Google’s growth potential as well as the industry’s overall risks, drivers, and trends. With an understanding of Google’s product offerings, industry, and growth outlook, the EIF researched databases, news articles, as well as the opinions of industry leaders to evaluate our own assumptions about possible growth potential and market drivers. With a better understanding of Google as a whole and the industry’s it competes in, the EIF began making assumptions about future revenue, cost, and overall price growth. Using the assumptions the EIF created a dividend discount model as well as a free cash flow model to determine the valuation we expect at the end of the fiscal year 2017, which allowed us to ultimately arrive at our hold recommendation. In addition, the EIF rationalized both a bear and bull scenario for Google over the next 3 years, allowing us to further evaluate the future potential benefit or risk of Google for the portfolio. Assumptions Revenue Growth To determine the outlook for revenue growth the EIF first looked at management’s assumptions and compared them with how we saw the industry growing. Management estimated that for the near future total advertising revenue would stay relatively flat or slightly decline. The EIF partially agreed with management, however, we see Google, and the search engine industry in general, finding ways to take advantage of new advertising opportunities as the “internet of thigs” marketplace as it evolves into actual consumer products. In addition, we believe that Google will be able to develop cheaper and more cost effective ways to earn advertising revenues. As a result, we expect Google’s total advertising revenue to grow at an average rate of around 0.79%. The outlooks relating to other revenue are very optimistic for both EIF and Google’s management team. During the period between 2012 and 2014, Google saw its other revenue segment increase by an average of 74% per year. With continued spending in R&D, Google seems poised to continue this trend. Even though the 3-year average growth rate for Google’s other revenue segment is 74% it has decreased in the past year to a more reasonable 40%. As a result, we weighted much of our estimate on the most recent revenue growth. The EIF expects the other revenue segment of Google’s total revenues to grow at an average rate of 39%.

Valuation Assumptions and Model Overview

Chart 8

Costs of Revenue Similar to the process used to arrive at our assumptions of revenue growth, EIF first evaluated management’s assumptions and compared them with what our research had shown and arrived at what we thought were accurate representations of Google’s future costs. As Google begins to capitalize on cost saving strategies as well as new efficiencies developed with advancements in technology, the EIF forecasts Google’s total cost of revenue to increase heavier in the near term but slow as these opportunities are realized. To estimate the other costs Google incurs on a yearly basis, the EIF viewed management’s discussions as well as what we thought were accurate trends within the company. R&D is expected to increase by roughly 1.85% per year due to both industry and Google trends. A similar strategy was used to develop assumptions on sales and marketing as well as general and administrative expenses. Income Taxes & Interest/Other income To project future income taxes and interest/other income, the EIF took three and five year averages and used the average we thought would be most likely in future years. This resulted in a 20% tax rate and an average of 4% interest growth for 2015, 2016, and 2017. Weighted Average Shares Similar to our process in determining income tax rates and interest income growth, the EIF took the average growth rate of 1% and used it to project the total number of shares for 2015, 2016, 2017. Balance Sheet Assumptions Once again the EIF used 3 and 5-year averages to determine the future values of these accounts. Price-to-Earnings We arrived at our price to earnings estimates by viewing multiple online estimates as well as coming up with our own. To create our own estimate, the EIF took the high, low, and actual averages of P/Es for each year starting in 2004. We then used these averages to determine a reasonable base estimate for our models. In addition, we used the high average for the bull case and low average for the bear case. When we averaged the analyst’s estimates with our own we weighted our estimate at a multiple of 2 because we feel it most accurately represented our views of future P/E ratios. Beta For beta we took used a variety of analyst’s estimates from online resources and averaged them together. We then used a regression model to determine the historical variation of Google’s returns and those of the market. We ultimately used the regression model’s beta of 1.04.

Chart 9

Risk Free Rate We used the yield on the 30-year treasury as of 6/20/2015 (3.05%)22. Market Risk Premium We used the EIF calculated market risk premium of 5.7%, which is the historical annual return of stocks over the 30-year Treasury Bonds since 1926.

Pro Forma Income Statement

22 http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Profitability Google has historically returned a lower profit margin when compared to its peers. Typically there are two reasons why Google does not return as much profit as its competitors. Research and development expenses linked to Google’s Other Revenue demand much more capital when compared to its peers, and capital expenditures due to the construction of offices, data centers and physical infrastructure around the globe represent a drain on profits. Google’s rationale behind these expenditures is that they are investing in the ideas and people behind their next 10x project in efforts to stay ahead of technology curve. Liquidity With large cash balances Google has been considered an extremely liquid company since its founding in 2004. This characteristic is represented in Google’s liquidity staying relatively the same since 2010. Debt Utilization With a strong credit rating of Aaa from Moody’s, Google has been able to borrow and take on debt for its spending in R&D as well as its active merger and acquisitions activity.

Ratio Analysis

Asset Utilization Google has consistently been able to innovate in all areas of its infrastructure, which has allowed them to be very efficient in earning the highest returns on their assets. This has been done primarily through cost reductions and economies of scale. Valuation Ratios Google has historically had higher valuation metrics due to the company’s market strength, variety of products, and future growth potential. This trend can be seen as Google’s P/E ratio has remained relatively high compared to competitors and the industry. Dupont Analysis Google’s return on equity has been relatively low in comparison to some of its competitors for the period 2010-2014. This is due to a variety of factors including the recent trend of lowering profit margins. Over the past 5 years Google’s profit margins have significantly dropped by almost 10%. We feel that this is not an issue, however, because this is an industry trend and Google is well positioned to implement strategical counters to the lowering profit margins. Altaman Z-Score With an Altman Z-Score of 10.87 Google is considered a very safe company for the possibility of credit default. With large market shares, continued R&D spending, and growing revenues, Google is expected to keep this rating on the future.

EU Demands Major Changes to Google’s Search Rankings Charge sheet says violations concern 12 countries and date back to 2008 By: Tom Fariless June 19, 2015 2:20 p.m. ET LONDON—The European Union has demanded sweeping changes to the way Google Inc. ranks rival comparison-shopping services in its general search results and warned that the company could be fined for alleged past violations of EU antitrust law, according to a formal charge sheet that was sent to the U.S. search giant in April, three people familiar with the matter said.

The charge sheet, which runs more than 100 pages, calls on Google to use the “same underlying processes and methods” when presenting rival shopping-comparison services on its search page, the people said.

That demand for equal treatment of competitors goes far beyond Google’s own proposal last year to settle the concerns of the European Commission, the EU’s top antitrust authority, that Google skews search results in favor of its own specialist search services, like Google Shopping.

The EU’s latest approach has potentially far-reaching implications for how search operators do business in Europe in the future.

At issue is whether Google uses its overwhelming 90% share of online searches in Europe to squeeze competitors in related markets where it also competes.

The EU’s new antitrust chief, Margrethe Vestager, filed formal charges against Google in April, escalating her agency’s five-year-old investigation. The charges focused specificallyon Google’s comparison-shopping service, but Ms. Vestager said she also continued to examine other domains, such as travel and local services, where Google is accused of favoring its own services. A redacted version of the charge sheet, which is known as a statement of objections, was sent Thursday to several of the companies that have filed formal complaints in Brussels over Google’s business practices, the people said. News Corp, which owns The Wall Street Journal, is one of the complainants.

Relevant News Articles

The charge sheet claims that Google’s alleged abuses extend to 12 European countries and date back as far as 2008, the people said. The document warns that the EU could fine Google for the violations, the people said. The European Commission declined to comment.

Comparison-shopping sites such as Nextag say that when users search for products, Google features results from Google Shopping and relegates products featured on rival sites lower, where they may not be seen.

Google has repeatedly denied breaking EU antitrust rules. U.S. regulators closed their own investigation into Google’s search practices two years ago after the company agreed to voluntary changes. Google couldn’t immediately be reached for comment. The company said in April that it strongly disagreed with the need to issue formal charges, and looked forward “to making our case over the weeks ahead.”

Ms. Vestager’s predecessor, Joaquín Almunia, sought three times to settle with Google, most recently in February last year. Under the latest deal, Google offered to reserve space near the top of its European search pages for competitors to serve specialized search results for things like hotel rooms alongside Google services that do the same thing.

But each settlement ultimately foundered amid criticism from the companies it was designed to protect.

Several of those companies indicated Friday that they would look more favorably on the EU’s latest solution.

Google has at least a few more weeks to respond to the EU’s charges, and can request an oral hearing with regulators to better present its case. The companies that filed complaints against Google have four weeks to file their own responses to the charge sheet.

The news of the charge sheet was first reported by MLex, a specialist news service for regulatory affairs.

Source – Wall Street Journal

http://www.wsj.com/articles/eu-demands-major-changes-to-googles-search-rankings-1434738055?KEYWORDS=google&cb=logged0.057619808008894324

Internet of Things Market to Reach $1.7 Trillion by 2020: IDC By: Steve Notron The global Internet of Things market will grow to $1.7 trillion in 2020 from $655.8 billion in 2014, research firm IDC says, as more devices come online and a bevy of platforms and services grow up around them.

The firm predicts that the number of “IoT endpoints,” connected devices such as cars, refrigerators and everything in between, will grow from 10.3 billion in 2014 to more than 29.5 billion in 2020.

Devices, connectivity and IT services are expected to account for the majority of the global IoT market in 2020, with devices alone accounting for 31.8% of the total. Purpose-built platforms, storage, security, application software and “as a service” offerings are expected to capture a greater percentage of revenue as the market matures.

The Asia Pacific region captured around 58.3% of the revenue from IoT in 2014 and will shrink slightly to 51.2% in 2020. In China, a large and growing population using mobile devices alongside a push to make manufacturing practices more efficient may spur a significant number of new devices and IoT standards, said Vernon Turner, IDC’s research fellow for the Internet of Things. Well networked countries like South Korea and Singapore may also ramp up smart city initiatives.

North America is expected to maintain revenue share of just more than 26% over the forecast period, while the share in Western Europe is expected to jump from 12% to about 19.5%.

As the Internet of Things ecosystem continues to grow, companies increasingly will look to platforms and services that help them manage and analyze the streams of data coming from connected cars, thermostats and smartwatches. That means a new world for the CIO as companies look for ways to process and analyze data from multiple sources in real time.

As CIO Journal has noted, the growth in IoT-enabled devices has been fueled in part by the declining cost of sensors, connectivity and data processing power. The software needed to analyze this data has improved and companies are using it to boost operations and seek out new business models. Ford Motor Co., Rio Tinto PLC and Stanley Black & Decker Inc. are just a few of the many companies making strides in the IoT space.

Embracing IoT may lead to increased use of open source software and standards, Mr. Turner said. Disparate devices will likely need to be managed by the same infrastructure, underscoring the need for common standards. As CIO Journal guest contributor Paul Daugherty noted last week, collaboration with a number of stakeholders will be crucial.

CIOs are contemplating how to secure and manage the multitude of new devices that could enter their companies, and how to deal with new types of data from different sources. “Enterprises have to manage that, so they have to create new management policies for the devices and how they’re connected,” Mr. Turner said.

IoT-enabled devices will also bring a number of practical questions, such as when and how to replace a sensor. “There is a life cycle that has to happen that might be different from the traditional application life cycle,” he said. Interoperability also will be a major sticking point when it comes to corporate adoption.

Write to steven.norton@wsj.com

CORRECTION: An earlier version of this story misstated the projected growth of “IoT endpoints”. These connected devices are expected to grow from 10.3 billion in 2014 to more than 29.5 billion in 2020. The story has been updated to reflect the change.

Source – Wall Street Journal http://blogs.wsj.com/cio/2015/06/02/internet-of-things-market-to-reach-1-7-trillion-by-2020-idc/?KEYWORDS=internet+of+things