United States | Equity Research

Media | Internet
September 28, 2010
GOOGLE INC.
GOOG | 527.29
UNDERWEIGHT | TARGET PRICE: $580
Ìnitiating Coverage

Ken Sena
212 822 7520
ken.sena@evercore.com
Anupam K. Palit, CFA
212 497 0844
anupam.palit@evercore.com



PIease see the anaIyst certification and important discIosures at the end of this report. Evercore Group L.L.C. and affiIiates do and
seek to do business with companies covered in its research reports. Investors shouId be aware that the firm may have a confIict of
interest that couId affect the objectivity of this report. Investors shouId consider this report as onIy a singIe factor in making their
investment decision.
Company Statistics

Market Capitalization $170,079
Enterprise Value $139,985
Average 10-Day Volume 3,159
52-Week Price Range $433.63 - $629.51



Earnings Summary

2009A 2010E 2011E
Revenue (M) $23,651 $28,124 $31,875
Net Revenue (M) $17,426 $21,020 $23,857
EBÌTDA (M) $11,001 $12,661 $14,254
Adjusted Op. Ìncome (M) $9,476 $10,943 $12,090
Adjusted EPS $23.22 $26.96 $30.62
EV/EBÌTDA 14.1x 10.8x 9.6x
P/E 20.3x 19.6x 17.2x
Paid Click Growth (Y/Y) 16% 15% 15%
CPC Growth (Y/Y) -7% 2% -3%

Adjusted EPS: Q1 $5.16A $6.76A
Q2 $5.36A $6.45A
Q3 $5.89A $6.56E
Q4 $6.79A $7.18E
FY $23.22A $26.96E $30.62E



Initiating with Underweight
Is Facebook the Better Long-term Ad ModeI?
We are initiating coverage of Google Ìnc. with an Underweight rating
and a $580 target price. Our rating reflects a below-consensus view of
the growth prospects for traditional search in light of increased
competition from social networking and display.
Our major concerns are as follows: (1) Facebook's present growth
trajectory, combined with its use of Open Graph and Likes, threatens to
undermine Google's ability to offer advertisers highest yield, which could
result in a revenue share shift to Facebook and "reverse network effect¨
consequences for Google; and (2) display marketplace improvement is
creating an increasingly viable alternative to search.
We assess a challenge from Facebook to Google's core advertising
algorithm, PageRank, in which we refashion Google's PageRank
algorithm on a "Like-driven" quality score, which we coin, FaceRank. Ìn
a hypothetical scenario analysis, we also quantify the Facebook risk for
Google. We estimate 20% of Google's market cap (or roughly $100 per
share) to be at risk by 2013, assuming no offsetting cost reduction
measures by Google.
Risks to our Underweight thesis include Google's strong traction within
mobile, renewed emphasis on its core search product, strong push into
display advertising, and recently stepped-up efforts to build a rival social
networking service to Facebook. Moreover, as the need for the rival
social networking service is the primary basis for our Underweight
rating, we would view a strong Google competitor as a major positive for
the stock and would revisit our investment thesis.
Until Google's social networking strategy is made clear, we are
forecasting Google's online advertising share to hold flat at 43% of the
online advertising industry over the next five years (below current Street
expectation) and Google's search revenues as a percent of global
online advertising to decline by 200bps to 38%. We note that our
hypothetical Facebook risk scenario is not presently in our estimates.
Our target price of $580 per share implies about 10% upside and the
assumption that Google can trade at 18.9x our $30.62 EPS estimate for
2011, in line with its current trading multiple. Ìn addition, our $580 target
price is supported by our discounted-cash-flow (DCF) analysis whereby
we assume a 3% terminal growth rate and an 11.5% weighted average
cost of capital.
2 Year Price History

10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/10
200
300
400
500
600
700
600
700
800
900
1,000
1,100
1,200
1,300
Source: FactSet Prices
GoogIe Inc. (CI A) vs. S&P 500
24-Sep-2008 to 24-Sep-2010 Price (Local Currency)
Google Ìnc. (Cl A) (Lef t)
S&P500 (Right)


Source: FactSet
September 28, 2010


2

Initiating with Underweight
Investment Thesis
We are initiating coverage of Google Ìnc. with an Underweight rating and a $580 target
price. Our rating reflects a below-consensus view of the growth prospects for traditional
search in light of increased competition from social networking and display. Our major
concerns are as follows: (1) Facebook's present growth trajectory, combined with its use of
Open Graph and Likes, threatens to undermine Google's ability to offer advertisers highest
yield, which could result in a revenue share shift to Facebook and "reverse network effect¨
consequences for Google; and (2) display marketplace improvement is creating an
increasingly viable alternative to search.
Ìn this report, we focus on Google's competitive strength versus Facebook and, to a lesser
extent, the display industry in general. Specifically, we assess a challenge from Facebook
to Google's core advertising algorithm, PageRank, in which we refashion Google's
PageRank algorithm on a "Like-driven¨ quality score, which we coin, FaceRank. Ìn a
hypothetical scenario analysis, we also quantify the Facebook risk for Google. We estimate
20% of Google's market cap (or roughly $100 per share) to be at risk by 2013, assuming
no offsetting cost-reduction measures by Google. Moreover, as we would view a strong
Google competitor as a major positive for the stock, we would at that point revisit our
investment thesis.
Google has underperformed the SPX by nearly 20% YTD. While this underperformance
has been due in large part to concerns over the company's competitive positioning,
brought on by stalling search query share, pullout from China, privacy violations, and
antitrust challenges, we think that little is understood about what we believe to be the more
serious threat for Google: the potential that it will no longer serve the highest yield to
advertisers online.
Figure 1: GoogIe's YTD Share Performance
-35º
-30º
-25º
-20º
-15º
-10º
-5º


10º
Jar-10 Feo-10 Var-10 Apr-10 Vay-10 Jur-10 Ju|-10 Aug-10
AdVoo Acqu|s|l|or
Approved
0oog|e lrrealers
lo |eave Cr|ra Coog|e
8PX

Source: Company data, Evercore Group L.L.C. Research
We begin by assessing search's revenue growth drivers and the role of "network effect¨
within search. We then lay out the risks we see to Google's continued network effect from
social networking and display. Finally, we examine the risks to our Underweight thesis,
which include Google's strong traction within mobile, renewed emphasis on its core search
product, strong push into display advertising, and recently stepped-up efforts to build a rival
social networking service to Facebook.

September 28, 2010


3

The Highest Advertiser YieId OnIine
The key to Google's search revenues is ad relevancy, which offers advertisers higher yield
on their search investment. Higher advertiser yield in turn drives paid click volume and
higher cost per click (CPC), as the advertiser will be more willing to spend on search. To
increase ad relevancy, a search engine needs a significant amount of query volume and an
algorithm that promotes ad quality, thus increasing ad relevancy. For additionaI detaiI on
the drivers of search revenue, pIease refer to the company overview section at the
end of this report.
Figure 2: Search Engine Revenue Drivers
Query Volume
Ad Relevancy
Paid Clicks
Conversion /
Advertiser ROI
Ad Matching
Algorithm
Cost per Click
Search Engine Revenue

Source: Company data, Evercore Group L.L.C. Research
Ìn the preceding chart, we show that higher ad relevancy drives paid clicks and advertiser
purchase conversion, which leads to higher cost per click, or CPCs. Higher CPCs along
with higher paid clicks leads to higher search revenues.
September 28, 2010


4

RoIe of Network Effect
A search engine's ability to serve more relevant ads has a volume and pricing benefit that,
in turn, drives further volume and pricing benefit, thus creating "network effect.¨
From a user standpoint, the better ad relevancy results in more paid clicks, and (again) in
improved ad relevancy.
From an advertiser standpoint, the higher ad relevancy leads to better conversion, which
drives CPC pricing and higher ad coverage, with the latter resulting (again) in improved ad
relevancy.
We summarize the network effect below from an advertiser and user perspective.

Figure 3: Ad ReIevancy's RoIe in Driving Network Effect
Ad Re|evancy
6onvers|on 6P6 Pr|c|ng
Pa|d 6||cks
User
Advert|ser
Ad 6overage

Source: Company data, Evercore Group L.L.C. Research
VoIume's RoIe in Ad ReIevancy
Volume share is almost directly proportional to click pricing, given the higher ad relevancy
and conversion it offers. On an owned-and-operated (O&O) basis, Google delivers
approximately two thirds of the search queries in the U.S. and roughly 71% worldwide.
Figure 4: GoogIe's Share of Web Queries, 1H10
0oog|e, êZ.êº
0oog|e, Z1.1º
Yaroo, 18.0º Yaroo, 11.0º
8|rg, 10.3º
A0L, 2.0º
8a|du, 10.8º
8|rg, 3.3º
As|, 2.1º Naver, 2.2º

10º
20º
30º
10º
50º
ê0º
Z0º
80º
90º
100º
u.3. 0|ooa|
º

3
e
a
r
c
r

3
r
a
r
e

Source: comScore, Evercore Group L.L.C. Research
September 28, 2010


5

Google's higher purchase conversion provides Google disproportionately higher revenue
relative to its query share. Ìn fact, we estimate that, on a revenue basis, Google has 83%
of the global search industry revenues, with the U.K. and U.S. even higher at 98% and
90%, respectively. We derive these estimates by subtracting licensing & fee and our
estimates for Google's display revenues from its reported gross revenues by geography.

Figure 5: GoogIe's Share of Industry Search Revenues 2003-2009
90º
98º
Z1º
83º

10º
20º
30º
10º
50º
ê0º
Z0º
80º
90º
100º
u.3. u.K. R0w 0|ooa|
100º

Source: Company data, Evercore Group L.L.C. Research
PageRank's RoIe in Ad ReIevancy
To drive ad relevancy even further, Google invented PageRank. PageRank increases ad
quality by discounting higher-quality listings. While lower click pricing has a revenue
impact, the higher converting search ads actually result in higher advertiser bidding, driving
improved CPC pricing along with higher paid click quantities. Therefore, through use of a
discount, the significance of PageRank is that it manages to drive overall search revenue
higher.
Figure 6: PageRank AIgorithm's Affect on Search Network Effect
8hort-Term
Revenue 0ec||nes
Long-Term
Revenue Acce|erat|on
CPC x Pa|d C||c|s = Reverue

Source: Company data, Evercore Group L.L.C. Research
To demonstrate how the discounted CPCs can drive higher ad revenue, we show a few
more arrows below. By encouraging advertisers to increase ad relevancy through
discounts, click-thru and purchase conversion improve, which drives higher CPC pricing,
ad coverage, and paid clicks. This, in turn, drives search revenue.
CPC pricing is lowered for higher
quality ads, driving higher
relevancy, advertiser yields, and
overall search revenues for
Google.
We estimate Google accounts for
83% of the global search industry
revenues.
PageRank's advantage was its
ability to discount higher-quality
ads, which resulted in higher
search revenue.
September 28, 2010


6

Figure 7: Using Lower CPC Pricing To Increase Ad ReIevancy = Higher Search Revs

PageRank
Ad Re|evancy
Pa|d 6||cks
8earch Revenue
6P6 Pr|c|ng
Ad 6overage
6onvers|on
6||ck-thru
6P6 Pr|c|ng

Source: Company data, Evercore Group L.L.C. Research
To review the search auction dynamics in detaiI, as weII as a PageRank exampIe,
pIease refer to the company overview section at the end of this report. Now, we
review the risks to Google's continued ability to improve ad relevancy, given the increased
competition from social networking and several improvements within the display
marketplace.
September 28, 2010


7

Threat to the Highest YieId: SociaI
Social networking stands to offer highly relevant search and display ads, assuming current
volume, data and analytic trends persist. Moreover, as social networking does not allow
search engines to crawl or index their content pages, a growing portion of the web's overall
behavior is not being captured by the engines. Ìn our view, risks to search from social
networks fall into two main categories:
• Potential for better ad targeting (higher monetization).
• Social network's ability to satisfy search intent (drive engagement).
Open Graph & Preference Buttons
Social networks' monetization potential was made clearer by the unveiling of Facebook's
"Open Graph¨ in April and the subsequent introduction of "Likes.¨ Ìn our view, through the
Open Graph and Likes, Facebook established a method in which to mimic ad relevancy
benefits derived by Google's PageRank algorithm. However, instead of the "quality score¨
being based on click-thru, as in the case with PageRank, the quality score can be based
on the explicitly indicated preferences of Facebook users, wherever they are on the web.
What Is the Open Graph?
With the open graph, Facebook is able to follow its users' preferences outside of
Facebook. Facebook's Open Graph personalizes the web for Facebook users by offering
"plug-ins¨ to websites, which make it easy for users to see information from or about their
Facebook friends without leaving a particular website or going through a login process. An
example is the new "Like¨ button on websites. A user can "Like¨ an article on CNN.com for
instance, share it with friends, and see who else liked it. Ìt also allows websites and apps to
tailor offers, features and services to the users even though the users have never visited
the site before. For example, if a Facebook user visits Pandora for the first time, Pandora
can immediately start playing songs from bands the user has Liked in the past, either on or
off Facebook. This allows Facebook to become a web identity that saves users time and
makes sharing more seamless.
RoIe of Preference Buttons
Preference buttons can be used on and off the social networks, essentially on any
webpage where the buttons have been embedded. As a result, the social networks are
able to track topics, products and content that their users are interested in and use this
information to optimize ad quality.

Figure 8: "Like" and "Tweet" buttons

Source: Company data, Evercore Group L.L.C. Research
As companies integrate Facebook into their pages, allowing Facebook to capture the
information for their profile and network, Facebook stands to use Likes as a basis of quality
score for ads. Similar to PageRank, the higher Like scores can be used to reward
advertisers with more favorable pricing and placement. Moreover, with the open graph, this
can be done for advertisers on and off Facebook. As a result, we suspect that advertisers
will want to more substantially integrate Facebook into their online efforts, driving similar
"network effect,¨ a likely trend we map out in the following example.
Higher 'Like" scores can be used
to reward advertisers with more
favorable pricing and placement.

With the open graph, this can be
done for advertisers on and off
Facebook.
Facebook established a method
to mimic the ad relevancy
benefits, derived by Google's
PageRank algorithm.
September 28, 2010


8

SociaI's TheoreticaI "PageRank" AIternative
Under this theoretical scenario, which we refer to as "FaceRank,¨ we assign rank (i.e.,
quality score) in terms of "Like degrees,¨ whereby each degree designates a network
distance between the user and a person who has indicated a Like for the advertiser's
product. Therefore, to show how a quality score can be derived, we show four degrees of
network separation. The first is my own individual network; the second degree would be
the networks of people in my network, and so on.
Figure 9: FaceRank QuaIity Score
0ua||ty 8core = (1 | L|ke 0egrees}
1
2
3
4
0.50
0.33
0.25
1.00
= lrd|v|dua|
= ¨L||es¨ Veasured |r NelWor| 0egrees

Source: Company data, Evercore Group L.L.C. Research
Google determines a quality score algorithmically based on user click-thru and perceived
ad relevancy and landing page quality, as determined by the search engine. Then, the
quality score is multiplied by the advertiser's maximum bid to obtain its PageRank
score. Therefore, we show below how this can similarly be applied to Likes. We use the
inverse of Like degrees to indicate quality as closer to the individual is better.

Figure 10: Comparison of PageRank to "FaceRank"
“FaceRank:”
PageRank:
= FaceRank x (1/Like Degrees) Max Bid
= PageRank x Quality Score Max Bid
“FaceRank:”
PageRank:
= FaceRank x (1/Like Degrees) Max Bid
= PageRank x Quality Score Max Bid

Source: Company data, Evercore Group L.L.C. Research: PageRank quality score is based on Click-thru, ad relevancy determinations, and
landing page quality. Please see company overview section for more detail.

September 28, 2010


9

Ad PIacement based on QuaIity Score
Following the same basic PageRank algorithm, but swapping clicks for Likes, we see that
Advertiser 3, despite not having the highest bid amount, could receive first placement in
targeting an ad to a Facebook individual based on the advertiser's higher FaceRank score
(Max Bid x Quality Score = FaceRank).
Figure 11: TheoreticaI Ad PIacement ExampIe for "FaceRank" AIgorithm
Advert|sers Hax ß|d = "FaceRank" Pos|t|on
1 S1.0 0.50 2.00 3
2 S5.0 0.25 1.25 Nol sroWr
3 S3.0 1.00 3.00 1
1 S5.0 0.33 1.êZ 2
= lrd|v|dua|
= ¨L||es¨ Veasured |r NelWor| 0egrees
x (1 | L|ke
0egrees}
1
2
3
4

Source: Company data, Evercore Group L.L.C. Research

Ad Pricing based on QuaIity Score
Secondly, if we extend the theoretical example to calculate price, we can show how pricing
could be discounted for advertisers with more Likes, in a similar way to what Google
manages to do with PageRank. Ìn fact, we use the PageRank pricing algorithm as an
example of how this could work.
We show below how pricing is derived under PageRank, which is the PageRank score of
the next ad placement, divided by the advertiser's own quality score. We can then apply
this formula to FaceRank. The only difference is that the quality Score (Q) is based on the
inverse of Likes (Q = 1 / L), which would thus allow Facebook to use Likes to determine
pricing and ad placement.

Figure 12: Comparison of PageRank and "FaceRank" Pricing Based On QuaIity Score
Price=B
2
Q
2/
Q
1
Nexl Pos|l|or
PageRar| 3core
Price=(B
2
(1/L
2
))
/
(1/L
1
)
Nexl Pos|l|or
FaceRar| 3core
PageRank:
“FaceRank:”
0ua||ly 3core ol 8|dder
0ua||ly 3core ol 8|dder
(oased or L||es)
Source: Company data, Evercore Group L.L.C. Research
As a pricing example, we see that Advertiser 3, which received the first placement, bid $3
per clicked ad, but only paid $1.70 cents, due to its higher quality score relative to other
bidders. Similar to PageRank, the ad price is based on the "FaceRank¨ score of the ad in
the next position, divided by the advertiser's own quality score.

September 28, 2010


10

Figure 13: TheoreticaI Pricing ExampIe for "FaceRank" AIgorithm
Advert|sers Hax ß|d = "FaceRank" Theoret|ca| 6P6
3 S3.0 1.00 3.0 1.Z/1 =S1.Z0
1 S5.0 0.33 1.Z 2/0.33=Sê.00
1 S1.0 0.50 2.0 V|r|rur Pr|ce
x (1 | L|ke
0egrees}
Source: Company data, Evercore Group L.L.C. Research

Higher SociaI Network Ad Revenues from Improvement to Ad ReIevancy
By using Likes to discount pricing and improve ad placement for the advertiser, Facebook
stands to drive network effect similar to the way Google managed to do with PageRank in
search. Moreover, to improve ad positioning and pricing, advertisers are encouraged to
perpetuate the use of Likes by further integrating the Facebook experience into their
overall web presence.
Figure 14: "FaceRank's" TheoreticaI PotentiaI To Drive Network Effect
“FaceRank”
Ad Relevancy
Paid Clicks
Facebook
Revenue
Ad Pricing
Ad Coverage
Conversion
Click-thru
Ad Pricing
Source: Company data, Evercore Group L.L.C. Research
SociaI's PotentiaI to Satisfy "Search Intent"
.While Being Off Limits to Search Engines
Social networks such as Twitter and Facebook have made real-time search an increasingly
important part of information gathering on the web. While these searches do not fall under
the traditional search category, they are nonetheless important, given that users who set
up real-time feeds find themselves with less need to search. Moreover, users have started
viewing these real-time sources of information as credible and as providing the latest
updates on unfolding events. (Facebook is owned by Facebook Ìnc. and Twitter is owned
by Obvious Corp. Both Facebook Ìnc. and Obvious are private companies.)
While Google and other search engines crawl the web to maintain an index which is then
optimized algorithmically to serve search results, much of the information possessed by
social networks remains behind firewalls. Therefore, while certain public portions of profile
pages can be searched, user social interactions and activities are typically off limits to
search engines. As such, the more web activity that takes place within social networks, the
higher the potential for an algorithmic impact to search engines, given that their view of the
web universe could potentially shrink as a percentage of total web usage.
CIoser Look at SociaI's Current Traffic Trajectory
Facebook's global pageviews comprise approximately 8% of global pageviews, nearly
double from the previous year. Meanwhile, Google's pageviews have held constant during
this same time frame at 10%.

To improve ad positioning
and pricing, advertisers are
encouraged to perpetuate the
use of Likes by further
integrating the Facebook
experience into their overall
web presence.
As more web activity happens
within social networks, there is
potential for an algorithmic
impact to search engines.
September 28, 2010


11

Figure 15: GIobaI Pageviews, Top Sites, 2007-1H10
2.Zº
3.5º
1.0º 1.0º
3.êº
1.Zº
1.2º
3.5º
5.1º
8.9º
10.2º
9.8º
2.5º
2.1º
1.3º
0.êº
1.5º
2.êº
1.Zº 8.1º
1.8º
3.êº
0.0º
5.0º
10.0º
15.0º
20.0º
25.0º
30.0º
35.0º
200Z 2008 2009 1l10
3oc|a|
Tercerl¯
Faceooo|
Vyspace
0oog|e
Yarool
V3N/8|rg
15.77
21.87
2ô.27
29.ô7

Source: comScore,* Tencent traffic includes its social network Qzone; Evercore Group L.L.C.
We note that Twitter's pageviews remain inconsequential, given that much of its traffic is
delivered through RSS feeds. However, as most Twitter users visit the Twitter site at least
once in any given month, we can compare the site to the others from the standpoint of a
unique visitor. On this basis, Twitter has roughly 17% and 13% of the unique visitors as
Facebook and Google, according to comScore.
Figure 16: Twitter Average MonthIy Uniques Versus Facebook and GoogIe
u3 Average Vorlr|y ur|ques 2010 (V||||ors)
131.2
22.9
1ê9.Z
0
20
10
ê0
80
100
120
110
1ê0
180
TW|ller Faceooo| 0oog|e

Source: comScore U.S.; Evercore Group L.L.C. Research

September 28, 2010


12

Quantifying the SociaI Threat
Given the risks outlined and our belief that Facebook stands to dramatically increase its
share of advertising revenues, we walk through an exercise to quantify what the potential
risk for Google. Bear in mind, because of the strength of network effect in search, a drop in
query or more specifically paid click volume for Google, either driven by declining user
engagement, ad coverage, or both, can have an almost equivalent decline in percentage
terms on pricing, due to volume's effect on ad quality. Ìn this hypothetical analysis, we
make several key assumptions, including the following:
Facebook can grow revenues from about $600 million, based on our estimates, to north
of $13 billion by 2015.
Roughly half of Facebook's revenue growth will come from search and Google will be
impacted by its proportionate share of the search industry.
The revenue impact to Google further impacts Google's ad relevancy and pricing from
fewer paid clicks, thus demonstrating the potential for "reverse network effect.¨
Assumption 1: Facebook Reaches North of $13 BiIIion in Revenues by 2015
To quantify the risk we see from Facebook, we start by estimating Facebook's revenue
potential. While there have been reports that place Facebook's revenues at over a billion
presently, we estimate the company's revenues at closer to $560 million, which is simply a
multiplication of the company's annual pageviews (based on 1H10) multiplied by a $0.25
effective CPM, which we view as fairly conservative. For comparison, Yahoo!'s effective
CPM, based on global comScore pagevides, is about $1.50. Moreover, we assume that
over five years, Facebook, can reach a $1.50 effective CPM while growing pageviews at a
33% compound annual rate. For comparison, Facebook grew pageviews through 2009 and
the first half of 2010 by roughly 200% year over year. Based on these assumptions, we
estimate that Facebook could reach nearly $14 billion in revenues by 2015, roughly half of
Google's expected gross revenues for 2010. This would also imply that Facebook would
comprise 15% of global pageviews, up from 8% in 1H10.

Figure 17: Estimate of Facebook Revenues, 2010E-2015E
2010 2011 2012 2013 2014 2015
Faceooo| Pagev|eWs (VVs) 2,23Z,Z02 3,35ê,553 1,ê99,1Z1 5,8Z3,9ê8 Z,312,1ê0 9,1Z8,0Z1 33º
x CPV (ellecl|ve) S0.25 S0.50 S0.Z5 S1.00 S1.25 S1.50 13º
= Facebook Est. Revenues $559.4 $1,ô78.3 $3,524.4 $5,874.0 $9,178.1 $13,7ô7.1 907
Y|Y 7 Crowth
Faceooo| Pagev|eWs (VVs) 50º 10º 25º 25º 25º
x CPV (ellecl|ve) 100º 50º 33º 25º 20º
= Facebook Est. Revenues 2007 1107 ô77 5ô7 507
2010-2015
6ACR

Source: Company data, Evercore Group L.L.C. Research

Assumption 2: HaIf of Facebook's Revenues WiII Come from Search
We then assume that, of this revenue growth, half comes from search, given that we view
social networking as satisfying attributes of both search and display and the fact that
search and display are roughly half each of the online advertising industry.

Figure 18: Estimated Impact to GIobaI Search Revenues from Facebook's Growth, 2010E-2015E
2010E 2011E 2012E 2013E 2014E 2015E
Faceooo| Esl. Reverues S559 S1,êZ8 S3,521 S5,8Z1 S9,1Z8 S13,ZêZ 90º
x º ol F8 Reverue Rea||ocaled lror 3earcr 50º 50º 50º 50º 50º 50º 0º
= Facebook Revenues from 8earch |ndustry $279.7 $839.1 $1,7ô2.2 $2,937.0 $4,589.0 $ô,883.ô 907
2010-2015
6ACR
Source: Company data, Evercore Group L.L.C. Research

Assumption 3: Proportionate Share Comes from GoogIe
Given that we estimate Google will have 84% of global search revenues in 2010, we
estimate that $236 million of Facebook's revenues this year would have otherwise gone to
Google. As Facebook's revenue model scales, we expect the revenue shift from Google to
Facebook to grow to $5.7 billion in 2015. However, as we will see, because of the impact
A decline in paid clicks can have
an almost equivalent impact on
pricing, due to volume's effect on
ad quality.
September 28, 2010


13

that query volumes have on ad relevancy and hence CPC pricing, we would expect the
revenue impact to Google to be more severe than the revenue shift to Facebook alone.

Figure 19: Revenue Shift from GoogIe to Facebook, 2010E-2015E
2010E 2011E 2012E 2013E 2014E 2015E
Facebook Revenues from 8earch |ndustry $279.7 $839.1 $1,7ô2.2 $2,937.0 $4,589.0 $ô,883.ô 907
x 0000 3rare ol 0|ooa| 3earcr Reverues 81º 81º 81º 83º 83º 83º 0º
= Cross Revenue 8hare 8h|ft from Coog|e $23ô.2 $705.7 $1,475.8 $2,447.3 $3,812.3 $5,703.1 897
2010-2015
6ACR
Source: Company data, Evercore Group L.L.C. Research

Assumption 4: GoogIe Paid CIicks Are Impacted from Shift
Ìf we assume that the shift in revenues from Google to Facebook resulted in fewer paid
clicks sold, as advertisers reallocate their budgets from search to social, there would be a
pricing impact to Google as overall ad relevancy would be impacted. Ìf we assume that
paid clicks were reduced in equal proportion to the search revenue share shift, it would
imply that 1% of Google's paid clicks would be affected in 2010, increasing to 15% by
2015.

Figure 20: Impact on Paid CIicks to GoogIe from Revenue Shift to Facebook, 2010E-2015E
2010E 2011E 2012E 2013E 2014E 2015E
0ross Reverue 3rare 3r|ll lror 0oog|e S23ê.2 SZ05.Z S1,1Z5.8 S2,11Z.3 S3,812.3 S5,Z03.1 89º
/ Corsersus Reverue Esl|rales (2010 & 2011) S21,1ê1.2 S21,338.5 S2Z,259.1 S30,530.2 S31,193.8 S38,29Z.1 13º
= |mpact on Pa|d 6||cks 1.17 2.97 5.47 8.07 11.17 14.97 ê8º
2010-2015
6ACR
Source: Company data, Evercore Group L.L.C. Research

Assumption 5: Ad ReIevancy Is Lowered Driving Down CPCs
Using the paid click impact as a proxy for CPC pricing effect, which assumes a 1:1
correlation between volume and pricing, we estimate the potential for "reverse network
effect¨ to nearly double the impact from the revenue shift alone. For example, we first take
consensus net revenue estimates for Google in 2010 and 2011 and grow these estimates
by 12% in the outer years. We then subtract the revenue shift to Facebook. On this
adjusted revenue result, we assume the impact to paid clicks is directly proportional to
CPC pricing and thus reduces CPC pricing further for Google's remaining revenues.
Therefore, we estimate that Google's net revenues to be impacted by another $234 million
in 2010 from the revenue shift to Facebook, due to lower resulting paid click growth and
the impact that this would have on pricing. Based on our estimated impact to paid clicks
over the next five years, we model an additional $4.9 billion impact to Google from lower
pricing in 2015E on top of the $5.7 billion that shifts directly to Facebook.

Figure 21: Estimated Impact to GoogIe's Revenues from Ad ReIevancy Impact due to Fewer Paid CIicks, 2010E-2015E
2010E 2011E 2012E 2013E 2014E 2015E
Corsersus Reverue Esl|rales (2010 & 2011) S21,1ê1.2 S21,338.5 S2Z,259.1 S30,530.2 S31,193.8 S38,29Z.1 13º
- 0ross Reverue 3rare 3r|ll lo Faceooo| S23ê.2 SZ05.Z S1,1Z5.8 S2,11Z.3 S3,812.3 S5,Z03.1 89º
= Coog|e Adj. Revs (ex. 6P6 |mpact} $20,925.0 $23,ô32.8 $25,783.3 $28,082.9 $30,381.ô $32,594.0 97
x CPC lrpacl lror leWer Pa|d C||c|s 1.1º 2.9º 5.1º 8.0º 11.1º 11.9º ê8º
= Est|mated 6P6 |mpact to Coog|e $233.ô $ô85.3 $1,395.9 $2,251.1 $3,387.2 $4,853.8 837
Y|Y 7 Crowth
Corsersus Reverue Esl|rales (2010 & 2011) 15º 12º 12º 12º 12º
0ross Reverue 3rare 3r|ll lo Faceooo| 199º 109º êêº 5êº 50º
0oog|e Adj. Revs (ex. CPC |rpacl) 13º 9º 9º 8º Zº
CPC lrpacl lror leWer Pa|d C||c|s 1ê0º 8Zº 18º 39º 31º
Esl|raled CPC lrpacl lo 0oog|e 193º 101º ê1º 50º 13º
2010-2015
6ACR
Source: Company data, Evercore Group L.L.C. Research
While we do not bake this scenario into our estimates, we think it is worth spelling out for
investors how we suspect this social networking risk could ultimately play out, should
Google not manage a strong social network response. Therefore, assuming this were the
September 28, 2010


14

case, we extend our hypothetical scenario to the impact it would likely have on Google's
share price.

What This WouId Mean for GoogIe Shares
By taking consensus net income for the next two years, which we hold at a constant
margin in the years following, and subtracting from this amount the combined net revenue
impact from Facebook (both directly and indirectly from lower ad relevancy and pricing), we
estimate Google's net revenue growth to decelerate from a 13% growth CAGR, which
approximates current Street consensus, to just 6% for the next five years. Moreover,
assuming Google did not take any cost-reduction measures during this time, EPS would
decline at an 8% compound annual CAGR.

Figure 22: Estimated Impact to EPS, Assuming No Cost-Reduction Measures, 2010E-2015E
2010E 2011E 2012E 2013E 2014E 2015E
Corsersus Reverue Esl|rales (2010 & 2011) S21,1ê1.2 S21,338.5 S2Z,259.1 S30,530.2 S31,193.8 S38,29Z.1 13º
- Esl. Rev lrpacl lror Faceooo| S1ê9.Z S1,391.0 S2,8Z1.Z S1,ê98.1 SZ,199.5 S10,55ê.9 8êº
= Adjusted Net Revenues $20,ô91.5 $22,947.5 $24,387.4 $25,831.8 $2ô,994.3 $27,740.2 ô7
-0pex (Currerl Corsersus) S12,392.2 S11,139.5 S15,810.3 S1Z,Z0Z.5 S19,832.1 S22,212.3 12º
= Net |ncome Adjusted $8,299.3 $8,808.0 $8,577.1 $8,124.3 $7,1ô1.9 $5,527.9 -87
/ 3rares 322.ê 321.2 325.8 32Z.1 329.1 330.Z 0º
EP8 $25.7 $27.2 $2ô.3 $24.8 $21.8 $1ô.7 -87
2010-2015
6ACR
Source: Company data, Evercore Group L.L.C. Research

Assuming Google could keep the same 17x P/E multiple at which it trades currently, which
we would view as optimistic given EPS would be in a state of decline, it would imply that
20% of Google's market capitalization could be erased by 2013 and nearly half by 2015.

Figure 23: Impact to GoogIe's Share Price and Market Cap Under HypotheticaI ExampIe, 2010E-2015E
2010E 2011E 2012E 2013E 2014E 2015E
EP8 $25.7 $27.2 $2ô.3 $24.8 $21.8 $1ô.7 -87
x P/E Vu|l|p|e 1Z 1Z 1Z 1Z 1Z 1Z 0º
= 8tock Pr|ce $437.4 $4ô1.9 $447.ô $421.8 $370.0 $284.2 -87
lrpacl lo 3loc| Pr|ce -1Zº -12º -15º -20º -30º -1êº
Currerl 3rare Pr|ce S52Z.29
x 3rares 322.ê
= Present Harket 6ap $170,079 $170,079 $170,079 $170,079 $170,079 $170,079
- lrpacl lo Var|el Cap S28,992 S21,088 S25,Z15 S31,01Z S50,Z32 SZ8,120
= Adjusted Harket 6ap $141,087 $148,991 $144,3ô4 $13ô,0ô2 $119,347 $91,ô59
2010-2015
6ACR
Source: Company data, Evercore Group L.L.C. Research

Moreover, by running the hypothetical exercise through our Google DCF, we estimate a
$300 share price for Google. Again, this assumes no cost-reduction measures by Google,
the absence of a strong competitive response to Facebook in the coming months and
years, and both the direct and indirect impacts (i.e., CPC pricing) on Google's business
model from continued Facebook growth.

September 28, 2010


15

Figure 24: HypotheticaI DCF Assuming Facebook Risk Is ReaIized
6ACR
2011E 2012E 2013E 2014E 2015E '10-'15
E8lT0A S11,250.Z S1ê,29ê.ê S18,5Z0.2 S20,951.9 S22,ê33.3 12.3º
Nel lrcore Z,218.ê Z,051.5 ê,ê51.1 5,ZZ2.9 1,0ê1.ê -10.Zº
÷ 0eprec|al|or & Arorl|zal|or 2,1ê3.Z 2,18Z.2 2,8Z1.3 3,130.ê 2,591.8 8.êº
÷ 0lrer Nor-Casr Crarges (8erel|ls) 1,122.1 1,ê1Z.2 1,81Z.3 2,0ê1.5 2,305.ê 11.8º
÷ lrleresl Experse (lrcore) (Z39.9) (92Z.9) (1,118.1) (1,302.0) (1,155.3) 3Z.1º
÷ Crarges |r 0peral|rg Assels & L|ao|||l|es 115.2 133.2 591.3 51ê.9 ê03.5 22.5º
= 6ash F|ows $10,479.7 $10,ôô1.2 $10,821.7 $10,182.8 $8,110.1 -4.07
- Cap|la| Experd|lures 2,02ê.ê 2,323.2 2,193.1 2,901.ê 3,158.ê 11.9º
= Free 6ash F|ows $8,453.0 $8,338.1 $8,328.ô $7,281.2 $4,951.ô -9.97
Y/Y / 0nange 1.1º (1.1)º (0.1)º (12.ê)º (32.0)º
Terr|ra| FCF S5,100
x Terr|ra| FCF Vu|l|p|e 11.8x
= Term|na| Va|ue $ô0,1ô4
we|grled Average Cosl ol Cap|la| 11.5º
Perpelua| uFCF 0roWlr Rale (¨0¨) 37
Terr|ra| va|ue Sê0,1ê1
/ E8lT0A S22,ê33
= |mp||ed Term|na| Eß|T0A Hu|t|p|e 2.7x
2011E
NPv ol Free Casr F|oWs S2Z,895
÷ Preserl va|ue ol Terr|ra| va|ue S31,91Z
= Enterpr|se Va|ue $ô2,842
÷ 0ll-8a|arce 3reel Assels S350.0
= Adjusted Enterpr|se Va|ue $ô3,192
- Year Erd Nel 0eol (Casr) (S32,315)
= Equ|ty Va|ue $95,508
/ 0||uled 3rares 0ulslard|rg 322.ê
= Equ|ty Va|ue Per 8hare $29ô.1

Source: Company data, Evercore Group L.L.C. Research
While our estimates do not reflect the above scenario risks, we are focused on Google's
major response initiative to Facebook expected later this year and in the meantime are
taking a cautious view of the stock. We believe this is the correct approach, given the
social risk and increased competition for Google's search business from display
advertising, given recent marketplace advances, which we will now review.
DispIay Competition AIso Increasing
Ìn addition to the threat from social networking and Facebook, Google is also experiencing
stiffening competition within display. Display advertising advances, such as improvements
in targeting, buying efficiency and "real-time¨ bidding, are making display a more viable
alternative to search for many advertisers. Some of the major developments within display
are as follows: display is moving further down the purchase funnel due to improved
targeting capabilities, the display marketplace itself is becoming more efficient, and real-
time bidding is allowing advertisers to adjust spending based on response levels, seconds
before the ad is placed, which, until recently, were exclusive attributes of search.
DispIay Moving Down the Purchase FunneI
With the availability and improved use of "intent data,¨ display advertisers are able to
identify individuals further down the purchase funnel, targeting based on audience data,
recent purchases, search activity, and other expressed interests. Ìntent data could be any
information about the individual that could help an advertiser determine their motivations
prior to showing the ad.
September 28, 2010


16

The purchase funnel breaks one's motivation to purchase into four areas: brand and
product awareness, brand favorability, purchase consideration, and intent to purchase. A
person with the intent to purchase would be considered furthest down the purchase funnel.
This is typically the area of the purchase funnel where advertisers use search the most. Ìn
contrast, display has typically been used to drive awareness and brand favorability further
to the top of the funnel.
Figure 25: DispIay Now Targeting Users with Consideration & Intent To Purchase

Source: Company data, Evercore Group L.L.C. Research
Now, with the use of "intent data,¨ search and display are targeting individuals deemed
ready or considering purchase. Moreover, from a social networking standpoint, due to the
"push/ pull¨ aspect of social networks, they have the ability to satisfy advertiser needs all
the way down the consumer purchase funnel, including driving awareness, brand
favorability, purchase consideration and intent to purchase. For instance, users pull
information by asking their friends questions or searching for news and entertainment.
Ìnformation is also pushed to social networking users based on friends' recommendations,
newsfeeds and other content updates. Ìn other words, Facebook can make
recommendations in addition to waiting for that interest to be triggered in the form of a
query, such as is the case with search.
With the use of 'Intent data,"
search and display are
targeting individuals deemed
ready or considering
purchase.
September 28, 2010


17

MarketpIace Efficiency Improvements
Display is also moving from a highly fragmented marketplace to one that is interconnected,
offering advertisers improved measurability and pricing, and more closely resembling the
auction dynamics within search. Factors that are driving this change include: the shift
toward exchange and demand-side buying platforms and the use of real-time bidding. We
show below how the display buying landscape has shifted from primarily direct purchase to
exchange and demand-side platforms (DSPs), with the latter capable of optimizing across
exchanges and ad networks. Each stage of display marketplace development has offered
advertisers increased buying efficiency, in many ways similar to what they have come to
expect from search.
Figure 26: EvoIution of DispIay Buying
Publisher
$1.00
$0.80
$0.64
$0.51
$0.41
$0.33
Ad Network
1
Ad Network
2
Ad Network
3
Ad Network
4
Ad Network
5
Ad Network
6
Publisher
Advertiser
Publisher
Advertiser
Advertiser
Direct:
(inefficient)
Ad Networks:
(inefficient)
Exchanges:
(efficient)
Publisher
Advertiser
Demand-Side
Platforms:
(More efficient)
Exchange
Ad Network
1
Publisher
Publisher
Publisher
Advertiser
Advertiser
Advertiser
Ad Network
2
Ad Network
3
Ad Network
4
Ad Network
5
Ad Network
6
Publisher
Publisher
Publisher
Advertiser
Advertiser
Advertiser
DSP
Exchange
1
Exchange
2
Exchange
3
Yield
Optimizer
DSPs Capable of Optimizing Across Multiple Exchanges

Source: Company data, Evercore Group L.L.C. Research
Ìn addition, within the DSP phase, we show the role of "yield optimizers,¨ which essentially
play the reverse role of DSPs, optimizing price for publishers across multiple exchanges
and networks. The combination of DSPs and yield optimization is bringing more advertisers
and publishers into the third-party display ecosystem, thereby bringing increased pricing
efficiency and inventory volume to the market. Furthermore, real-time bidding, which was
developed by the exchanges, matches a display advertiser with a publisher in the moments
before the ad loads. This allows advertisers to manage their spending flows based on
conversion and responsiveness levels just as advertisers have typically done with search.
Overall, improvements in display audience targeting efficiency and real-time bidding are
offering advertisers many of the same advantages that were previously exclusive to
search, just with more ad formats to choose from.

Combination of DSPs and
yield optimization is bringing
more advertisers and
publishers into the third-party
display ecosystem.
September 28, 2010


18

Risks to Underweight Thesis
Our Underweight rating does take into account Google's strong traction within mobile and
display, recent search product advances, and the company's anticipated social networking
competitive response. However, we view much of the company's success in these areas
as necessary to Google retaining its present position or as providing benefits that are
largely indirect to Google. Nevertheless, we view these initiatives as important to Google's
overall revenue potential and as potential "risks¨ to our Underweight thesis on the stock.
We show below how Google's current O&O inventories and ad platforms flow into its
revenue equation. Moreover, we view all of these platform initiatives as critical to Google's
revenue potential and ability to offer overall higher relevancy and advertiser yield.
Figure 27: PIatforms HeIp Drive Network Effect
Partner |nventor|es
vo|ure
Ad Re|evarcy / Y|e|d
(|.e., pr|c|rg)
x
= Reverue
0&0 |nventor|es
6
o
n
t
e
n
t

&

6
o
m
m
u
n
|
c
a
t
|
o
n
s
Ad P|atforms
Search
Mobile
Display
Exchange |nventor|es
Over 1 million
Web, video,
gaming, and
mobile display
partners
8
e
a
r
c
h

Source: Company data, Evercore Group L.L.C. Research
Ìn this section, we walk through Google's recent traction in search, mobile and display and
its potential Facebook competitive response.
Thesis Risk #1: GoogIe's Facebook Response
While a strong Facebook response would technically be a "risk¨ to our Underweight thesis,
we would view a strong social launch by Google as a potential game changer, which would
result in our revisiting our thesis and/or estimates. According to our conversations with
developers, the new social interface (internally named GoogleMe) is likely to include
Google's communication tools (including Gmail and Buzz), content delivery services
(including video, games, apps and the soon-to-be launched cloud music service), third-
party services (including social networks and micro-blogs) and, potentially, a micropayment
capability that will enable small purchases on the web, such as for subscription news
articles, games, apps and virtual goods. While this is all speculation at this point, we do
believe that Google's recent actions do suggest that the company is moving in this
direction.
Google has been buying companies that have a specific focus on social, either through
development of apps and games or through providing another social product, such as
social searches, which scan profile information across social networking sites. We provide
here a list of a few such companies that Google acquired in just the last few months. We
provide additional detail on these acquisitions below. As shown, games, social search and
shopping, as well as apps, are the company's recent focus.
We view Google's efforts in
social as particularly
important, given the owned-
and-operated inventory and
ad relevancy benefits it
stands to offer.
September 28, 2010


19

Figure 28: Business Descriptions on SociaI/Games Acquisitions
Games / MobiIe
SociaI Search
Games
SociaI Shopping /
Payments
Apps
Games
S
I
i
d
e

I
n
c
Social Network Applications (4-Aug-2010, Complete), Price: $182M
Slide Ìnc. offers online applications like slideshow, image and video personalization,
guestbook, and virtual gift applications for social networks.
Z
y
n
g
a
Game Developer, (10-Jul-2010, Complete), Price: $100-200M (Est.)
Founded in July 2007; Social network game developer; develops browser-based
games.
n
g
m
o
c
o
Mobile Game Developer, (11-Aug-10, Complete), Price: $5M
Founded in July 2008; Publisher of video games for the iOS platform (iPhone/iPad)
J
a
m
b
o
o
I

I
n
c
Social Shopping Network & Online Payment (9-Aug-10, Complete), Price: $70M
Jambool Ìnc. operates Social Gold, an industry-leading virtual monetization platform.
Social Gold enables developers to create and manage their own virtual currency.

S
o
c
i
a
I

D
e
c
k
Mobile Social Game Developer (30-Aug-2010, Complete), Price: N/A
A Waterloo-based developer of mobile social gaming software; its technology allows
game play across multiple mobile devices and social network; developed games for
iPhone, Facebook, and BlackBerry.
A
n
g
s
t
r
o
Social Search (27-Aug-2010, Complete), Price: N/A
Angstro.com's service "Noteworthy News¨ delivers news about people and companies
in real-time. Other offerings ÷ Knx.to and Disco Explorer ÷ sort updates, photos and
links from social networks.

Source: Company data, Evercore Group L.L.C. Research

Ìn addition, we suspect Google will leverage many of the content and communications
services it already offers in rolling out its new interface. We provide a list of some of these
services in the following exhibit.
Figure 29: Current or Announced Content and Communications
P|atform 0escr|pt|on
6ontent
YouTuoe up|oad ard srare v|deos lree ol crarge; reverues lrrougr adverl|sererls
0oog|e Ed|l|ors For purcrase ard doWr|oad e|eclror|c ed|l|ors ol ooo|s (sl||| lo oe |aurcred)
NeWs NeWs aggregalor Wr|cr d|sp|ays sporsored ||r|s or cerla|r |eyWords
F|rarce 8us|ress |rlo, reWs ard |rleracl|ve crarls
lea|lr 0rgar|ze your red|ca| records or||re
Vaps F|rd po|rls ol |rleresl or rap; d|sp|ays adverl|sererls us|rg Ad3erse
Reader weo-oased corlerl aggregalor lral a|so a||oWs srare ol corlerl
8|ogger 8|og 3rar|rg Too|
A|erls 0r||re corlerl ror|lor|rg serv|ce W|lr auloral|c rol|l|cal|or lac|||ly
NeWspass (Reporled) V|cro payrerls so|ul|or lo Weo corlerl, v|rlua| goods & olrer
6ommun|cat|on
0-Va|| Ad-supporled Weo-ra|| serv|ce
0oog|e Ta|| lV ard ca|| your lr|erds lrrougr your corpuler (volP capao|||ly)
0oog|e vo|ce 0re ruroer lor a|| your prores, or||re vo|cera|| ard creap ca|||rg
8uzz NelWor||rg ard ressag|rg loo| |rlegraled |rlo 0-Va||
Trars|ale Trars|ale lexl oelWeer |arguages; A|so used or sore Ardro|d roo||e prores
0roups 3erd|rg ressages across ra|||rg ||sls

Source: Company data, Evercore Group L.L.C. Research
Ìn addition to current offerings, Google is also expected to launch a cloud-based music and
paid-video service, a games platform, a micropayment service, and a television platform
later in the year, which we suspect will also somehow be rolled into this new social
communications service.
September 28, 2010


20

Figure 30: SIated Content and Communications Launches
P|atform 0escr|pt|on Expected
0oog|e Vus|c C|oud Vus|c 3erv|ce 1010
0oog|eTv 3ollWare P|allorr 1010
Vov|e v00 v|deo-or-derard pay serv|ce 2l10
0oog|e NeWspass V|cropayrerl serv|ce lor corlerl, v|rlua| goods & olrer 2l10
0oog|e 0ares 0ares p|allorr 2l10

Source: Company data, Evercore Group L.L.C. Research
PotentiaI for a Game Changing SociaI Networking Response
We suspect Google's chances for success will depend on the simplicity of the user
interface; the seamlessness of its integration with other services; the ability of users to port
their contact, music and video lists and libraries from other services; and finally, something
that users cannot currently receive elsewhere. This "must-have¨ service may have to do
with a micropayment option or a number of other services, including video-calling from
Gmail, discounted games and virtual good services or libraries of entertainment content.
For now, it appears that games, apps and search seem to be the areas of social that
Google is focusing on the most, due in part to the significant amount of social networking
usage that this content helps generate. We support these efforts but believe the social
networking response will need to offer more. Nevertheless, roughly 20% of Facebook's
traffic stems from five game applications on its site. Ìn addition, Zynga, which Google just
invested in, offers five of the six top apps available on Facebook. We show below our
estimates of Facebook's top app traffic as a percentage of overall Facebook pageview
traffic.
Figure 31: Game Apps as percentage of Facebook Traffic
97
ô7
37
27
27
17
07
17
27
37
47
57
ô7
77
87
97
Farmv|||e
(Zynga}
Texasho|d'em
(Zynga}
Front|erV|||e
(Zynga}
Phrases 6afewor|d
(Zynga}
Haf|awars
(Zynga}
97
ô7
37
27
27
17
07
17
27
37
47
57
ô7
77
87
97
Farmv|||e
(Zynga}
Texasho|d'em
(Zynga}
Front|erV|||e
(Zynga}
Phrases 6afewor|d
(Zynga}
Haf|awars
(Zynga}

Source: Evercore Group L.L.C. Research Estimates based on comScore data
Ìn sum, while games and apps do generate a significant amount of social networking
traffic, we are not convinced that this strategy alone is enough to stem the social
networking risk for Google. As we said, we will be looking for a social product that has a
simple user interface, seamless integration with other third-party services, and a "must
have¨ differentiator that will be enough to convince people to alter current social behaviors.
Thesis Risk #2: Recent Search Enhancement
Based on recent investments in its traditional search product, we expect Google to
maintain its dominant query and revenue share in traditional search, despite the recent
inroads by competitors, including Microsoft's (MSFT, $24.77, Not Covered) Bing. While we
About 20% of Facebook's traffic
stems from 5 game applications.
September 28, 2010


21

believe it is too early to predict whether these enhancements can accelerate query share
advances any time soon, we would expect such query share advances to help drive
volume and ad relevancy and would therefore offset a portion of the social platform risk we
have laid out.
Recent Advances in "ContextuaI" Search
Contextual search (or sometimes referred to as semantic) aims to analyze keyword
meaning to understand the query's intention as opposed to straight algorithmic matching.
By understanding the query intention, other relevant content can be presented to the user
to improve the search experience. For instance, a search for "Rome¨ can offer photos of
the city, points of interest, and travel information, such as hotels and flights, among other
information. Traditional search, however, would provide results based on the keyword
Rome and matching based on user click-thru.
Ìnterestingly enough, the introduction of contextual signified a philosophical shift in how
search engines operate by inferring meaning and programming based on that meaning, as
opposed to letting user clicks determine what results are seen. To some extent, the
contextual search engine has became more portal-like and less social by identifying the
query intention for the user as opposed to letting users determine.
Microsoft's Bing search engine, launched in June 2009, made early progress in contextual,
in part due to its 2008 acquisition of Powerset, a company which integrated data from
Wikipedia and other databases, including ÌTA Software and MetaWeb, both of which were
recently acquired by Google in an apparent effort to match Bing's contextual capability. We
show below what a search for "Rome¨ on Bing serves. As shown, nearly the full first page
provides basic contextual information on the city, including weather, attractions, and
Wikipedia information, intended to help users make decisions around planning a trip to
Rome.
Figure 32: Bing Search for "Rome"

Source: Company data, Evercore Group L.L.C. Research

September 28, 2010


22

While Google now offers similar contextual results to Bing, a quick look at Google's query
volume share in the U.S. relative to the other engines shows that, since Bing's launch
(June 2009), Google's share has stalled at about 64% of U.S. search queries, while Bing's
share has increased from 9% to 12% of U.S. search queries, demonstrating its increasing
popularity with many users.
Figure 33: Domestic Share of Queries, 2007-2Q10
5ê.1º
ê1.8º
ê1.êº ê1.1º ê3.êº
21.1º
20.Zº
19.3º
1Z.êº 18.3º
10.1º
8.8º
9.0º 11.9º 12.2º
1.Zº 1.5º
3.3º
3.Zº 3.êº
1.êº 1.2º
2.1º 2.3º 3.8º

10º
20º
30º
10º
50º
ê0º
Z0º
80º
90º
100º
200Z 2008 2009 1010 2010
7

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As|
A0L
V3N/ 8|rg
Yaroo
0oog|e

Source: comScore, Evercore Group L.L.C. Research
We provide next detail on Google's recent search acquisitions whereby we notate which
acquisitions provide contextual capabilities versus real-time. Again, contextual results are
search results that take into account more information than just the term searched, such as
third-party data that can provide related information on the search term. Real-time, on the
other hand, relies on networks of individuals to provide current information.

September 28, 2010


23

Figure 34: GoogIe's Search Acquisition DetaiI, 2010
ReaI-time
ContextuaI
ContextuaI
ContextuaI
ReaI-time
ContextuaI
ReaI-time
P
I
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k

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A

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o
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I
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R
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b
a

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c
Social Search (27-Aug-2010, Complete), Price: N/A
Angstro.com's service "Noteworthy News¨ delivers news about people and companies
in real-time. Other offerings ÷ Knx.to and Disco Explorer ÷ sort updates, photos and
links from social networks.
A
n
g
s
t
r
o
.
c
o
m
Mechanical Zoo's Aardvark social network service allows users to ask questions and
searches its database for user profiles that are likely to answer the question.
MetaWeb's Freebase database system is modeled on the Semantic Web idea wherein
all data has meaning and is linked to other content within the database.
Travel Booking Engine, (1-Jul-2010, Pending), Price: $700M
The travel search engine possesses user travel preference data which offers contextual
search and ad targeting capability.
Social Search (11-Feb-2010, Complete), Price: $50M
Social & Visual Travel Guide, (21-May-2010, Complete), Price: N/A
Ruba Ìnc is a visual and social travel guide site that provides visual and written results
by other travelers
Plink is a visual search application for mobile phones that lets users search for images
by clicking similar images, and once the subject image is located, users are provided
with information detail on the image
Contextual Database, (16-Jul-2010, Complete), Price: N/A
Visual Search Shopping Engine, (20-Aug-2010, Complete), Price: $100M
Like.com is a visual search engine that identifies product images uploaded by users
and tells them where they can buy the same or similar-looking products.
Visual Search (12-Apr-10, Complete), Price: N/A

Source: Company data, Evercore Group L.L.C. Research
Ìn addition to catching up to its contextual search competitors, Google has possibly taken
search even a step further versus Bing with its recently released Google Instant product.
Google Ìnstant adjusts information and page layout based on the search term as it is being
typed. A few of the new features include:
÷ Dynamic resuIts. Google dynamically displays relevant search results as the
query is typed.
÷ Predictions. Google Ìnstant predicts the rest of the query before one finishes
typing.
÷ ScroII to search. The ability to scroll through predictions and see results
instantly for each query prediction as you arrow down.
As a result of recent Google search product efforts, we believe Google's share of search
queries should stabilize. However, as an aside, we suspect there may be a period of noise
around its monthly query share numbers, given the accounting of "dynamic¨ search query
results may necessitate some tracking recalibration on the part of the query share reporting
firms, such as comScore and Nielsen.



September 28, 2010


24

Thesis Risk #3: Emerging DispIay PIatform
Google is in the process of building a comprehensive display platform for third-party
publishers and advertisers. Google has managed to blur the typical boundaries of display
advertising by being publisher, ad network, ad exchange and, more recently, with the
acquisition of Ìnvite Media, a demand-side platform. With its acquisition of Ìnvite Media,
Google is able to optimize display advertising across exchanges and ad networks,
including Yahoo!'s RightMedia and Microsoft's AdECN ad exchanges. This allows Google
to extend its reach with advertisers and gather more data that can help it better optimize
(i.e., increase ad relevancy) across its online advertising spectrum. However, with the
exception of YouTube, we find the majority of Google's display efforts to exist outside of its
owned-and-operated inventories, thus providing Google relatively little revenue upside.
Background on GoogIe's DispIay Strategy
Since Google acquired DoubleClick in 2007, it has launched an ad exchange, rolled out
real-time bidding, and increased the overall level of transparency and targeting capability
available to advertisers. Along the way, Google made several acquisitions to extend its
display reach, including a demand-side-platform (Ìnvite Media), a video creative optimizer
(Teracent) and a mobile display advertising network (AdMob).
We break Google's display strategy into three broad areas: the exchange, the ad network
and O&O sites, which include Google's content and communications offerings, such as
YouTube, Gmail, and Buzz. We show below the three ways in which Google books its
display revenues. They include the following:
- Ad Exchange. Google books gross under Licensing and Fee revenues.
- Ad Network. Google sells the ads for its affiliate publishing partners.
- O&O DispIay. Google sells its own publishing inventory
Figure 35: DispIay Revenues
0|sp|ay Type ßus|ness Revenue 6|ass|f|cat|on
Ad Excrarge 0ouo|ec||c| Ad Excrarge L|cers|rg & lees
Ad NelWor| 0oog|e 0|sp|ay Parlrers 0r||re adverl|s|rg
0Wred ard 0peraled Youluoe, 0ra||, elc. 0r||re adverl|s|rg

Source: Company data, Evercore Group L.L.C. Research
As the following exhibit shows, O&O display advertising is by far the most important from a
revenue-generating standpoint, followed by ad networking revenues for Google's display
partners. Google's ad exchange, while providing minimal revenues, generates advertiser
and publisher liquidity, thus driving ad relevancy. As a result, while revenues vary based on
type, each area of the display strategy is important from an overall network effect
standpoint. We estimate that Google generates only about 2% on third-party inventory
transacted through its exchange.
Figure 36: DispIay Net Revenues as a Percentage of Media Booked
Ad Exchange Ad Network 0wned and 0perated
% of Media Booked 2% 100% 100%
x Net Revenue Margin 100% 20-25% 100%
= Net Rev as % of Media 2% 20-25% 100%

Source: Company data, Evercore Group L.L.C. Research
We provide additional business descriptions on Google's display acquisitions below, which
include a DSP, mobile ad network, video capabilities within delivery, sharing measurement
and 3D, and server technology.
Google's ad exchange, while
providing minimal revenues,
generates advertiser and
publisher liquidity, thus
driving ad relevancy.
September 28, 2010


25

Figure 37: Business Descriptions on DispIay Acquisitions
DSP MobiIe Ad Network
3D Video Video DeIivery
Video Measurement Video Sharing
DispIay Server DispIay Server
Creative Optimizer
Online Ad Serving an Management (13-Apr-07, Complete), Price:
$3.1B
Provides ad management technology for media buyers and sellers; Offers management of
both search and display ads in one place
T
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C
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Algorithms for optimized ads, (23-Nov-2009, Pending), Price: N/A
Teracent is developer of machine learning algorithms designed to deliver optimized Web ads
in real time; creates display ads customized to consumer and site
D
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C
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Demand-side Platform capable of optimizing display purchasing for advertisers across
exchanges and ad networks
I
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Online advertising services, (2-Jun-10, Complete), Price: $70M
(Est.)
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3D Environment Software (2-May-10, Complete), Price: N/A
A Toronto-based developer of 3D environment software.
Video Annotation (5-Feb-08, Complete), Price: $15M
O
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Helps annotate and share videos from website; it was integrated into YouTube
E
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c Online Video Publishing Services (2-Apr-2010, Complete), Price:
N/A
D
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J
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s
s
Advertising, (25-Jan-2010, Complete), Price: $45M (Est.)
Google Ìnc(US) and Google Asia Pacific Pte Ltd of Singapore acquired DART business of
DoubleClick Japan Ìnc (DoubleClick), Tokyo-based provider of Ìnternet advertising services
Online video hosting platform for broadcasting, monetizing and measuring live and on-
demand video.
Develops Advanced Video Compression Technology (5-Aug-09,
Complete), Price: $121M
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Mobile in-App Display Ad Network (9-Nov-09, Complete), Price:
$750M
A
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One of the world's largest mobile advertising networks. Ìt offers advertising solutions for
mobile platforms like Android, iOS, webOS, Flash Lite and standard mobile web browsers.
On2 Technologies Ìnc (On2) is a developer of video compression and streaming software,
thus enabling multimedia in battery operated mobile handsets

Source: Company data, Evercore Group L.L.C. Research
DispIay Benefits MostIy Indirect
Display benefits search by increasing traffic and improving the ad formats available. Ìt also
provides a stronger avenue into traditional media. Finally, it offers Google a better chance
to monetize its owned-and-operated inventories.
DispIay Strategy Offers Search Benefits in Terms of Traffic and Ad Formats
With the influx of online behavioral data, advertisers are better understanding the
connection between display advertising and search. For instance, a display campaign can
drive click-thru in search and higher purchase conversion. Therefore, knowing which
display ads are being viewed by which user becomes another attribute on which to base
search advertising results. From an advertiser's standpoint, based on marketer
discussions, an effective display campaign can drive the number of searches for a
sponsored keyword by a multiple factor, which we find to be supported by a Yahoo! study,
included below.

Figure 38: Query Lift from Adjacent DispIay Campaigns
25º
Z0º
130º
150º
150º
210º
2ê0º
280º
0º 50º 100º 150º 200º 250º 300º
Corsurer 0oods
Rela||
Properly ard Rea| Eslale
Aulorol|ve
NeWs ard Ved|a
Persora| F|rarce
lea|lr
Trave| ard Tour|sr

Source: Yahoo!, Evercore Group L.L.C. Research

Ìn addition, we are beginning to see display formats being fed into Google's O&O search
results. Typically, the links need to be expanded to view images, but once expanded, it is
September 28, 2010


26

easy to imagine how graphics÷and video advertisements in the case of movie trailers, for
instance÷will become a more essential part of search advertising in the future. This further
supports the rationale behind Google's significant investment within display.

Figure 39: Use of DispIay in Sponsored Search ResuIts

Source: Company data, Evercore Group L.L.C. Research

A PotentiaIIy Stronger Avenue into TraditionaI Media
The similarities between display and traditional media are stronger than in search, in part
because of the higher percentage of brand advertising within both display and traditional
media. As a result, Google's display platform may offer greater potential to extend
Google's reach into traditional media than its search platform has managed to achieve.
Some of Google's less-than-successful efforts to extend its search platform into traditional
media include the following:
Figure 40: GoogIe in TraditionaI Media
Venture 0escr|pt|on 8tatus
dVar|
dVarc 8roadcasl|rg, lrc, |s a rad|o adverl|s|rg corpary purcrased oy 0oog|e |r Jaruary
200Z lo errarce Adwords W|lr lre opl|or lor cuslorers lo ouy rad|o adverl|sererls |r
add|l|or lo weo ads.
lrlegraled |rlo Adwords
(success urc|ear)
0oog|e Tv Ads
Targels relWor|s ard progrars or ral|ora| cao|e le|ev|s|or us|rg Adwords |rlerlace;
Recerl|y parlrered W|lr 0lRECTv, |argesl sale|||le prov|der |r lre u3
0peral|rg as parl ol Adwords
(success urc|ear)
0oog|e Pr|rl Ads
Prograr lo loray |rlo reWspaper adverl|s|rg as a parl ol 0oog|e AdWords; 3lopped aller |l d|d
rol acr|eve des|red reverue
0|scorl|rued
0oog|e Rad|o Ads
1ê00 rad|o slal|ors rave oeer acl|ve|y us|rg lre prograr; 0oog|e dec|ded lo d|scorl|rue |l as
a parl ol cosl cull|rg allerpls
0|scorl|rued

Source: Evercore Group L.L.C. Research estimates based on comScore data

DirectIy Offers Higher Monetization on O&O Properties, such as YouTube
By owning one of the largest display advertising platforms, Google stands to monetize its
O&O inventory at higher rates. Google owns a large amount of O&O display inventory
within its search and content and communications pages, such as YouTube, Gmail, and
Maps. This inventory should only increase as Google prepares to unveil music, games,
and social services.

September 28, 2010


27

Thesis Risk #4: Strong MobiIe Traction
Mobile is critical for Google to extend its reach with users, advertisers, and publishers.
However, mobile currently generates modest revenues at less than 1% of Google's gross
revenues, based on our estimates, due in part to the challenges associated with marketing
to 3¨x2¨ screens. Nevertheless, Google has managed to tackle the mobile opportunity by
acquiring mobile technologies, application developers, and ad networks, creating the
fastest-growing mobile O/S standard, launching a fast-growing mobile apps marketplace,
and extending much of its PC advertising platform capabilities to the mobile device.

MobiIe O/S and Apps MarketpIace
Google's launch of an open-source mobile operating system, Android, and its free app
store has had impressive traction. While Google does not generate revenue from Android
or the Android app store directly, Android helps ensure Google mobile distribution for its
advertising, content and communications platforms.
Android's Outpacing Competition
Since its launch in October 2008, Android has sold approximately 23.3 million units, is
carried on 21 handset manufactures, and is sold on 60 devices with 42 more Android
devices slated for release by year-end. According to Nielsen, on new units, Android now
exceeds the iPhone with 27% of new units sold versus 23% for the iPhone.
Figure 41: U.S. MobiIe O/S Share in Six- Month Recent Acquirers, 2Q09-2Q10
15º
10º
39º
3êº
33º
23º
30º
31º
2Zº
23º
20º 1êº
13º
11º
11º


êº
1Zº
2Zº

11º

êº êº

10º
20º
30º
10º
50º
ê0º
Z0º
80º
90º
100º
2009 3009 1009 1010 2010
º

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0
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V|crosoll
w|rdoWs Voo||e
App|e |Prore 03
RlV
8|ac|8erry 03
3,029 3,Z01 1,312 1,118 3,821
0lrers
r =

Source: Nielsen, Evercore Group L.L.C. Research

While Google does not generate
revenue from Android or the
Android app store directly,
Android helps ensure Google
mobile distribution for its
advertising, content and
communications platforms.
September 28, 2010


28

Android MarketpIace Continues to Show Strong Growth
Android's mobile app store now offers 95,000 applications comparable to 250,000 on the
iPhone. While still trailing Apple in total app volume, the rate of app growth for Android has
exceeded that of iPhone, increasing 32% from June-August 2010 against an estimated
growth of 11% for iPhone during the same period. The exhibit below compares apps
available at 2Q end.

Figure 42: Number of Apps AvaiIabIe in App Sores, 2Q10
13,500
5,000
Z,800
15,000
Z2,000
225,000
ê,900
0 50,000 100,000 150,000 200,000 250,000
w|rdoWs Prore
F|asr L|le
8|ac|8erry
Java VE
Ardro|d
|Prore(|03)
3yro|ar
apps

Source: Company data, Evercore Group L.L.C. Research
Ìn terms of revenue to Google, Google generates revenue from the apps by offering in-app
advertising via DoubleClick and AdMob, with roughly 60-70% of the gross ad revenue
being paid to the app publishers in the form of traffic acquisition costs. There also exists
the opportunity to sell sponsorship app upgrades to advertisers. We note that Google does
not make money on the sale of the mobile app itself. That money is split between the
mobile carrier and app developer.
PC Ad PIatforms Extending to MobiIe
Google's new "Location Extensions¨ demonstrates Google's ability to leverage multiple ad
platforms with O&O content to grow local ad revenues. Location extensions deliver a
combination of search and display format results, based on a search query and a targeted
location demo. While the keywords are still run through AdWords, "Location Extensions¨
allow advertisers to target their ads through Google Places, using display formats such as
maps, logos, banners, and phone numbers, which are served through Google's Display
Network, demonstrating how Google is leveraging multiple platforms to grow the local
mobile opportunity.
Figure 43: Use of GoogIe "Location Extensions" for Adwords

Source: Company data, Evercore Group L.L.C. Research
September 28, 2010


29

AggressiveIy Acquired AdditionaI MobiIe CapabiIities
Google has also made a series of acquisitions within mobile over the last couple years,
which cumulatively have bolstered the company's mobile technology capability and
relationships with mobile publishers (e.g., mobile app developers) and advertisers. We
show below the mobile acquisitions the company has made over last year. Google has
expanded its mobile capabilities through acquisition to include VoÌP, apps, video, in-apps
display, and social. We provide detail on selected acquisitions below.
Figure 44: Business Descriptions of MobiIe Acquisitions
Apps
Video
VoIP
in-App DispIay
SociaI
SociaI
J
a
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k
u
Social Network & Microblogging (9-Oct-2007, Complete)
Jaiku is a social networking and micro-blogging service. The Jaiku mobile client
application allows users to make posts on their Jaiku home page. Jaiku also allows
users to stream their activity on other websites such as flickr and last.fm.
Z
i
n
g
k
u
Mobile Social Network, (28-Sep-2007, Complete)
Zingku is a mobile social networking service that uses text messaging which is
available on all mobile phones. Ìt also has a web-based interface that allows users to
share photos and communicate with their friends.

G
i
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m
o
5

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Mobile VoÌP, (12-Nov-09, Complete)
Gizmo5 provides internet-based voice and video calling for mobile phones and
computers. This service has now been integrated into Google Voice.
A
d
M
o
b
Mobile in-Application Display Ad Network (9-Nov-09, Complete)
AdMob is a leading mobile advertising platforms. Ìt offers advertising solutions for
mobile platforms like Android, iOS, webOS, Flash Lite and standard mobile web
browsers.

L
a
b
P
i
x
i
e
s Apps/Gadget Developer, (28-Apr-2010, Complete)
LabPixies is an app/gadget developer for Google's personalized "iGoogle¨ offering in
addition to mobile devices.
E
p
i
s
o
d
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c
Mobile Video Platform, (2-Apr-10, Complete)
Episodic is a platform for serving live and on-demand video on the internet. The
platform provides ad insertion into live videos and also allows marketers to measure
audience real-time.

Source: Company data, Evercore Group L.L.C. Research
Among the more significant mobile acquisitions was AdMob, which Google acquired for
$750 million dollars. AdMob serves in-app advertising and was considered to be a share
leader over DoubleClick, prior to its acquisition. Current mobile ad formats include SMS,
search ads, web-display ads, app display ads, sponsored apps and click-to-call.
September 28, 2010


30

Figure 45: Types of MobiIe Advertising

Source: http://timcohn.files.wordpress.com/2009/11/types-of-mobile-advertising.png
However, we note that the challenge of advertising to the small mobile screen, as well as
limited ecommerce activity on the mobile device which drives ad dollars, have resulted in
the mobile advertising opportunity remaining somewhat nascent. We provide estimates on
the mobile advertising industry opportunity in our industry piece entitled, "It's Time to Face
the Future: Openness, Sharing & Data is Changing Online Advertising," dated September
28th, and for Google specifically within the display revenue forecast section of this report.
GoogIe Revenue Forecast
As our estimates do not include the hypothetical Facebook scenario, we forecast that
Google's search revenues will increase at a 12% five-year CAGR, in line with the industry,
and that the company's display and Licensing & Fees revenues will grow by 30% and 17%,
respectively, on a five-year CAGR basis, resulting in a 14% compound annual growth rate
for Google overall. We note that, while our rating is Underweight, we are taking a wait-and-
see approach in terms of our estimates until more data points on Facebook's competitive
threat emerge. Moreover, the higher growth rates we estimate for the Display Network and
Licensing & Fees businesses reflect the potential for faster growth in display, given video
and in-app mobile, and in Licensing & Fees, due to the anticipated growth within
DoubleClick's Ad Exchange and the Google Apps Premium Edition for enterprise.
Search to HoId FIat with Search Industry
Our search revenue forecast assumes that Google search share in the U.S., U.K. and the
rest of the world (ROW) holds flat as a percentage of traditional search revenues, as we
expect Google's recent search enhancements to stall the recent share encroachment from
Bing. Our expectation for 12% global search revenue growth is driven by our assumption
for paid click growth of 13-14%, offset slightly by flattish÷to-negative CPC growth. Our
basis for flat-to-declining CPCs is due in part to faster growth abroad at lower CPCs,
resulting in mix shift pricing pressure and the impact of slowing-to-flat query share growth.
September 28, 2010


31

Figure 46: Pricing and VoIume Estimates, 2009A-2015E
6ACR
2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
6P6 Est|mate
3earcr Reverues S21,Z08 S25,3ê1 S28,102 S32,155 S3ê,1êZ S10,38ê S11,152 11.9º
/ Pa|d C||c|s 2Z,101 31,1êê.9 35,811.9 11,039.0 1ê,5Z9.3 52,ê31.ê 58,950.Z 13.êº
= 6P6 (Est|mated} $0.80 $0.81 $0.79 $0.78 $0.78 $0.77 $0.75 -1.57
6P6 (x-FX}
Y|Y Crowth
0ross Ad Reverue Z.1º 1ê.8º 12.0º 13.2º 13.1º 10.Zº 10.1º
Pa|d C||c|s 0roWlr (Reporled) 1ê.0º 15.0º 15.0º 11.5º 13.5º 13.0º 12.0º
CPC 0roWlr (Reporled) -Z.1º 1.êº -2.êº -1.1º -0.1º -2.0º -1.Zº
CPC 0roWlr (x-FX)

Source: Company data, Evercore Group L.L.C. Research
Our assumption for flat revenue share by geography suggests that U.S. search revenues
will grow at 9%, the U.K. at 6% and ROW at 16%.
Figure 47: GoogIe Revenue Forecast, 2009A-2015E
6ACR
2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
U.8.
u3 3earcr lrduslry S11,211 S13,008 S11,3ê1 S15,Z1Z S1Z,019 S18,113 S19,Z98 8.8º
x 0000 3earcr Reverue 3rare 92º 91º 91º 91º 91º 91º 91º 0.0º
= 8earch Revenue $10,274 $11,831 130ô1.8514 $14,295 $15,507 $1ô,748 $18,007 8.87
U.K.
uK 3earcr lrduslry S2,Z9ê S3,190 S3,2Z0 S3,511 S3,821 S1,0Z3 S1,331 ê.3º
x 0000 3earcr Reverue 3rare 98º 98º 98º 98º 98º 98º 98º 0.0º
= 8earch Revenue $2,740 $3,12ô $3,204 $3,470 $3,748 $3,991 $4,247 ô.37
R0w
R0w 3earcr lrduslry S11,559 S13,85Z S1ê,1ê1 S19,1êZ S22,925 S2ê,1ê8 S29,5êê 1ê.1º
x 0000 3earcr Reverue 3rare Z5º Z5º Z5º Z5º Z5º Z5º Z5º 0.0º
= 8earch Revenue $8,ô94 $10,404 $12,13ô $14,390 $17,212 $19,ô47 $22,198 1ô.47

Source: Company data, Evercore Group L.L.C. Research
We derived Google's current search revenue estimates by geography by subtracting
Licensing & Fee revenues on a pro-rata basis and subtracting Google Display Network
revenues, which we estimate as a combination of Google Display Partner revenues,
YouTube, and Mobile display.

DispIay to Remain ReIativeIy SmaII
We estimate Google's display revenues based on Google's display partners (non-mobile),
mobile display partners, and video O&O (i.e., YouTube). Ìn all, we estimate Google's
display revenues to grow over the next five years by 29% on a compound annual basis,
approximately double our expectation for the industry. We expect the growth to be primarily
driven by growth in mobile partner display and video O&O from YouTube. We note there
are also owned-and-operated display revenues for Google's search and content &
communications properties, but we do not break out estimates for these currently.
September 28, 2010


32

Figure 48: GoogIe DispIay Network Forecast, 2009A-2015E
6ACR
2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
C00CLE 0|sp|ay Network
0|sp|ay Parlrers 811 932 1,0Z2 1,233 1,118 1,ê31 1,8Z5 15.0º
÷ Voo||e 0|sp|ay Parlrers (AdVoo, 0CLK) Z3 21ê 153 Z21 1,0Z1 1,521 2,091 53.1º
÷ v|deo 0&0 0|sp|ay (e.g. YouTuoe) 29Z 188 ê90 1,018 1,138 1,913 2,508 38.Zº
= 0|sp|ay, 0ther 1,181 1,ôôô 2,215 2,975 3,930 5,097 ô,475 31.2º
|ndustry
Nor-v|deo, Nor-Voo||e 0|sp|ay 2Z,022 30,503 31,218 38,053 12,115 1ê,1ê3 51,158 10.9º
÷ Voo||e 0|sp|ay 223 Z15 1,291 1,95Z 2,82ê 3,908 5,228 1Z.êº
÷ v|deo 0|sp|ay 1,151 2,0Z8 2,93Z 3,992 5,229 ê,58ê Z,9ê3 30.8º
= 0|sp|ay, 0ther 28,ô99 33,32ô 38,448 44,002 50,170 5ô,957 ô4,349 11.1º
Coog|e as 7 of |ndustry
Nor-v|deo, Nor-Voo||e 0|sp|ay 3.0º 3.1º 3.1º 3.2º 3.1º 3.5º 3.Zº
÷ Voo||e 0|sp|ay (AdVoo) 33.0º 33.0º 35.0º 3Z.0º 38.0º 39.0º 10.0º
÷ v|deo 0|sp|ay (YouTuoe) 20.1º 23.5º 23.5º 25.5º 2Z.5º 29.5º 31.5º
= 0|sp|ay, 0ther 4.17 5.07 5.87 ô.87 7.87 8.97 10.17

Source: Company data, Evercore Group L.L.C. Research
DispIay Partner Revenue
We estimate display partner revenue at 3% of the display industry in 2009, which we
expect to increase by 15% on a compound annual basis. Driving the increase is the
transition from text to graphical and video ads. Of Google's display partner revenues, we
estimate that approximately 60% comes from text display ads, down from 100% only a few
years ago. At 3% of the industry, it would suggest that display partner revenues comprise
11% of Google's total partner affiliate revenues.
Figure 49: DispIay Partner Revenue Estimated at 11% of TotaI Partner Revenue
2009
as 7 of Aff|||ate Revenues
0|sp|ay Parlrers 11.3º
÷ Voo||e 0|sp|ay Parlrers (AdVoo, 0CLK) 1.0º
= 0|sp|ay Aff|||ate 12.37
÷ 3earcr All|||ale 8Z.Zº
= Aff|||ate Revenues 100.07

Source: Company data, Evercore Group L.L.C. Research
MobiIe DispIay
For mobile display, we begin with our industry mobile display forecast of $223 million in
2009. We then assume that Google and DoubleClick have a combined third share of the
market, which places mobile at roughly 1% of Google's affiliate revenues. We then
estimate that these revenues increase at 53% on a compound annual basis, about 600bps
faster than our industry estimates, suggesting that mobile can reach 14% of Google's
affiliate revenues by 2015.
September 28, 2010


33

Figure 50: AffiIiate Revenue Forecast as Percentage of TotaI, 2009A-2015E
2009 2010E 2011E 2012E 2013E 2014E 2015E
as 7 of Aff|||ate Revenues
0|sp|ay Parlrers 11.3º 11.1º 11.Zº 11.Zº 11.1º 11.8º 12.3º
÷ Voo||e 0|sp|ay Parlrers (AdVoo, 0CLK) 1.0º 2.9º 1.9º ê.9º 8.Zº 11.1º 13.8º
= 0|sp|ay Aff|||ate 12.37 14.17 1ô.ô7 18.57 20.17 22.97 2ô.17
÷ 3earcr All|||ale 8Z.Zº 85.9º 83.1º 81.5º Z9.9º ZZ.1º Z3.9º
= Aff|||ate Revenues 100.07 100.07 100.07 100.07 100.07 100.07 100.07

Source: Company data, Evercore Group L.L.C. Research
Video Owned and Operated (YouTube)
Through discussions with agencies, we found that, despite YouTube comprising roughly
half of the online videos in the U.S., only about 15% of total agency online video spending
is directed at YouTube, which we attempted to corroborate with the following analysis.
Based on recent comScore US Video Metrix data, less than 2% of YouTube videos serve
in-video stream advertising with two thirds for Hulu's. We note that this data does not
include banner adjacency or homepage sponsorship advertising revenues, which we
estimate separately.

Figure 51: Percentage of Videos Serving Ads
9.8º
êê.1º
1.1º

10º
20º
30º
10º
50º
ê0º
Z0º
0oog|e 3|les lu|u Tola| lrlerrel

Source: comScore U.S. VideoMetrix July data, Evercore Group L.L.C. Research
Ìf we multiply these in-video stream monetization rates, based on our estimate of global
video streams and apply a $20 CPM, it would suggest that Hulu actually generates close to
the same streaming revenue as YouTube, despite having a small fraction of the overall
number of streams. By adding in revenues for non-streaming monetization, such as banner
adjacencies, we estimate that YouTube generated $300 million in 2009.

September 28, 2010


34

Figure 52: Comparison of Video Streaming Revenues
2009 Coog|e 8|tes hu|u Tota| |nternet
u3 v|deos (8||s) 101.1 ê.5 2ê0.0
/ (u.3. Pagev|eWs / wor|dW|de) 20º 80º 35º
= wor|dw|de V|deos (ß||s} 521 8 745
X º v|deo Vorel|zed (cor3core) 1.1º êê.1º 9.8º
= 8treams monet|zed (ß||s} 7 5 73
X v|deo CPV S20 S20 S20
= 8tream|ng Revenue $148 $107 $1,453
/ 3lrear|rg as a º ol Tola| 0|sp|ay 50.0º 80.0º 5.1º
= Est|mated Revenues $297 $134 $28,ô99

Source: comScore % videos Monetized based on July VideoMetrix data, Evercore Group L.L.C.
Given that the "streams monetized¨ do not explicitly factor in banner adjacency ads and
other forms of advertising on YouTube, this estimate of streams monetized is
understandably below the 1 billion per week figure that the company has suggested.
DispIay Forecast Summary
We estimate that display will increase from $1.2 billion in 2009, or 5% of total gross
revenues, to $6.5 billion over the course of the next five years, which would place display
at 15% of Google's total gross revenues.
Figure 53: GoogIe DispIay Estimates as a % of GoogIe Gross Revs, 2009-2015E
1,181
1,êêê
2,215
2,9Z5
3,930
5,09Z
ê,1Z5
5.1º
ê.êº
Z.8º
9.3º
10.8º
12.êº
11.êº
0
1,000
2,000
3,000
1,000
5,000
ê,000
Z,000
2009 2010E 2011E 2012E 2013E 2011E 2015E
0
|
s
p
|
a
y

0
r
o
s
s

R
e
v
e
r
u
e
s

(
V
V
s
)
-1º





11º
13º
15º
º

o
l

0
o
o
g

0
r
o
s
s

R
e
v
e
r
u
e
s
0|sp|ayReverues 0|sp|ay as º ol 0oog|e Reverues

Source: Company data, Evercore Group L.L.C. Research
However, since most of the display revenue that we estimate has traffic acquisition costs
associated with it, we estimate that as a percentage of net revenues, display's contribution
is actually lower than we estimate on a gross basis. As shown in the following exhibit, by
subtracting traffic acquisition costs from partner revenues, including mobile, we estimate
that Google generated only $300 million in net revenues from its display partners in 2009.
Adding to this figure our estimate that it generated $300 million from YouTube, which we
assume to be primarily all O&O despite its emerging affiliate platform, we derive a net
revenue display estimate of $600 million, or just 3-4% of Google's total display revenues.
However, we expect this figure to grow to 11% of net revenues over the next five years.

September 28, 2010


35

Figure 54: DispIay as a Percentage of Net Revenues
6ACR
2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
0|sp|ay Parlrers 811 932 1,0Z2 1,233 1,118 1,ê31 1,8Z5 15.0º
÷ Voo||e 0|sp|ay Parlrers (AdVoo, 0CLK) Z3 21ê 153 Z21 1,0Z1 1,521 2,091 53.1º
= 0|sp|ay Aff|||ate 1,181 1,ôôô 2,215 2,975 3,930 5,097 ô,475 31.2º
x (1- TAC) 2êº 29º 2Zº 2Zº 2Zº 2Zº 2Zº
= 0|sp|ay Aff|||ate net Revenue 304 475 598 803 1,0ô1 1,37ô 1,748 29.Zº
÷ v|deo 0|sp|ay (YouTuoe) 29Z 188 ê90 1,018 1,138 1,913 2,508 38.Zº
= 0|sp|ay Net Revenue ô01 9ô4 1,288 1,821 2,499 3,319 4,257 31.êº
/ Nel Reverue 1Z,12ê 21,020 23,85Z 2Z,3ê2 31,218 35,25Z 39,ê19 13.5º
= 0|sp|ay as 7 of Net Revenue 3.47 4.ô7 5.47 ô.77 8.07 9.47 10.77

Source: Company data, Evercore Group L.L.C. Research
Share of OnIine Advertising
Moreover, given the convergence trends between search and display, we believe that an
increasingly useful share metric for Google is simply online advertising (search + display +
other). On this basis, we estimate that Google's share of global online advertising will hold
flat at 42-43% through 2015E. Ìts ability to hold share flat, in our view, is due to the faster
growth we expect within mobile and display. On the basis of search revenues, we
anticipate Google's share of online advertising to shed 200bps, due to our expectation for
faster growth from display, given video advertising's faster-growth trajectory.

Figure 55: GoogIe as a Percentage of OnIine Industry Advertising, 2009A-2015E
6ACR
2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
Coog|e
0oog|e 0r||re Adverl|s|rg 22,889 2Z,028 30,ê1Z 35,130 10,39Z 15,183 50,92Z 13.5º
/ lrduslry 51,2ê8 ê3,380 Z2,212 82,12ê 93,9ê9 105,ê11 118,01Z 13.2º
= Coog|e 8hare of 0n||ne Advert|s|ng 42.27 42.ô7 42.47 42.ô7 43.07 43.17 43.17
Coog|e 8earch
0oog|e 0r||re Adverl|s|rg 22,889 2Z,028 30,ê1Z 35,130 10,39Z 15,183 50,92Z 13.5º
- 0|sp|ay 1,181 1,êêê 2,215 2,9Z5 3,930 5,09Z ê,1Z5 31.2º
= Coog|e 8earch 21,708 25,3ô1 28,402 32,155 3ô,4ô7 40,38ô 44,452 11.9º
/ lrduslry 51,2ê8 ê3,380 Z2,212 82,12ê 93,9ê9 105,ê11 118,01Z 13.2º
= 8earch 8hare of 0n||ne Advert|s|ng 40.07 40.07 39.37 39.07 38.87 38.27 37.77

Source: Company data, Evercore Group L.L.C. Research
Google's flat performance in search, coupled with its smaller display presence÷where we
see modestly faster industry growth÷leads us to expect flat online advertising share for
the company over the next five years.
License Revenue Forecast
Based on conversations with enterprise ÌT consultants, we break down Google's licensing
revenues into the following components: search appliance subscriptions, DoubleClick ad
server and exchange, Postini, Google Apps Premier Edition (GAPE) and other. We
estimate that these businesses will collectively generate $1.1 billion in 2010 and will grow
by 18% on a compound annual basis over the next five years.
September 28, 2010


36

Figure 56: GoogIe Licensing Revenues Forecast, 2009A-2015E
6ACR
2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
3earcr App||arce 3uoscr|pl|ors S255.0 S310.0 S391.0 S115.Z S503.Z S5ê1.1 Sê2ê.2 13.0º
÷ 0ouo|eC||c| Ad 3erver Rev S210.1 S280.2 S33ê.2 S39ê.Z S1ê0.2 S521.ê S58Z.ê 1ê.0º
÷ Posl|r| S111.0 S180.0 S231.0 S292.5 S35ê.9 S121.1 S188.5 22.1º
÷ 0oog|e Apps Prer|er Ed|l|or (0APE) S58.8 S81.0 S12ê.0 S182.Z S255.8 S353.0 S1Zê.5 11.5º
÷ 0lrer S93.8 S212.3 S191.0 S210.1 S231.2 S251.3 S2Z9.Z 5.Zº
= Tota| L|cens|ng and 0ther Revenues $7ô1.8 $1,09ô.4 $1,278.2 $1,527.8 $1,807.ô $2,117.1 $2,458.4 17.57
Y|Y 7 Crowth
3earcr App||arce 3uoscr|pl|ors 33º 15º 11º 13º 12º 11º
÷ 0ouo|eC||c| Ad 3erver Rev 33º 20º 18º 1êº 11º 12º
÷ Posl|r| 25º 30º 25º 22º 18º 1êº
÷ 0oog|e Apps Prer|er Ed|l|or (0APE) 13º 50º 15º 10º 38º 35º
÷ 0lrer 12êº -10º 10º 10º 10º 10º
= Tota| L|cens|ng and 0ther Revenues 447 177 207 187 177 1ô7

Source: Company data, Evercore Group L.L.C. Research
Revenue Summary
We expect Google's site revenues and affiliate partner revenues to grow closely in line with
one another, with O&O revenues growth at a five-year CAGR of 14%, outpacing affiliate at
12% through 2015. Adding Licensing & Fees revenue growth of 17.5% over the next five
years results in an estimated 14% CAGR.

Figure 57: GoogIe Revenue Forecast Summary, 2007A-2015E
6ACR
2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
0oog|e 3|le Reverues S10,ê21.5 S11,113.1 S15,Z22.5 S18,ê50.Z S21,101.Z S21,501.9 S2Z,813.1 S31,128.8 S35,35Z.1 13.êº
÷ Tre 0oog|e NelWor| S5,Z8Z.8 Sê,Z11.5 SZ,1êê.3 S8,3Zê.9 S9,195.5 S10,551.3 S12,10ê.0 S13,Z8ê.8 S15,192.1 12.êº
= Cross Advert|s|ng Revenue $1ô,412.4 $21,128.0 $22,888.8 $27,027.ô $30,597.2 $35,05ô.2 $40,219.1 $45,215.ô $50,549.5 13.37
÷ L|cers|rg & 0lrer S181.ê SêêZ.ê SZê1.8 S1,09ê.1 S1,2Z8.2 S1,52Z.8 S1,80Z.ê S2,11Z.1 S2,158.1 1Z.5º
= Tota| Cross Revenues $1ô,594.0 $21,795.ô $23,ô50.ô $28,124.0 $31,875.5 $3ô,584.0 $42,02ô.8 $47,332.ô $53,007.9 13.57
Y|Y 7 6hange
0oog|e 3|le Reverues êZ.8º 35.Zº 9.1º 18.êº 11.8º 11.5º 13.5º 13.0º 12.5º
Tre 0oog|e NelWor| 39.1º 1ê.0º ê.Zº 1ê.9º 9.8º 11.Zº 1Z.êº 11.1º 10.2º
Cross Advert|s|ng Revenue 5ô.47 28.77 8.37 18.17 13.27 14.ô7 14.77 12.47 11.87
L|cers|rg & 0lrer ê0.8º 2êZ.êº 11.1º 13.9º 1ê.êº 19.5º 18.3º 1Z.1º 1ê.1º
Tota| Cross Revenues 5ô.57 31.37 8.57 18.97 13.37 14.87 14.97 12.ô7 12.07

Source: Company data, Evercore Group L.L.C. Research
Expect Some Near-Term Margin Pressure
We estimate operating margins including stock-based compensation to decline by roughly
120bps into 2011 to 32.9%, but we expect margins to stay flat thereafter. We view the
near-term margin contraction as a likely result of the company's accelerated hiring in
product development and R&D, as well as the company's emphasized need to invest in
each of their platform areas.
September 28, 2010


37

Figure 58: Operating Expenses, 2007A-2015E
6ACR
2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
0perat|ng Expenses (|nc|. 8tock 6omp}
Cosl ol Reverue Sê,ê19.1 S8,ê21.5 S8,811.1 S10,113.1 S11,99Z.Z S13,Z89.0 S1ê,055.5 S1Z,985.0 S20,00ê.3 11.0º
÷ Researcr & 0eve|oprerl 2,120.0 2,Z93.2 2,813.0 3,êê8.Z 1,2Z0.1 1,925.2 5,ê50.5 ê,381.5 Z,250.1 11.êº
÷ 3a|es & Var|el|rg 1,1ê1.3 1,91ê.2 1,983.9 2,591.3 2,982.2 3,392.9 3,839.8 1,301.3 1,833.ê 13.3º
÷ 0erera| & Adr|r|slral|ve 1,2Z9.2 1,802.ê 1,êêZ.3 1,819.0 2,123.3 2,1ê2.ê 2,809.ê 3,085.0 3,3êZ.Z 12.Zº
= Tota| 0perat|ng Expenses $11,509.ô $15,1ô3.ô $15,338.4 $18,525.3 $21,373.ô $24,5ô9.8 $28,355.4 $31,752.8 $35,457.8 13.97
0PEX 7 of Cross Revenue (|nc|-8tock 6omp}
Cosl ol Reverue (º ol 0ross Rev) 10.1º 39.êº 3Z.1º 3Z.0º 3Z.êº 3Z.Zº 38.2º 38.0º 3Z.Zº
Researcr & 0eve|oprerl (º ol Nel Rev) 18.2º 1Z.êº 1ê.3º 1Z.5º 1Z.9º 18.0º 18.1º 18.1º 18.3º
3a|es & Var|el|rg (º ol Nel Rev) 12.5º 12.3º 11.1º 12.3º 12.5º 12.1º 12.3º 12.2º 12.2º
0erera| & Adr|r|slral|ve (º ol Nel Rev) 11.0º 11.1º 9.êº 8.8º 8.9º 9.0º 9.0º 8.8º 8.5º
Tota| 0perat|ng Expenses (7 of Cross Rev} ô9.47 ô9.ô7 ô4.97 ô5.97 ô7.17 ô7.27 ô7.57 ô7.17 ôô.97

Source: Company data, Evercore Group L.L.C. Research
We detail below our cost of revenue assumptions, in which we estimate that TAC rates
return to historical levels at about 73%. We also expect slightly faster growth from other
cost of revenues, given the company's increased investment focus within product
development.
Figure 59: Cost of Revenues, 2007A-2015E
6ACR
2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
6ost of Rev. ßreakdown x-8tock 6omp
TAC (Ad 3erse Parlrers) S1,511.0 S5,28Z.ê S5,320.1 S5,98Z.1 Sê,Z12.Z SZ,Z02.1 S9,05ê.1 S10,0ê1.3 S11,090.2 13.1º
÷ TAC (0|slr|oul|or Parlrers) S390.0 Sê51.0 S901.0 S1,11ê.8 S1,305.5 S1,519.3 S1,Z52.2 S2,011.1 S2,298.2 15.5º
= TA6 $4,934.0 $5,941.ô $ô,224.4 $7,103.8 $8,018.2 $9,221.7 $10,808.ô $12,075.8 $13,388.5 13.57
÷ 0lrer Cosl ol Reverue (x-3loc| Corp) S1,ê92.8 S2,ê38.ê S2,5Z2.ê S3,2ê1.1 S3,920.Z S1,199.8 S5,1ê9.3 S5,821.9 Sê,520.0 11.8º
= Tota| 6ost of Revenue (x 8tock 6omp} $ô,ô2ô.8 $8,580.2 $8,797.1 $10,3ô8.2 $11,938.9 $13,721.ô $15,977.9 $17,897.7 $19,908.5 13.97
Ad8ense TA6 7 of Network Revenue 78.57 78.77 74.27 71.57 73.07 73.07 73.07 73.07 73.07
0|slr|oul|or TAC º ol 0&0 3.Zº 1.5º 5.Zº ê.0º ê.1º ê.2º ê.3º ê.1º ê.5º
7 of Cross Revenues
TAC (All|||ale Parlrers) 2Z.1º 21.3º 22.5º 21.3º 21.1º 21.1º 21.5º 21.3º 20.9º
TAC (0&0) 2.1º 3.0º 3.8º 1.0º 1.1º 1.2º 1.2º 1.2º 1.3º
TA6 7 of Cross Revenue 29.77 27.37 2ô.37 25.37 25.27 25.27 25.77 25.57 25.37
0lrer Cosl ol Rev. º ol Reverue x TAC 10.2º 12.1º 10.9º 11.êº 12.3º 12.3º 12.3º 12.3º 12.3º
6ost of Revenue 39.97 39.47 37.27 3ô.97 37.57 37.57 38.07 37.87 37.ô7

Source: Company data, Evercore Group L.L.C. Research
September 28, 2010


38

VaIuation and Investment ConcIusion
Our Underweight rating and $580 target price reflects a below-consensus view of the
growth prospects for traditional search in light of increased competition from social
networking and display. Our major concerns are as follows: (1) Facebook's present growth
trajectory, combined with its use of Open Graph and Likes, threatens to undermine
Google's ability to offer advertisers highest yield, which could result in a revenue share
shift to Facebook and "reverse network effect¨ consequences for Google; and (2) display
marketplace improvement is creating an increasingly viable alternative to search.
Our target price of $580 per share implies about 10% upside and that Google can trade at
18.9x our $30.62 EPS estimate for 2011, in line with its current trading multiple. Ìn addition,
our $580 target price is supported by our discounted-cash-flow (DCF) analysis whereby we
assume a 3% terminal growth rate and an 11.5% weighted average cost of capital.
Figure 60: GoogIe DCF
6ACR
2011E 2012E 2013E 2014E 2015E '10-'15
E8lT0A S11,251.1 S1ê,303.9 S18,583.0 S20,9Z2.5 S22,êêê.2 12.1º
Nel lrcore 8,ê29.3 9,9Z8.1 11,1ê9.8 13,18Z.9 11,981.8 11.5º
÷ 0eprec|al|or & Arorl|zal|or 2,1ê1.0 2,18Z.9 2,8Z5.ê 3,132.5 2,598.1 8.êº
÷ 0lrer Nor-Casr Crarges (8erel|ls) 1,122.3 1,ê15.9 1,81ê.2 2,0ê3.8 2,301.3 11.8º
÷ lrleresl Experse (lrcore) (Zê3.ê) (995.1) (1,2ê3.2) (1,5ê9.ê) (1,90ê.8) 11.êº
÷ Crarges |r 0peral|rg Assels & L|ao|||l|es 118.Z 11ê.Z ê11.1 515.3 ê50.Z 23.5º
= 6ash F|ows $11,870.7 $13,533.5 $15,512.7 $17,359.9 $18,ô28.1 12.37
- Cap|la| Experd|lures 2,02Z.9 2,325.8 2,19Z.5 2,908.Z 3,1ê9.ê 15.0º
= Free 6ash F|ows $9,842.8 $11,207.7 $13,015.2 $14,451.2 $15,458.ô 11.87
Y/Y / 0nange 11.1º 13.9º 1ê.1º 11.0º Z.0º
Terr|ra| FCF S15,922
x Terr|ra| FCF Vu|l|p|e 11.8x
= Term|na| Va|ue $187,830
we|grled Average Cosl ol Cap|la| 11.5º
Perpelua| uFCF 0roWlr Rale (¨0¨) 37
Terr|ra| va|ue S18Z,830
/ E8lT0A S22,êêê
= |mp||ed Term|na| Eß|T0A Hu|t|p|e 8.3x
2011E
NPv ol Free Casr F|oWs S15,580
÷ Preserl va|ue ol Terr|ra| va|ue S109,103
= Enterpr|se Va|ue $154,ô83
÷ 0ll-8a|arce 3reel Assels S350.0
= Adjusted Enterpr|se Va|ue $155,033
- Year Erd Nel 0eol (Casr) (S32,Z93)
= Equ|ty Va|ue $187,827
/ 0||uled 3rares 0ulslard|rg 322.ê
= Equ|ty Va|ue Per 8hare $582.3

Source: Company data, Evercore Group L.L.C. Research
While our target price multiple is higher than our five-year EPS growth rate of 13%, we
note that, excluding cash, Google trades at 14x our 2011 estimates excluding cash (or 17x
with cash). We recognize that, should Google decide to redistribute some of its cash,
valuation would become less demanding and we would likely reevaluate the risks outlined
in this report within the context of a potentially more compelling valuation. We presently
view a cash distribution scenario as unlikely beyond increased share repurchase activity,
given the company's emphasis on the need for increased strategic investment and
acquisition.
September 28, 2010


39

Figure 61: P/E MuItipIe (IncIuding and ExcIuding Cash)
2010E 2011E 2010E 2011E
3loc| Pr|ce S52Z.29 S52Z.29 S52Z.29 S52Z.29
- Casr S101.êZ S131.10
= 8tock Pr|ce (x 6ash} $425.ô2 $392.89 $527.29 $527.29
/ Prolorra EP3 (x-3loc| Corp & casr) S2ê.9ê S30.ê2 S2ê.9ê S30.ê2
= P|E 15.8x 12.8x 19.ôx 17.2x
|nc|ud|ng 6ash x 6ash

Source: Company data, Evercore Group L.L.C. Research
We provide below valuation comparables of Google, Yahoo! and AOL.
Figure 62: Comparative EV/EBITDA MuItipIes, 2010E-2012E
C00C Yh00 A0L
9|25|2010 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E
3loc| Pr|ce S52Z.29 S11.50 S23.9Z
x 3rares 0ulslard|rg 322.ê 1,390.ê 10ê.Z
= Equ|ty Harket 6ap $170,079.0 $20,1ô4.0 $2,557.ô
Net 0ebt (6ash} (32,793.1} (4,320.ô} (843.2}
÷ 0lrer Adjuslrerls 0.0 0.0 0.0
= Adjusted Enterpr|se Va|ue 137,285.9 15,843.4 1,714.4
- 0ll 8a|arce 3reel Assels 350.0 Z,198.Z 0.0
÷ V|ror|ly lrleresl 0.0 13.5 0.0
= Enterpr|se Va|ue $13ô,935.9 $13ô,935.9 $13ô,935.9 $8,358.2 $8,358.2 $8,358.2 $1,714.4 $1,714.4 $1,714.4
/ E8lT0A¯ 12,êê0.ê 11,251.1 1ê,303.9 1,Z1ê.3 2,001.9 2,320.2 Z03.Z ê28.ê 553.1
= EV|Eß|T0A Hu|t|p|e (x-8tock comp} 10.8x 9.ôx 8.4x 4.9x 4.2x 3.ôx 2.4x 2.7x 3.1x

Share price as of September 24, 2010, market close.
Source: Company data, Evercore Group L.L.C. Research;

Figure 63: Comparative P/E MuItipIes, 2010E-2012E
C00C Yh00 A0L
9|25|2010 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E
3loc| Pr|ce S52Z.29 S52Z.29 S52Z.29 S11.50 S11.50 S11.50 S23.9Z S23.9Z S23.9Z
/ Prolorra EP3 (x-3loc| corp) 2ê.9ê 30.ê2 35.1ê 0.ê0 0.Z1 0.8ê 1.81 1.82 1.Z8
= P|E (x-8tock 6omp} 19.ôx 17.2x 15.0x 24.3x 19.ôx 1ô.9x 13.3x 13.1x 13.5x
3loc| Pr|ce S52Z.29 S52Z.29 S52Z.29 S11.50 S11.50 S11.50 S23.9Z S23.9Z S23.9Z
YE10 Casr/3rare (101.êZ) (101.êZ) (101.êZ) (8.50) (8.50) (8.50) (Z.90) (Z.90) (Z.90)
8tock Pr|ce (x-6ash} 425.ô2 425.ô2 425.ô2 ô.00 ô.00 ô.00 1ô.07 1ô.07 1ô.07
/ Prolorra EP3 (x-3loc| corp) 2ê.9ê 30.ê2 35.1ê 0.ê0 0.Z1 0.8ê 1.81 1.82 1.Z8
= P|E (x-8tock 6omp, 0ß8 & 6ash} 15.8x 13.9x 12.1x 10.0x 8.1x 7.0x 8.9x 8.8x 9.0x
PEC 1.4x 1.2x 1.1x 1.4x 1.2x 1.0x n.m. n.m. n.m.
PEC (x-6ash, 0ß8} 1.1x 1.0x 0.9x 0.ôx 0.5x 0.4x n.m. n.m. n.m.
P/E 15.8x 13.9x 12.1x 10.0x 8.1x Z.0x 8.9x 8.8x 9.0x
/ Var|el Vu|l|p|e 15.1x 12.5x 12.5x 15.1x 12.5x 12.5x 15.1x 12.5x 12.5x
-1 1 1 1 1 1 1 1 1 1
= Prem|um (0|scount} to Harket 4.87 11.ô7 -3.07 -33.37 -34.87 -43.97 -41.07 -29.37 -27.57

Share price as of September 24, 2010, market close.
Source: Company data, Evercore Group L.L.C. Research; EPS excludes non-cash stock option expense

September 28, 2010


40


Figure 64: Comparative P/FCF MuItipIes, 2010E-2012E
C00C Yh00 A0L
9|25|2010 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E
= 6|F from 0ps $10,71ô.ô $12,ô34.3 $13,838.9 $1,487.8 $1,72ô.2 $1,780.9 $757.0 $489.3 $43ô.2
- CAPEX 1,5Zê.5 2,02Z.9 2,325.8 585.3 599.2 ê32.ê 100.ê 91.3 8Z.Z
= F6F 9,140.0 10,ô0ô.5 11,513.1 902.ô 1,127.0 1,148.3 ô5ô.4 398.0 348.ô
/ E8lT0A¯ 12,êê0.ê 11,251.1 1ê,303.9 1,Z1ê.3 2,001.9 2,320.2 Z03.Z ê28.ê 553.1
= F6F|Eß|T0A 6onvers|on 72.27 74.47 70.ô7 52.ô7 5ô.27 49.57 93.37 ô3.37 ô3.07
Free Casr F|oW S9,110.0 S10,ê0ê.5 S11,513.1 S902.ê S1,12Z.0 S1,118.3 Sê5ê.1 S398.0 S318.ê
/ 3rares 0ulslard|rg 322.ê 322.ê 322.ê 1,390.ê 1,390.ê 1,390.ê 10ê.Z 10ê.Z 10ê.Z
= Free 6ash F|ow per 8hare $28.34 $32.88 $35.ô9 $0.ô5 $0.81 $0.83 $ô.15 $3.73 $3.27
3loc| Pr|ce S52Z.29 S52Z.29 S52Z.29 S11.50 S11.50 S11.50 S23.9Z S23.9Z S23.9Z
/ Free Casr F|oW per 3rare 28.31 32.88 35.ê9 0.ê5 0.81 0.83 ê.15 3.Z3 3.2Z
= P|F6F Hu|t|p|e 18.ôx 1ô.0x 14.8x 22.3x 17.9x 17.ôx 3.9x ô.4x 7.3x
3loc| Pr|ce (x-Casr) S125.ê2 S125.ê2 S125.ê2 Sê.00 Sê.00 Sê.00 S1ê.0Z S1ê.0Z S1ê.0Z
/ Free Casr F|oW per 3rare 28.31 32.88 35.ê9 0.ê5 0.81 0.83 ê.15 3.Z3 3.2Z
= P|F6F Hu|t|p|e (x-6ash} 15.0x 12.9x 11.9x 9.2x 7.4x 7.3x 2.ôx 4.3x 4.9x
F6F Y|e|d 5.47 ô.27 ô.87 4.57 5.ô7 5.77 25.77 15.ô7 13.ô7
F6F Y|e|d (x-6ash} ô.77 7.77 8.47 10.87 13.57 13.87 38.37 23.27 20.37

Source: Company data, Evercore Group L.L.C. Research
AdditionaI Investment Risks
Ìn addition to the risks posed to our estimates by social networking and growth in display,
there are other risks to our projections, including those related to the economy, scrutiny
from governments related to antitrust and user privacy, content litigation risk, and
movements in currency, which could affect a substantial portion of Google's revenues
generated abroad. We note that these risks, similar to social and display, should be viewed
as risks to our current estimates, not our view of the stock, which we presently rate at
Underweight.
Economy Risk
• Google generated 97% of its revenues in both 2008 and 2009 from advertising.
However, advertising revenue is cyclical in nature, reflecting the overall economic
patterns where they operate. As a result, Google is exposed to the same risk as
the economy in the locations where it operates.
Antitrust Risk
• Google is involved in a number of claims, suits and investigations, which include
cases such as trademark infringement, copyright claims, patent lawsuits, and
antitrust investigations. Besides Google's dominant market position in online
search market, its ability to automatically insert its own services in Google's
search results has led to concerns of an unassailable competitive advantage for
Google, resulting in the filing of antitrust complaints against the company with the
European Commission and U.S. Federal Communications Commission. An
adverse outcome in these areas can pose a risk to our estimates.
Privacy Risk
• Google's ability to protect private data such as Ìnternet search data and user
profiles remains a cause for concern for users. Ìncidents like automatically
allowing Gmail users' contacts to view their other contacts on Buzz reflect such
lapses. Further Google's data collection methods for its applications such as
Street View also remain a cause of concern. Such incidents could drive away
Google's users to other, potentially more secure, offerings.
September 28, 2010


41

Content Litigation Risk
• While Google won a summary judgment against Viacom over its use of
copyrighted content through protected use under the Digital Copyright Millennium
Act, Viacom is presently appealing. This case and others are likely to challenge
the level of protection afforded by the DCMA, which could be potentially harmful
to Google's YouTube, search and other businesses.
Currency Risk
• Google generates more than half its revenue outside the U.S. (about 52% in
2Q10). As a result, it is exposed to currency risk, despite company-hedging
efforts. Based on current forward rates, we suspect the potential for a negative
impact from movement in the British pound as well as the euro against the U.S.
dollar on year-over-year basis in 3Q10 and 4Q10, partially offset by movement in
the Japanese yen and the company's current hedging strategy. A strengthening in
the U.S. dollar from current levels could have an adverse effect on international
revenues and on estimates.
Figure 65: Currency Movement Against USD Based On Forward Rates, 1Q10A-2Q11E
ê.1º
-ê.1º
-8.5º
-11.2º
-ê.0º
2.1º
8.êº
-3.5º
-1.5º
-2.3º
0.5º
5.Zº
3.1º
5.8º
9.1º
1.0º
ê.êº
8.9º
3ê.3º
1ê.êº
8.3º
-1.1º
0.1º
-1.1º
-20º
-10º

10º
20º
30º
10º
01-2010 02-2010 03-2010 01-2010 01-2011 02-2011
EuR u30 08P u30 JPY u30 Au0 u30

$ource. 0ompan, oara, Evercore Sroup l.l.0. Researcn

September 28, 2010


42

Company Overview
Google's success as a search engine stems from the quality and speed of its search
results, self service ad platform, PageRank matching algorithm, and its user commitment to
"make money without doing evil.¨ By striking a favorable balance between advertisers,
users and publishing partners, Google captured the vast share ($23 billion) of the $26
billion global search industry in 2009.
Figure 66: GIobaI Search Industry, 2003-2009
0|ooa| 3earcr
lrduslry
0oog|e
S0
S5,000
S10,000
S15,000
S20,000
S25,000
S30,000
2003 2001 2005 200ê 200Z 2008 2009
8
e
a
r
c
h

R
e
v
e
n
u
e
s

(
|
n

H
|
|
|
|
o
n
s
}

Source: MagnaGlobal, Evercore Group L.L.C. Research
Ìn 2009, Google generated nearly $10 billion in EBÌT (adjusted to exclude stock-based
compensation) on $17 billion in net revenues ($23.6 billion gross), excluding traffic
acquisition costs paid to its affiliate sites.
Figure 67: GoogIe Net Revenues, and EBIT, 2007-2009
S11.Z
S15.9
S1Z.1
Sê.0
SZ.8
S9.5
S0
S5
S10
S15
S20
(
S

|
r

8
N
s
)
Nel Reverues S11,êê0 S15,851 S1Z,12ê
E8lT (x-3loc| Corp.) S5,953 SZ,Z52 S9,1Zê
E8lT (º ol Nel Revs) 51º 19º 51º
200Z 2008 2009

Source: Company data, Evercore Group L.L.C. Research
More than half (53%) of Google's gross revenues are now generated outside the U.S., with
approximately 13% in the U.K. and the remaining 40% from elsewhere in the world.
September 28, 2010


43


Figure 68: GoogIe's Gross Revenues by Geography, 2009
u.3. , 1Z.3º
u.K., 12.êº
R0w, 10.0º

Source: Company data, Evercore Group L.L.C. Research
Gross versus net revenues. Google's online advertising revenues come from "O&O¨ and
affiliate sites. Although partner affiliate revenues are booked gross, Google pays traffic
acquisition costs (TAC) to its network of publishing partners. As a result, Google generates
the vast majority of its net revenues (gross revenues less TAC) from O&O advertising, or
approximately 85% of total net revenues.
Figure 69: GoogIe's Site, Partner and Licensing Revenues, Gross and Net, 2009
êê.5º
85.0º
30.3º
10.êº
3.2º 1.1º

10º
20º
30º
10º
50º
ê0º
Z0º
80º
90º
100º
0ross Reverue Nel Reverues
º

o
l

T
o
l
a
|

2
0
0
9

R
e
v
e
r
u
e
0oog|e 3|le Reverues Parlrer Reverues L|cers|rg & 0lrer

Source: Company data, Evercore Group L.L.C. Research
Search Revenue Drivers - AdditionaI DetaiI
Search advertising reflects the interests of three parties: user, advertiser and search
engine. The advertiser wants to serve more relevant ads to generate sales and users will
respond only to relevant ads. Therefore, it is in the search engine's interest to help drive ad
relevancy, as better ads result in more sales for advertisers and more search ad spend.
Figure 70: Ad Auction System ReconciIes the Interest of Three Parties
user
Adverl|ser 3earcr Erg|re
user
Adverl|ser 3earcr Erg|re

Source: Company data, Evercore Group L.L.C. Research
When a search query is entered, an auction is run to determine the placement of these
ads. The "winning¨ ads are determined based on a combination of keyword bid price and
September 28, 2010


44

quality score. When the user clicks one of the sponsored links, the search engine gets paid
for the click, which is referred to as a paid click. The cost for this click is referred to as cost-
per-click (CPC). Searching for "running shoes¨ results in sponsored links (ads) at the top
and side of the page, as shown in the following figure.
Figure 71: Sponsored Search ResuIts for Running Shoes

Source: Company data, Evercore Group L.L.C. Research
Paid-CIick Drivers
The drivers of paid clicks are query volume, ad coverage, and click-thru rate. The more
people who query search, the more sponsored listings that are shown. Ìn addition, the
higher the ad coverage, or the number of sponsored links per search query, the higher the
number of sponsored listings. Therefore, query volume and ad coverage determine the
amount of total paid sponsorship ad listings. By multiplying the total number of sponsored
listings by click-thru, it results in the number of paid clicks. Therefore, paid click drivers are
as follows:
- Search Queries
- Ad Coverage: Average number of ads per query
- Click-thru Rate: Average number of ads clicked per query
Figure 72: Paid-cIick Drivers
Query Volume
x Ad Coverage
= Sponsored Listings
x Paid Click-Thru Rate
= Paid Clicks

Source: Company data, Evercore Group L.L.C. Research
To put it differently, there are three components of paid click volume: user engagement
(query volume), the query's commercial nature (ad coverage) and the relevancy of the ad,
which drives click-thru and ad coverage. User engagement and advertisement relevancy
are the two factors managed by the search engine.

September 28, 2010


45

Figure 73: Components of Search Drivers
3|le user Ergagererl
0uery Correrc|a| Nalure
Ad Re|evarcy
0uery vo|ure
x Ad Coverage
x C||c|-lrru
= Pa|d 6||cks

Source: Company data, Evercore Group L.L.C. Research
Google's past success has had much to do with its ability to increase user engagement
and ad relevancy over that of its competition. By disassembling packets of information and
storing them locally, Google was able to offer a faster search product than its competitors.
This speed drove more queries, which allowed for improved ad relevancy from the greater
amount of data the search share offered and, by extension, higher ad coverage and click-
thru, all contributing to higher paid clicks.
CPC Drivers
CPC is determined based on the location of the ad and dynamics of auction pricing. The
price of the paid click is set at the time of the query, and the advertiser only pays for the
click when it is selected by the user. However, unlike in a normal auction, where the winner
is determined based on price alone, search engines also use a "quality score¨ to determine
the price and relative locations of the ads.
How Marketers Set Maximum Bid
The maximum bid amount an advertiser is willing to spend on a particular keyword is
based on the average marginal profit the advertiser receives from the click and the
percentage of clicks that convert to a purchase, which is referred to as the "conversation
rate.¨ Therefore, given the transparency search advertising allows in terms of which clicks
convert to a purchase, search marketers tend to follow the laws of marginal economics in
setting their maximum bid.
Figure 74: Maximum CPC Bid Determined by Advertiser ROI
Sold Item Price
x Profit Margin
= Sold Item Profit
x Conversion Rate
= Average Profit per Click to Marketer = Maximum CPC Bid

Source: Company data, Evercore Group L.L.C. Research
When an advertiser buys clicks, they are buying clicks associated with keywords. The
relative worth of the keyword to the advertiser is typically based on the keyword's
conversion rate. Therefore, a keyword that converts at a higher rate will support a higher
maximum bid price from the advertiser. As an example, a search marketer is selling an
item priced at $100; the profit margin to the advertiser is 20% and the conversion rate (the
number of paid clicks that result in a purchase) is 5%. Based on this particular keyword,
the average profit per click expected by the advertiser is $1.00. Therefore, the most the
search marketer should be willing to bid for this paid click is $1, assuming the advertiser
wants to maintain a positive ROÌ and maximize profit.
September 28, 2010


46

Figure 75: Average RPC to Advertiser Based On Item Profit and Conversion
ßase
ller Pr|ce S100.0
x Prol|l Varg|r 20º
= Prof|t per |tem $20.0
x Corvers|or Rale 5º
= Avg. Revenue per 6||ck to Advert|ser $1.0

Source: Evercore Group L.L.C. Research
As a result, given that clicks are priced in an auction, the price the marketer would
theoretically set as the maximum bid would be $1 and the advertiser would profit from all
clicks that are priced below $1.00. At this point, the search marketer is able to maximize
profit.
Figure 76: Advertisers Base Max CPC Bids on MarginaI CIick Revenue Generated
Varg|ra| Reverue =
Avg. Reveruer per C||c|
Prol|l lo Var|eler
Varg|ra| Cosl =
Cosl per C||c|
S1
S0.5
S0
S1.5
S2
Pa|d C||c| vo|ure
P
r
|
c
e

p
e
r

C
|
|
c
|

Source: Evercore Group L.L.C. Research
Now, if we assume that the search engine managed to improve conversion for the
advertiser through better ad relevancy, the advertiser would be able to increase the
maximum bid price per keyword. We show below that by increasing the conversion rate
from 5% to 10%, this particular advertiser can afford to bid $2 per click, double the
previous max bid, simply based on the higher conversion rate.
Figure 77: Higher Conversion ResuIts in Higher Marketer Revenue and CPCs
Varg|ra| Reverue =
Avg. Reveruer per C||c|
Prol|l lo Var|eler
Varg|ra| Cosl =
Cosl per C||c|
S1
S0.5
S0
S1.5
S2
Pa|d C||c| vo|ure
P
r
|
c
e

p
e
r

C
|
|
c
|

Source: Evercore Group L.L.C. Research
As a result, ad relevancy, which is determined by conversion rate, directly leads to higher
maximum bids and increased ad coverage (i.e., a driver of paid clicks).
Adverl|ser rax o|d
per |eyWord
Adverl|ser o|d
per |eyWord
September 28, 2010


47

How PageRank Works
Driving Network Effect AIgorithmicaIIy
Ìncorporating PageRank into AdWords transformed the keyword auction to account for
quality. Therefore, unlike most auction platforms that sell based on price, AdWords takes
into account the users' perception of the ad quality (determined by PageRank quality
score) in establishing the price and the location of the sponsored listing. Moreover, the
PageRank "quality score¨ is based on three components:
§ Click-thru Rate (CTR): Largest component
§ Relevancy: Second-largest component
§ Landing Page Quality
Figure 78: Components of QuaIity Score
C||c| lrrougr
rale
Re|evarcy
Lard|rg Page
0ua||ly

Source: Company data, Evercore Group L.L.C. Research
PageRank ExampIe (SimpIified)
Ìn the example below, we show four advertisers bidding for three slots. The third
advertiser, despite not having the highest maximum bid price or quality score, is selected
to rank first in placement, based on the relevant PageRank weights of maximum bid and
quality score. PageRank therefore encourages advertisers to improve the quality of their
ads in order to pay less per click and receive higher ad positioning.
Figure 79: PageRank Based on QuaIity

Advert|sers Hax ß|d x 0ua||ty 8core = PageRank Pos|t|on
1 S1.0 1 4 Nol sroWr
2 S3.0 3 9 2
3 S2.0 ê 12 1
1 S1.0 8 8 3

Source: Company data, Evercore Group L.L.C. Research
The formula itself is rather simple. Ad placement is based on PageRank score, and price is
based on a combination of PageRank scores and quality score. Specifically, the price paid
is based on the next advertiser's PageRank score divided by the advertiser's own quality
score. Ìn other words, the price of the advertiser in position one equals the PageRank
score of the advertiser in position two divided by the quality score of the advertiser in
position one.
Figure 80: Cost-Per-CIick Derived Using the FoIIowing FormuIa:
Price=B
2
Q
2/
Q
1
Nexl Pos|l|or
PageRar| 3core
PageRank:
0ua||ly 3core ol 8|dder
Source: Company data, Evercore Group L.L.C. Research
September 28, 2010


48

Moreover, when the maximum bids are the same, the CPC and placement of the ads are
determined by the quality scores. Therefore, as Advertiser 4 has the highest quality score,
Advertiser 4 gets position 1 and the price paid is equal to the PageRank score of the next
placed ad divided by the advertiser's own quality score. Based on this math, advertiser 4
pays $3.00 for the top spot positioning.
Figure 81: CPC Depends Upon Ad Rank of Next Advertiser and QuaIity Score
Advert|sers Hax ß|d 0ua||ty 8core PageRank Actua| 6P6
1 S1.0 8 32 21/8 = S3.0
3 S1.0 ê 21 12/ê = S2.0
2 S1.0 3 12 V|r|rur Pr|ce

Source: Company data, Evercore Group L.L.C. Research
Taking the example a step further, Google rewards advertisers that can improve their
quality score by lowering their cost-per-click. Therefore, if Advertiser 4 can increase his
quality score from 8 to 10, the cost-per-click drops from $3 indicated above to $2.40.
Figure 82: Higher QuaIity Score Decreases ActuaI CPC
Advert|sers Hax ß|d 0ua||ty 8core PageRank Actua| 6P6
1 S1.0 10 10 21/10 = S2.1
3 S1.0 ê 21 12/ê = S2.0
2 S1.0 3 12 V|r|rur Pr|ce

Source: Company data, Evercore Group L.L.C. Research
As shown in the exhibit below, the critical element to PageRank is its ability to discount
higher quality ads. By encouraging advertisers to increase ad relevancy to receive
discounts, click-thru and purchase conversion improve, which drives higher CPC pricing,
ad coverage, and paid clicks. This, in turn, drives search revenue higher.
Figure 83: Using Lower CPC Pricing to Increase Ad ReIevancy = Higher Search Revs

Ad Relevancy
Paid Clicks
Search Revenue
CPC Pricing
Ad Coverage
Conversion
Click-thru
CPC Pricing
PageRank

Source: Company data, Evercore Group L.L.C. Research
Ownership
Google's major shareholders include Fidelity Management, Capital Research, Vanguard
Group Ìnc and T Rowe Price Associate.
September 28, 2010


49

Figure 84: SharehoIding Structure
0lrers
83.1º
Cap|la| Researcr
3.8º
varguard 0roup
lrc
3.êº
T RoWe Pr|ce
Assoc|ale
3.5º
F|de||ly
Varagererl
ê.0º

$ource. Reurers, Evercore Sroup l.l.0. Researcn
DuaI CIass Structure
Ahead of its 2004 ÌPO, Google set up a two-tier structure made up of Class A common
stock available to public shareholders and a non-public Class B stock held by insiders.
Under this structure, Class A stock has one vote per share, while Class B stock held by
insiders has 10 votes per share. As a result of this arrangement, cofounders Larry Page
and Sergey Brin, and the chief executive Eric Schmidt, holding about 90% of the Class B
stock, have more than two thirds of voting power on the basis of their Class B share
holding alone.
Figure 85: Management Ownership of CIass A and CIass B Shares
Zê.Zº
21.8º
21.0º
êZ.Zº
2.3º
Z.5º

10º
20º
30º
10º
50º
ê0º
Z0º
80º
90º
100º
lo|d|rg (º) vol|rg(º)
C
|
a
s
s

A

a
r
d

C
|
a
s
s
8

s
r
a
r
e

o
r
e
a
|
-
u
p
C|ass 8 - 0lrers
C|ass 8: Larry,
3ergey & Er|c
C|ass A srares
100.0º 100.0º

Source: Company data, Evercore Group L.L.C. Research
Ownership Origins
Google received its first funding of US$100,000 in August 1998 from Andy Bechtolsheim
who was the cofounder of Sun Microsystems. Ìt was incorporated as a privately held
company on September 4, 1998. Ìn June 1999, Google received $25 million in funding
from various investors, which included venture capital firms Kleiner Perkins Caufield &
Byers and Sequoia Capital. Google made its initial public offering (ÌPO) on August 19,
2004.
September 28, 2010


50

Management
We provide profiles of Google's management team and founders below.
Dr. Eric Schmidt, chairman of the board and chief executive officer. Dr. Schmidt has
served as CEO of Google since July 2001 and as chairman of the board of directors since
March 2001, except for a period from April 2004 to April 2007. He has also served as
chairman of the Executive Committee of the company's board of directors since April 2004.
Prior to joining Google, he served as chairman of the board of directors and as the CEO of
Novell, Ìnc., a computer networking company. He also held various positions at Sun
Microsystems, Apple Ìnc. and Siebel Systems, Ìnc. (a customer relationship management
software company). Dr. Schmidt holds a BS in electrical engineering from Princeton
University and a master's degree and Ph.D. in computer science from the University of
California at Berkeley.
Lawrence (Larry) Page, president of products and director. Page is a Google founder
and member of the company's board of directors. He has served as president of products
since July 2001. Prior to this, he also served as CFO and CEO at Google. He holds a BS
degree in engineering from the University of Michigan and a master's degree in computer
science from Stanford University.
Sergey Brin, president of technoIogy and director. Brin is a Google founder and
member of the company's board of directors. He has also served as president of
technology since July 2001. Prior to that, Brin served as Google's president and chairman
of the board of directors. He holds a BS degree in mathematics and computer science from
the University of Maryland at College Park, and a master's degree in computer science
from Stanford University.
Patrick Pichette, CFO and senior vice president. Pichette has served as CFO and
senior vice president of Google since August 2008. Prior to that, he served as an executive
officer of Bell Canada Enterprises Ìnc. from January 2001 until July 2008. He has nearly 20
years of experience in financial operations and management in the telecommunications
sector. He has also worked as a partner at McKinsey & Company and a vice president and
CFO of Call-Net Enterprises, a Canadian telecommunications company Pichette holds a
BA degree in business administration from Université du Québec à Montréal (1987) and an
MA degree in philosophy, politics, and economics from Oxford University (1989).
Jonathan Rosenberg, senior vice president of product management. Rosenberg
served as vice president of product management from February 2002 to January 2006,
when he became senior vice president of product management of Google Ìnc. Prior to
joining Google, he served as vice president of Software for palmOne (provider of handheld
computer and communications solutions) and held various executive positions at
Excite@Home (internet media company). He holds a BA degree in economics from
Claremont McKenna College and a MBA degree from the University of Chicago.
September 28, 2010


51

FinanciaIs
Figure 86: GoogIe Inc. Income Statement, 1Q08A-4Q10E
1008 1009 1010 2008 2009 2010 3008 3009 3010E 4008 4009 4010E
Cross Revenue $5,18ô.0 $5,509.0 $ô,775.0 $5,3ô7.2 $5,522.9 $ô,820.0 $5,541.4 $5,944.9 $ô,ô5ô.3 $5,700.9 $ô,ô73.8 $7,872.7
-TAC S1,18ê.0 S1,18Z.1 S1,Z11.0 S1,1Z1.0 S1,158.0 S1,Z30.0 S1,198.ê S1,559.0 S1,51ê.9 S1,183.0 S1,Z20.0 S2,115.9
= Net Revenues $3,700.0 $4,021.ô $5,0ô4.0 $3,893.2 $4,0ô4.9 $5,090.0 $4,042.8 $4,385.9 $5,109.4 $4,217.9 $4,953.8 $5,75ô.8
- 0lrer Cosl ol Reverue (x-TAC) Sê15.1 Sê01.5 SZ35.0 Sêê1.2 Sê3ê.1 SZ29.0 Sêê1.1 Sê52.1 S832.0 Sê91.9 Sê82.3 S9ê8.3
- Researcr & 0eve|oprerl S1Z9.3 S1Z3.1 Sê2Z.0 S191.9 S525.1 Sê9ê.0 S535.3 S5ê1.9 SZ18.1 S551.3 S55Z.3 SZê5.Z
- 3a|es & Var|el|rg S101.3 S3Z1.9 S553.0 S112.0 S111.Z S5Z3.0 S111.3 S135.ê S5ê8.1 S119.ê S530.Z Sê1Z.ê
- 0erera| & Adr|r|slral|ve S3Z1.1 S111.0 S3Z0.0 S111.1 S321.1 S118.0 S1Z1.5 S311.8 S101.Z S3Z5.Z S12ê.5 S1Z1.5
= 0perat|ng |ncome Adjusted (Non-CAAP} $1,827.0 $2,1ô1.1 $2,779.0 $1,850.7 $2,1ô7.0 $2,ô74.0 $1,927.ô $2,391.2 $2,585.9 $2,14ô.4 $2,757.0 $2,903.7
- 3loc|-oased Corpersal|or S280.8 S2ZZ.5 S291.0 S2Z2.8 S293.1 S309.0 S280.0 S31Z.5 S3ê8.9 S28ê.2 S2Zê.0 S3Z1.9
= 0perat|ng |ncome Reported (CAAP} $1,54ô.2 $1,883.ô $2,488.0 $1,578.0 $1,873.9 $2,3ô5.0 $1,ô47.ô $2,073.7 $2,217.0 $1,8ô0.2 $2,481.0 $2,528.8
- Exlraord|rary llers S0.0 S0.0 S0.0 S0.0 S0.0 S0.0 S0.0 S0.0 S0.0 (S1,091.8) S0.0 S0.0
÷ lrleresl (Experse) lrcore S1êZ.3 Sê.2 S18.0 S58.0 (S1Z.Z) Sê9.0 S21.2 (SZ.2) S10Z.1 Sê9.9 S8Z.Z S10Z.1
= Pretax |ncome $1,713.ô $1,889.8 $2,50ô.0 $1,ô35.9 $1,85ô.2 $2,434.0 $1,ôô8.8 $2,0ôô.5 $2,324.3 $835.3 $2,5ô8.7 $2,ô3ô.2
- Prov|s|or lor |rcore laxes S10ê.5 S1êZ.0 S551.0 S388.5 S3Z1.ê S591.0 S3Z8.8 S12Z.ê S525.3 S152.9 S591.ê Sê15.5
= Net |ncome After Extraord|nary |tems (CAAP} $1,307.1 $1,422.8 $1,955.0 $1,247.4 $1,484.5 $1,840.0 $1,289.9 $1,ô39.0 $1,799.0 $382.4 $1,974.1 $2,020.ô
/ 0||uled 3rares 0ulslard|rg 31Z.1 31Z.2 322.ê 318.0 318.5 322.5 31Z.8 319.Z 321.3 31ê.9 322.2 323.8
= 0||uled EP3 Reporled S1.12 S1.19 Sê.0ê S3.92 S1.êê S5.Z1 S1.0ê S5.13 S5.ê0 S1.21 Sê.13 Sê.21
Proforma EP8 x-8tock 6omp $4.84 $5.1ô $ô.7ô $4.ô3 $5.3ô $ô.45 $4.92 $5.89 $ô.5ô $5.10 $ô.79 $7.18
Prolorra EP3 lrc|. 3loc| Corp S1.12 S1.19 Sê.0ê S3.92 S1.êê S5.Z1 S1.3ê S5.13 S5.ê0 S1.êê Sê.13 Sê.21
Adjusted Eß|T0A $2,1ô3.5 $2,5ô4.3 $3,110.0 $2,242.3 $2,543.9 $3,01ô.0 $2,313.9 $2,7ô9.9 $3,02ô.9 $2,531.9 $3,122.5 $3,327.8
Y|Y 7 6hange
0ross Reverue 11.5º ê.2º 23.0º 38.êº 2.9º 23.5º 31.0º Z.3º 12.0º 18.1º 1Z.1º 18.0º
TAC 32.1º 0.1º 15.0º 28.1º (1.1)º 18.Zº 22.Zº 1.0º (0.8)º 3.0º 1ê.0º 23.0º
Net Revenues 45.77 8.77 25.97 42.97 4.47 25.27 34.37 8.57 1ô.57 24.57 17.47 1ô.27
0lrer Cosl ol Reverue (x-TAC) 80.1º (2.3)º 22.2º ê1.2º (1.2)º 11.êº 51.8º (1.8)º 2Z.5º 3ê.1º (1.8)º 11.9º
Researcr & 0eve|oprerl êê.êº (1.3)º 32.5º 31.9º ê.2º 32.5º 28.0º 5.0º 2Z.8º 1Z.1º 1.1º 3Z.1º
3a|es & Var|el|rg 1ê.9º (Z.3)º 1Z.5º 38.5º (ê.8)º 39.2º 2ê.êº (2.0)º 30.5º 1Z.0º 18.0º 22.0º
0erera| & Adr|r|slral|ve ê2.Zº 9.9º (10.0)º 58.2º (2ê.5)º 28.9º ê3.Zº (2ê.9)º 1Z.1º 11.3º 13.5º 10.5º
0perat|ng |ncome (Exc|. 8tock 6omp} 30.07 18.37 28.ô7 37.57 17.17 23.47 27.27 24.17 8.17 27.37 28.47 5.37
3loc|-oased Corpersal|or 52.Zº (1.2)º 1.9º 12.9º Z.1º 5.1º 11.5º 13.1º 1ê.2º 1ê.Zº (3.ê)º 35.8º
0perat|ng |ncome (|nc|. 8tock 6omp} 2ô.ô7 21.87 32.17 42.97 18.87 2ô.27 25.07 25.97 ô.97 29.17 33.47 1.97
Nor-0AAP Nel lrcore 32.êº ê.5º 33.3º 31.0º 1ê.0º 21.Zº 2ê.1º 20.5º 11.9º 11.êº 35.1º ê.3º
0||uled 3rares 0ulslard|rg 0.8º (0.1)º 1.Zº 0.8º 0.2º 1.2º 0.1º 0.êº 0.5º (0.3)º 1.Zº 0.5º
Proforma EP8 (Exc|. 8tock 6omp} 31.57 ô.57 31.17 30.07 15.87 20.27 25.97 19.87 11.47 15.07 33.27 5.87
Adjusted Eß|T0A 34.47 18.57 21.37 42.57 13.47 18.ô7 31.17 19.77 9.37 28.17 23.37 ô.ô7
7 of Cross Revenue|Harg|ns (x8tock 6omp}
TAC 28.Zº 2Z.0º 25.3º 2Z.5º 2ê.1º 25.1º 2Z.0º 2ê.2º 23.2º 2ê.0º 25.8º 2ê.9º
Net Revenues 71.37 73.07 74.77 72.57 73.ô7 74.ô7 73.07 73.87 7ô.87 74.07 74.27 73.17
0lrer Cosl ol Reverue (x-TAC) 11.9º 10.9º 10.8º 12.1º 11.5º 10.Zº 12.0º 11.0º 12.5º 12.2º 10.2º 12.3º
Researcr & 0eve|oprerl 9.2º 8.êº 9.3º 9.2º 9.5º 10.2º 9.Zº 9.5º 10.8º 9.Zº 8.1º 9.Zº
3a|es & Var|el|rg Z.8º ê.8º 8.2º 8.2º Z.5º 8.1º 8.0º Z.3º 8.5º Z.9º 8.0º 8.2º
0erera| & Adr|r|slral|ve Z.2º Z.5º 5.5º 8.2º 5.9º ê.1º 8.5º 5.8º ê.1º ê.êº ê.1º ê.0º
0perat|ng |ncome (Exc|. 8tock 6omp} 35.27 39.27 41.07 34.57 39.27 39.27 34.87 40.27 38.87 37.ô7 41.37 3ô.97
3loc| 8ased Corp 5.1º 5.0º 1.3º 5.1º 5.3º 1.5º 5.1º 5.3º 5.5º 5.0º 1.1º 1.8º
0perat|ng |ncome (|nc|. 8tock 6omp} 29.87 34.27 3ô.77 29.47 33.97 34.77 29.77 34.97 33.37 32.ô7 37.27 32.17
Adjusted Eß|T0A 41.77 4ô.57 45.97 41.87 4ô.17 44.27 41.87 4ô.ô7 45.57 44.47 4ô.87 42.37
0tr. End|ng 0ec 0tr. End|ng 8ep 0tr. End|ng Jun 0tr. End|ng Har

Source: Company data, Evercore Group L.L.C. Research






September 28, 2010


52

FinanciaIs (Cont'd)
Figure 87: GoogIe Inc. Income Statement, 2007A-2015E
6ACR
2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-'15
Cross Revenue $1ô,594.0 $21,795.ô $23,ô50.ô $28,124.0 $31,875.5 $3ô,584.0 $42,02ô.8 $47,332.ô $53,007.9 13.57
-TAC S1,931.0 S5,911.ê Sê,221.1 SZ,103.8 S8,018.2 S9,221.Z S10,808.ê S12,0Z5.8 S13,388.5 13.5º
= Net Revenues $11,ôô0.0 $15,854.0 $17,42ô.1 $21,020.2 $23,857.2 $27,3ô2.2 $31,218.1 $35,25ô.8 $39,ô19.4 13.57
- 0lrer Cosl ol Reverue (x-TAC) S1,ê92.8 S2,ê38.ê S2,5Z2.ê S3,2ê1.1 S3,920.Z S1,199.8 S5,1ê9.3 S5,821.9 Sê,520.0 11.8º
- Researcr & 0eve|oprerl S1,550.2 S2,0ê0.8 S2,11Z.Z S2,80Z.0 S3,215.5 S3,Z53.0 S1,31Z.0 S1,888.2 S5,5ê8.3 11.Zº
- 3a|es & Var|el|rg S1,329.ê S1,Z10.2 S1,Z52.9 S2,312.1 S2,ê89.9 S3,0êZ.2 S3,1Z8.9 S3,905.ê S1,398.ê 13.1º
- 0erera| & Adr|r|slral|ve S1,131.1 S1,êê2.Z S1,50ê.Z S1,êê1.1 S1,911.0 S2,22ê.2 S2,515.5 S2,801.2 S3,0ê1.ê 13.0º
= 0perat|ng |ncome Adjusted (Non-CAAP} $5,953.0 $7,751.7 $9,47ô.2 $10,942.ô $12,090.1 $13,81ô.0 $15,707.5 $17,839.9 $20,0ô8.1 12.97
- 3loc|-oased Corpersal|or S8ê8.ê S1,119.8 S1,1ê1.1 S1,313.8 S1,588.3 S1,801.8 S2,03ê.1 S2,2ê0.1 S2,518.0 13.1º
= 0perat|ng |ncome Reported (CAAP} $5,084.4 $ô,ô32.0 $8,312.2 $9,598.7 $10,501.8 $12,014.2 $13,ô71.4 $15,579.8 $17,550.1 12.87
- Exlraord|rary llers S0.0 (S1,091.8) S0.0 S0.0 S0.0 S0.0 S0.0 S0.0 S0.0
÷ lrleresl (Experse) lrcore S589.ê S31ê.1 Sê9.0 S301.8 SZê3.ê S995.1 S1,2ê3.2 S1,5ê9.ê S1,90ê.8 11.êº
= Pretax |ncome $5,ô74.0 $5,853.ô $8,381.2 $9,900.5 $11,2ô5.4 $13,009.3 $14,934.ô $17,149.4 $19,45ô.9 14.57
- Prov|s|or lor |rcore laxes S1,1Z0.3 S1,ê2ê.Z S1,8ê0.Z S2,285.8 S2,ê3ê.1 S3,031.2 S3,1ê1.8 S3,9ê1.5 S1,1Z5.1 11.1º
= Net |ncome After Extraord|nary |tems (CAAP} $4,203.7 $4,22ô.9 $ô,520.4 $7,ô14.7 $8,ô29.3 $9,978.1 $11,4ô9.8 $13,187.9 $14,981.8 14.57
/ 0||uled 3rares 0ulslard|rg 31ê.2 31Z.5 319.1 322.ê 321.2 325.8 32Z.1 329.1 330.Z 0.5º
= 0||uled EP3 Reporled S13.29 S13.31 S20.11 S23.ê1 S2ê.ê2 S30.ê3 S35.03 S10.08 S15.30 13.9º
Proforma EP8 x-8tock 6omp $15.59 $19.49 $23.22 $2ô.9ô $30.ô2 $35.1ô $40.1ô $45.75 $51.ô2 13.97
Prolorra EP3 lrc|. 3loc| Corp S13.29 S1Z.0ê S20.11 S23.ê1 S2ê.ê2 S30.ê3 S35.03 S10.08 S15.30 13.97
Adjusted Eß|T0A $ô,924.4 $9,251.7 $11,000.5 $12,ôô0.ô $14,254.1 $1ô,303.9 $18,583.0 $20,972.5 $22,ôôô.2 12.47
Y|Y 7 6hange
0ross Reverue 5ê.5º 31.3º 8.5º 18.9º 13.3º 11.8º 11.9º 12.êº 12.0º
TAC 19.1º 20.1º 1.8º 11.1º 12.9º 15.0º 1Z.2º 11.Zº 10.9º
Net Revenues 59.87 3ô.07 9.97 20.ô7 13.57 14.77 14.17 12.97 12.47
0lrer Cosl ol Reverue (x-TAC) 88.1º 55.9º (2.5)º 2ê.9º 20.1º 11.8º 11.9º 12.êº 12.0º
Researcr & 0eve|oprerl ê1.Zº 32.9º 2.8º 32.êº 15.êº 15.êº 15.0º 13.2º 13.9º
3a|es & Var|el|rg ê8.3º 30.9º 0.Zº 33.êº 11.9º 11.0º 13.1º 12.3º 12.êº
0erera| & Adr|r|slral|ve Z2.3º 1ê.êº (9.1)º 10.5º 11.8º 1ê.5º 11.3º 10.0º 9.1º
0perat|ng |ncome (Exc|. 8tock 6omp} 48.57 30.27 22.27 15.57 10.57 14.37 13.77 13.ô7 12.57
3loc|-oased Corpersal|or 89.êº 28.9º 1.0º 15.1º 18.2º 13.1º 13.0º 11.0º 11.1º
0perat|ng |ncome (|nc|. 8tock 6omp} 43.27 30.47 25.37 15.57 9.47 14.47 13.87 14.07 12.ô7
Nor-0AAP Nel lrcore 50.3º 25.5º 19.8º 1Z.2º 11.1º 15.1º 11.8º 11.5º 13.1º
0||uled 3rares 0ulslard|rg 2.2º 0.1º 0.êº 1.0º 0.5º 0.5º 0.5º 0.5º 0.5º
Proforma EP8 (Exc|. 8tock 6omp} 47.27 25.07 19.17 1ô.17 13.ô7 14.87 14.27 13.97 12.87
Adjusted Eß|T0A 50.87 33.ô7 18.97 15.17 12.ô7 14.47 14.07 12.97 8.17
7 of Cross Revenue|Harg|ns (x8tock 6omp}
TAC 29.Zº 2Z.3º 2ê.3º 25.3º 25.2º 25.2º 25.Zº 25.5º 25.3º
Net Revenues 70.37 72.77 73.77 74.77 74.87 74.87 74.37 74.57 74.77
0lrer Cosl ol Reverue (x-TAC) 10.2º 12.1º 10.9º 11.êº 12.3º 12.3º 12.3º 12.3º 12.3º
Researcr & 0eve|oprerl 9.3º 9.5º 9.0º 10.0º 10.2º 10.3º 10.3º 10.3º 10.5º
3a|es & Var|el|rg 8.0º 8.0º Z.1º 8.3º 8.1º 8.1º 8.3º 8.3º 8.3º
0erera| & Adr|r|slral|ve ê.8º Z.êº ê.1º 5.9º ê.0º ê.1º ê.1º 5.9º 5.8º
0perat|ng |ncome (Exc|. 8tock 6omp} 35.97 35.ô7 40.17 38.97 37.97 37.87 37.47 37.77 37.97
3loc| 8ased Corp 5.2º 5.1º 1.9º 1.8º 5.0º 1.9º 1.8º 1.8º 1.8º
0perat|ng |ncome (|nc|. 8tock 6omp} 30.ô7 30.47 35.17 34.17 32.97 32.87 32.57 32.97 33.17
Adjusted Eß|T0A 41.77 42.47 4ô.57 45.07 44.77 44.ô7 44.27 44.37 42.87

Source: Company data, Evercore Group L.L.C. Research



September 28, 2010


53

FinanciaIs (Cont'd)
Figure 88: GoogIe Inc. BaIance Sheet, 2007A-2015E
2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
A88ET8
Casr & Equ|va|erls Sê,081.ê S8,ê5ê.ê S10,19Z.ê S18,321.ê S28,912.1 S11,098.9 S55,3ê1.1 SZ1,3êê.2 S88,Z15.ê
Var|elao|e 3ecur|l|es 8,13Z.0 Z,189.1 11,28Z.2 11,1Z1.5 11,ê55.8 11,810.1 15,021.1 15,208.Z 15,393.0
Accourls Rec., Nel 2,1ê2.5 2,ê12.2 3,1Z8.5 3,813.0 1,303.8 1,908.Z 5,5ê9.2 ê,251.1 ê,988.Z
0elerred lrc. Taxes, Nel ê8.5 28ê.1 ê11.1 ZZê.1 893.Z 1,021.9 1,1Z9.9 1,318.1 1,1ê8.1
lrcore Taxes Rece|vao|e 115.3 0.0 23.2 10.8 (11.ê) (10.ê) (ZZ.ê) (122.9) (1ZZ.Z)
Currerl Prepa|d Experses & 0lrer Assels ê91.2 1,101.1 83ê.1 991.2 1,122.3 1,2ê5.5 1,132.2 1,5Z2.0 1,Z20.0
Tota| 6urrent Assets $17,289.1 $20,178.1 $29,1ô7.0 $38,384.ô $49,87ô.1 $ô3,097.5 $78,489.ô $95,59ô.7 $114,108.1
Prepa|d Experses & 0lrer Assels 1ê8.5 133.8 11ê.1 519.2 599.5 êê0.2 Z22.1 Z80.2 83Z.1
0elerred lrc. Taxes, Nel 33.2 0.0 2ê2.ê 31Z.2 3ê5.9 120.Z 185.5 513.ê ê0Z.1
Nor-Var|elao|e Equ|ly 3ecur|l|es 1,059.Z 85.2 129.0 191.1 259.2 321.3 389.1 151.5 519.5
PP&E, Nel 1,039.3 5,233.8 1,811.ê 5,035.2 5,285.ê 5,1ê8.3 5,103.3 5,185.0 ê,119.2
lrlarg|o|e Assels, Nel 11ê.ê 99ê.Z ZZ1.9 1,112.8 1,05ê.3 Z11.1 398.1 92.8 0.0
0oodW||| 2,299.1 1,810.0 1,902.ê 1,902.ê 1,902.ê 1,902.ê 1,902.ê 1,902.ê 1,902.ê
Tota| Assets $25,335.8 $31,7ô7.ô $40,49ô.8 $50,825.7 $ô2,345.1 $75,585.0 $90,790.7 $107,855.4 $127,123.7
L|Aß|L|T|E8 & 8T06Kh0L0ER8' E0U|TY
Accourls Payao|e S282.1 S1Z8.0 S215.9 S311.1 S193.2 SêZZ.5 S909.5 S1,1ê1.3 S1,15ê.1
Accrued Corpersal|or & 8erel|ls 588.1 811.ê 982.5 1,18ê.ê 1,3ê9.1 1,5Z3.8 1,81ê.3 2,033.9 2,2Z1.2
Accrued Experses & 0lrer Currerl L|ao. 1ê5.0 180.3 5Z0.1 Z53.1 911.0 1,1Z1.2 1,150.9 1,Z35.8 2,0ê2.5
Accrued Reverue 3rare 522.0 532.5 ê91.0 819.ê 921.3 1,03Z.9 1,1ê9.5 1,2ZZ.8 1,391.5
0elerred Reverue 1Z8.1 218.1 285.1 32Z.ê 3Z1.8 12ê.5 18ê.ê 519.5 ê1Z.5
lrcore Taxes Payao|e 0.0 81.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tota| 6urrent L|ab|||t|es $2,035.ô $2,302.1 $2,747.5 $3,431.3 $4,102.3 $4,88ô.8 $5,832.ô $ô,758.4 $7,799.1
Lorg-lerr Porl|ors ol Equ|prerl Leases 0.0 0.0 0.0 S0.0 S0.0 S0.0 S0.0 S0.0 S0.0
0elerred Reverue 30.2 29.8 11.ê S50.3 S58.0 Sêê.Z SZê.9 S8ê.2 S9ê.2
0elerred lrcore Taxes, Nel 0.0 12.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0
lrcore Taxes Payao|e, Lorg-Terr 1Z8.1 890.1 1,392.5 1,ê81.8 1,910.1 2,230.5 2,5Z1.2 2,882.ê 3,219.0
0lrer Lorg-Terr L|ao|||l|es 101.9 291.2 311.0 1,953.2 3,815.ê 5,903.9 8,219.Z 10,Z92.9 13,ê02.0
Tota| L|ab|||t|es $2,ô4ô.1 $3,528.7 $4,492.ô $7,11ô.5 $9,91ô.3 $13,087.9 $1ô,733.5 $20,520.0 $24,71ô.2
8tockho|ders' Equ|ty
Corverl|o|er Prelerred 3loc| 0.0 0.0 0.0 S0.0 S0.0 S0.0 S0.0 S0.0 S0.0
Corror 3loc| 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Add|l|ora| Pa|d-lr Cap|la| 13,211.2 11,150.3 15,81ê.Z 15,90Z.0 15,99Z.3 1ê,08Z.ê 1ê,1ZZ.8 1ê,2ê8.1 1ê,358.1
Accuru|aled 0lrer Corprerers|ve lrcore 113.1 22ê.ê 105.1 105.1 105.1 105.1 105.1 105.1 105.1
Rela|red Earr|rgs 9,331.8 13,5ê1.Z 20,082.1 2Z,ê9ê.Z 3ê,32ê.1 1ê,301.2 5Z,ZZ1.0 Z0,9ê1.9 85,913.Z
Tota| 8tockho|ders' Equ|ty $22,ô89.7 $28,238.9 $3ô,004.2 $43,709.2 $52,428.8 $ô2,497.1 $74,057.2 $87,335.4 $102,407.5
Tota| L|ab. & 8tockho|ders' Equ|ty $25,335.8 $31,7ô7.ô $40,49ô.8 $50,825.7 $ô2,345.1 $75,585.0 $90,790.7 $107,855.4 $127,123.7
Source: Company data, Evercore Group L.L.C. Research


September 28, 2010


54

FinanciaIs (Cont'd)
Figure 89: GoogIe Inc. Cash FIow Statement, 2007A-2015E
200ô 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
0PERAT|NC A6TV|T|E8
Net |ncome $3,077.4 $4,203.7 $4,22ô.9 $ô,520.4 $7,ô14.7 $8,ô29.3 $9,978.1 $11,4ô9.8 $13,187.9 $14,981.8
0eprec|al|or & Arorl|zal|or ol PP&E 191.1 80Z.Z 1,212.2 1,210.0 1,385.9 1,ZZZ.5 2,113.0 2,5ê2.5 2,82Z.0 2,505.3
lrpa|rrerl Crarges or Equ|ly lrveslrerls 1,091.8
Arorl|zal|or ol lrlarg|o|es & warrarls ZZ.5 159.9 28Z.Z 281.3 332.1 38ê.5 311.8 313.1 305.5 92.8
3loc|-8ased Corpersal|or 158.1 8ê8.ê 1,119.8 1,1ê1.1 1,313.8 1,588.3 1,801.8 2,03ê.1 2,2ê0.1 2,518.0
Excess Tax 8erel|ls lror 3loc|-8ased AWard Acl|v|ly -581.Z -3Z9.2 -159.1 -90.3 0.0 0.0 0.0 0.0 0.0 0.0
0elerred lrcore Taxes -98.5 -1ê1.2 -221.ê -2ê8.1 -18ê.ê -1êê.0 -185.9 -219.9 -19ê.1 -213.Z
0lrer 12.5 -39.Z -31.9 -20.3 0.0 0.0 0.0 0.0 0.0 0.0
Crarges |r Assel & L|ao|||l|es 110.Z 318.5 32Z.2 18ê.0 22ê.ê 118.Z 11ê.Z ê11.1 515.3 ê50.Z
Net 6ash Prov|ded by 0perat|ng Act|v|t|es $3,580.5 $5,775.4 $7,852.9 $9,31ô.2 $10,71ô.ô $12,ô34.3 $14,528.ô $1ô,775.9 $18,929.5 $20,535.0
|NVE8T|NC A6T|V|T|E8
Purcrases ol PP&E -S1,902.8 -S2,102.8 -S2,358.5 -S809.9 -S1,5Zê.5 -S2,02Z.9 -S2,325.8 -S2,19Z.5 -S2,908.Z -S3,1ê9.ê
Purcrases ol Var|elao|e 3ecur|l|es -2ê,ê81.9 -15,99Z.1 -15,35ê.3 -29,139.1 -29,139.1 -29,139.1 -29,139.1 -29,139.1 -29,139.1 -29,139.1
Valur|l|es & 3a|es ol Var|elao|e 3ecur|l|es 23,10Z.1 15,ê59.5 15,Zê2.8 22,102.9 28,951.8 28,951.8 28,951.8 28,951.8 28,951.8 28,951.8
lrveslrerls |r Nor-V|lao|e 3ecur|l|es -1,019.1 -31.5 -1Z.2 -ê5.1 -ê5.1 -ê5.1 -ê5.1 -ê5.1 -ê5.1 -ê5.1
Acqu|s|l|ors, Nel Casr -102.1 -90ê.Z -3,320.3 -108.0 -1,000.0 0.0 0.0 0.0 0.0 0.0
Net 6ash Used |n |nvest|ng Act|v|t|es -$ô,899.2 -$3,ô81.ô -$5,319.4 -$8,019.2 -$2,825.9 -$2,277.3 -$2,575.2 -$2,74ô.9 -$3,158.1 -$3,419.0
F|NAN6|NC A6T|V|T|E8
Nel Proceeds lror 3loc|-8ased AWard Acl|v|ly S321.1 S23.9 -SZ1.5 S113.1 S113.1 S113.1 S113.1 S113.1 S113.1 S113.1
Excess Tax 8erel|ls lror 3loc|-8ased AWard Acl|v|ly 581.Z 3Z9.2 159.1 90.3 90.3 90.3 90.3 90.3 90.3 90.3
Net 6ash Prov|ded by F|nanc|ng Act|v|t|es $2,9ôô.4 $403.1 $87.ô $233.4 $233.4 $233.4 $233.4 $233.4 $233.4 $233.4
Ellecl ol Excrarge Rales 19.Z 10.0 -15.9 10.5 0.0 0.0 0.0 0.0 0.0 0.0
Net |ncrease (0ecrease} |n 6ash -$332.5 $2,53ô.9 $2,575.1 $1,540.9 $8,124.1 $10,590.5 $12,18ô.8 $14,2ô2.5 $1ô,004.8 $17,349.4
Casr _ 80P S3,8ZZ.2 S3,511.Z Sê,081.ê S8,ê5ê.Z S10,19Z.ê S18,321.ê S28,912.1 S11,098.9 S55,3ê1.1 SZ1,3êê.2
6ash § E0P $3,544.7 $ô,081.ô $8,ô5ô.7 $10,197.ô $18,321.ô $28,912.1 $41,098.9 $55,3ô1.4 $71,3ôô.2 $88,715.ô

Source: Company data, Evercore Group L.L.C. Research



September 28, 2010


55

ANALYST CERTIFICATION
The analysts Ken Sena and Anupam K. Palit, CFA, primarily responsible for the preparation of this research report attest to the following:
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and (2) that no part of the research analyst's compensation was, is, or will be directly related to the specific recommendations or views in this
research report.

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Underweight ÷ the stock is expected to perform in line with the average total return of the analyst's coverage universe over the next 12 months.
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Coverage Universe Investment Banking Services/Past 12 Mos.
Ratings Count Pct. Count Pct.
Overweight 4 36% 0 0%
Underweight 6 55% 0 0%
Underweight 1 9% 0 0%
For disclosure purposes, in accordance with FÌNRA requirement, our "Overweight,¨ "Underweight¨ and "Underweight¨ ratings may be viewed as
"Buy,¨ "Hold¨ and "Sell,¨ respectively.
As of June 30, 2010
Issuer-Specific DiscIosures & DiscIosure Legend (as of September 28, 2010)
Company DiscIosures
Google Ìnc. 4
AOL, Ìnc. 4
Yahoo! Ìnc. 4

Research DiscIosure Legend
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subject company in the last 12 months.
September 28, 2010


56

7.
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

! C $ / !! 64 T< ## C = ?5* = < != T 8 8 8 #! A # E A / = = 8 < = A = A 8 !# / # 7= A $A = # C = 8 /.. = 8 = !# A =$ 8 8 = 8 ! # # C < A = = = 8 #$ # E = A # E # 8 # 8 = A ## 8 8 # 8 AC 8 8 < = # E 8 !# / !# A / AA 8 # 8 = = !# A -= A # AA . 8 < D 64 A * //4- ' / - B ) . $ / ( )/ 7= C # -- / 4 ! (0 8 !# / /' / = C = 8 !# / 8 ! # . C 2 4 A $ 3 CK 9 . 9 = "7 " 3 % 9 = > A A 3 /0 = 9 L0 A = L * > = : 7 > = 3 ? 3 ? A :72F!CK" 9 4 2 # = A " AL : $ - . &4 A = # = = = 8 / = / J / / = )/ !# A # ! # $ $ ! ! = # A :/ ' 8 K 8 !# / > 7 C $ # $ ( #$ / 8 $ 6/ < K < = ' ! 7= 8 # / 8 !# / 8 # < 8 #8 #/ 2 .

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% (% &% % % (% % % < F/2 /0: )4 /0: <& 4' /0: < /: /0: < % #% #%# %& %& %& %$ (%.@ 8 &@ $ ! ##/ AA C/ = P ! / 8 = ! /E = 8 / = = B 8 ## A # # #8 = 8 AA # 8 C.* " /0 #% 64 & (4 $7 6/ 2 B (8 B #%# #% (%# %& %( . # !/ = ' ## $+ ! #/ !! # 7= 8 = # #/ = ## = # # A! AA 8 8 C/ = .! 8 / $8 ! ! /-= 8 AA 6 8 A < 8 $< ! = ! #A ! A = 6 =! 8 < ## = = B 8 ## / -/ C . #%& &% < < & .! C $ "/ • 4 / 1 0= # # < /9 8 + A !/ = 8 = =! 8 8 = . ' $ <= = #8 C ! ##/ = # E > 7 C $ = 8 = C 1 A # " • # = = #A 8 = B 3 C ? @ 4 #$ .

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

! C $ 64 C * //4.> / 0 /4 5 2*3" & % /%0% " &$% /%1%" %# / 0 AA # H = !! .2 # & =C % ( % ##% 2 0 2 4 2 . 8$ 8 8C 8 8 C = !# A = A /< 8 C 8 ! 8 . ' -$ 8 # = 8 < ## = #! 8 8 = 8 ! 8 ) / 0 F 0= =H / 8 7= F< G 8 &. 64 C5* 0 #= = ! 37 4 9 / A #/ ? A # //4.> ) # # E # 8 AA # C < A ! C# = ! 3 # A 8 7 4A $ #$ K # # 8 F K G 8 ! / AA $ 4 % 0 &%& %# / ! 5 . ( $ .2 + G* 0 = 8 7= 8 ! 8 #/ # /$ C 64 D *( ( A# < # 8 / 8 # 7= = $ 0 A = # A $ # / A P( ! = 8 D 8 = / $ 8 E 8 /.

= $ # = C A! 8 # 7= A $ ! 8 # 8 A ## < D 64 =@ 8 D # -= 1 D D *) 8 .# 3 " 4 = A F 8 8 A = ! $ = < 64 D * / / A = ! ! 8 # 7= = G # = A ## < A .1$ 0 C A 8 ! H C A 8 # / 8! H / Query Volume x Ad Coverage = Sponsored Listings x Paid Click-Thru Rate = Paid Clicks 7 ! 8 AA #/$ = 3H / # 4$ = H <= = 8 # -= = < A = /E 8 8 8 C/ = ! # B = A! 8 # 3 8 4 D 8 = 8 8 # # / A = # 8$ / && .1 $ 0 7= 8 A! 8 # H / # $ 8 $ 8 # -= 7= ! !# <= H / =$ = ! 8# = = < 88 $ = = = = 8 $ = C A ! 8# ! = H /$ = = = = C A ! 8# 7= A $ H / # 8 8 8 = A #! 8 ! =! 8# 6/ # !#/ = # C A ! 8 # C/ # ./ 4 8# $ = A = # ! 8# = A 3 8 4 8 = ! 8 ! / ) 8".! C $ H # / 0= = # A = # $ <= = A 8 ! .

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old Item Price x Profit Margin = Sold Item Profit x Conversion Rate = Average Profit per Click to Marketer = Maximum CPC Bid 0= # . ! C = = < < C / # $ = / C / # 8 < = /< 8 7= A = /< 8 = 8 /! ##/ C 8 = /< 8E 7= A $ /< 8 = = = < ## !! = = C8 ! A = 8 . ( ! A 8 = & . $= = 8 = = ! 8 # = = 8 ! = 8 # - ")" $ 0 " 8 8C 8 = # A = ! A = ! 8 # = A = H # <= # 8 C/ = M < $ 8 8C 8 ! # $ = = ! 8 # # A = 8 8 /$ # 8 8/ 8 = # A 8 # FH ! 7= #/ ! / A = $ <= = < # / G 8 &/2 7= C ! .

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

% . ) 4 = 8 1 F .* PageRank: Price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§ # -= 1 3 714D J § 1 # /D 8-# § J 8 " @ # / D * "/ / /. !# C # <$ < = < A $8 ! = = = = A !# $C 8 = H # / " 1 = A 8 8 ! /# ! # 8 64 D5* ) 4 17 / B - & ) *+ . < C 88 A = # 7= = 8 C8 ! H # / $ # 8 # " 1 < = A .

&% . %& @# 6 . % A A4 7 H H 64 = # / # / .&% ( # & &@( 6 .# 7= A $ A 8 -! . ! F ( 0 B - / & ) *+ .= C C # <$ = # / 8 6/ $ # -= 8 ! = $ 8! 8 # 7= $ 4 /2 ")" ) # # 8 ! $8 4 / ( " 1 8 $ <= = 8 = = = . A = ! ! ! 64 * ")" $ C8 = $ = " 8 !# 7= A $ 8 &= = = = 8 = ! ! 8 H # = " 1 E < H # / 6 8 = A = 8 H # / A = =$ 8 $ .0 CPC Pricing C# / 8 # / = = " ! $ ?* E&4 0 Conversion CPC Pricing Ad Relevancy Ad Coverage Search Revenue Click-thru Paid Clicks PageRank 2 # E ! 9 = = #8 871 < " # 8 %8 # / ' $ ! # 1 =$ + 8 & . & / ( 1 /.! C $ ' $ <= = .&% .&% .# 8 ! A ). !# C/ # < A *&4 B - ! A = $ = / = $ # < 8 8 -! . % A A4 = = 8 8 64 = < H = .")" = & 8 C ! ) & = = & ) *+ . % @# 6 . 8 8 C/ = H # / 8 & ! !# 8 8 8 8 8 C/ = 8 ! / ).&% & # & &@ 6 . 8 $ ( .&% .

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

/-/4 A = ! /E C 8 A 8 / P #/ " = $6 8 A8 M = #8 6 8 / A ' /# 8 ## " $ A 8B / / 0 A ! ! 8 $ A 8 P A "6 ! 8 A # AA A 6 ## 8 * ! / A . ! A = B #A 6 # / 2 8 8 A 4 C = # A = C = B A ) 1) 7 .! C $ 4 0 ! $# 8 = 8 ! A# A # E 8A 8 C # < = 8 = & A /.A 8 B /3 4 C / " A= A 2$ 8= #8 / 0 /. #.. C P #/ 8 ! # = * / A <) 4 /. ! 8 ! /4 M = #8 6 8 ## 8 '6 8 A = B / A = . ! A ! 8A ! # & ! # M = # = A = *. = 8 = #8 6 # # A " B / 8 E 8 8 "= . / 4 #1 A! 8 A % C / P ! 8 A! 8 A # 8 ! 8 A A< A ! # 3! 8 # 4 8 = #8 . / . * A # P #/ 8 = A = C 8 A8 ' $ . / / #" # A 8 A = ! /S C 8 A 8 M = 8 ! 8 A! 8 " = $= # 8 % 8 * # M = #8 6 A = B / A' = 8 E 8 ! A 8B / M = 8 #" = " / / #6 # 8 = # A 8 8 8 ! 8 A # E ! 8 8 = 8 ! E 8 ! /.! A # M = # < 8 % A ##-5 * ! $ 6 8 C 8 ' 8 != # !=/$ ! # N/ <= 9 ! *. A = ! /S C 8 A 8 " 9 # $= 8 = A = C 8 A8 8 5 ##$ $ ! < ! / M # = #8 ! ' / $ !!# 8 C # / $ 3 # =! A< ! /4 . # 8 = C / ! # $= 8 M 3 ' 4 8 8 ' # B = 8 % 8 = $= 8 . F 0 /. # P #/ M = #/ = # /K ! / 8 ! 8 8 ! /" = = #8 V 8 @ VC W ' V #3 4 8 A .

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