Google float conjures up memories of the bubble

The internet search engine is listing with a health warning. Clayton Hirst and Tim Webb report

Anyone who still bears the scars of the dot-com boom and bust should avoid reading Google's preliminary flotation prospectus. The internet search company last week spelt out every possible risk faced by future investors if they decide to back its $2.7bn (£1.5bn) offering.

Anyone who still bears the scars of the dot-com boom and bust should avoid reading Google's preliminary flotation prospectus. The internet search company last week spelt out every possible risk faced by future investors if they decide to back its $2.7bn (£1.5bn) offering.

"If we do not continue to innovate... we may not remain competitive," said Google.

"We generate our revenue almost entirely from advertising.... Our advertisers can gradually terminate their contracts with us at any time."

These statements are worth taking seriously. The day before the prospectus was circulated, it emerged that Spanish telecoms company Telefonica was looking to sell Lycos, the internet portal.

Telefonica bought Lycos at the peak of the internet boom for a staggering $12.5bn. It was at a time when Telefonica's then chairman, the colourful Juan Villalonga, snapped up anything remotely telecoms, media or technology related. Analysts now believe that Telefonica will be lucky to get $200m for its struggling portal.

With Lycos on the stocks, there is now talk that Telefonica will also sell Endemol, the producer of reality TV show Big Brother, which is worth upwards of £1bn. A Telefonica insider said: "If we found a good buyer offering an excellent price then of course we would sell. But we are not actively looking."

The fall of Lycos is likely to focus the minds of American investors considering investing in Google. The company's preliminary filing takes up 20 pages, cataloguing every possible negative outcome from the obvious ("we face significant competition from Microsoft") to the nightmare ("system failures could harm our business").

Philip Carnelley, an analyst at technology research firm Ovum, said: "This is a company with an uncertain future. If a better search engine appears - from Microsoft, from Yahoo! or from a start-up - then Google could see its traffic vanish almost overnight."

Expectations are high. Based on the pricing of the float, it has a price-to-earnings (PE) ratio of an incredible 185. The ratio is the number of times a company's annual profits are multiplied to reach its stock market valuation; the higher the number, the higher the hopes for growth. Yahoo! has a PE ratio of 130 and a traditional UK media firm has a ratio of around 20.

Jim Davis, the chief marketing officer of SAS, the world's largest, privately owned, software company, warned against software firms floating in general: "The marriage with Wall Street is not a great one. Wall Street expects companies to increase revenue each quarter. This is harder for software companies, which rely on new product launches."

But Google is bucking this trend, announcing that it will not time product launches with its quarterly reports to smooth revenues. Mr Davis added: "I'm behind them 100 per cent. They are making a stand." He hasn't yet made his mind up whether to buy shares, though. "It's the water-cooler topic of conversation at the moment."

While the bears may draw comparisons between the Google float and the bubble that spawned companies such as Lycos, the bulls argue that the company's plans to expand into email and other services could prove the key to its success. Google's email service, Gmail, offers users high storage capacity for free, in return for selling market research gleaned from the contents of the emails.

Kevin Ryan, the chief executive of internet advertising and marketing company DoubleClick, said: "Google will make it work. People might raise the privacy issue, but if the service is good, users will come round."

First Google must win round cynical investors such as Mr Davis, who remember similar promises made by companies such as Lycos during the bubble days.