Saturday, September 13, 2008

Google's Interest in GeoEye and Geospatial Imagery

A few days ago, I wrote about Google's potential interest in buying geospatial imagery company, GeoEye. Here are some additional reasons for why Google might want to acquire GeoEye and control the actual satellites and additional analytical tools which GeoEye possesses as a supplement to their Google Earth product.

One of the first companies which Google acquired after it went public in 2004 (for an undisclosed sum) was Keyhole -- the foundation piece for Google Earth. As a carry-over from that acquisition, Google has continued to sell its Google Earth imagery to end users for a fee: Google Earth Plus (for a $20 annual subscription) and Google Earth Pro (for a $400 annual subscription).

At first glance, it doesn't seem to make sense for Google to keep such a subscription model in place with its dominant Google AdWords Search model. Yet, Google aspires to make money beyond AdWords. They have continued to invest in a competitive suite of applications as an alternative to Office (called Google Apps). They have done so, because they believe people will save their data and files through Web services in the future (in the cloud) rather than on their PC. If this occurs, Microsoft is tremendously weakened and Google grows.

Google Earth is yet another way for Google to make money. However, it is less a money-maker on its own, rather than a way of driving loyalty and therefore revenues back to Google Search and Google Apps. For Google to keep its Google Earth subscription model in place 4+ years since the Keyhole acquisition suggests it has further plans for this model of selling its high-end earth imagery. It is not a mistake that it has maintained this model.

Consider this also. Google is interested in developing its relationship with Government (the largest customer for satellite imagery). Go to for more evidence of this. Google's focus in this niche centers on 3 services: Search, Geospatial Images, and their Google Apps suite of Web services (Gmail vs. Outlook, their own apps vs. Office). (To see an example of a government client that has used Google Earth to improve their efficiency, see this case study on the US Forest Service.) As Google develops their relationships with such a client, it becomes much easier to go back and communicate the benefits of search and Google Apps. Microsoft would have to more heavily invest in its Virtual Earth offering to keep up with Google (or perhaps acquire GeoEye's smaller competitor, DigitalGlobe -- who's revenues at the time it filed its S-1 earlier this year were smaller than GeoEye's).

One government client that Google has great interest in developing a relationship with is the National Geospatial-Intelligence Agency (or NGA). NGA also happens to be GeoEye's largest customer. This coming week, Google is a Gold Sponsor of the NGA's Industry Day. This is a classified conference for US citizens only at which the NGA will lay out their plans for the coming year. (GeoEye is a Silver Patron for the conference.) Google will be continuing to push the benefits of Google Earth and Google Search Appliance (its tool for pulling key information from government clients' own records) at this conference and afterwards. They would not sponsor this conference if they did not see opportunity in this government vertical in the years ahead. (GeoEye's chief competitor, DigitalGlobe, is interestingly not a sponsor at this event.)

Some evidence that the NGA has big plans in the years ahead came out last week when the IT consulting firm NJVC, who works closely with the NGA and is also a Gold Patron at the conference mentioned above, announced that it is expanding its square footage by 33% and hiring 100 new employees in expectation of significant growth in the firm in the coming 4 years. NGA is NJVC's largest customer.

Matt O'Connell, CEO of GeoEye, has also discussed rapid expansion to keep up with planned growth in orders from NGA and other customers now that the new GeoEye-1 satellite was successfully launched last week. GeoEye did $200 million in annual revenues a couple of quarters ago and will certainly exceed that in the coming 2 quarters now that they've successfully launched their newest GeoEye-1 satellite last week. The NGA will continue to be a very important customer to GeoEye.

Google also clearly sees opportunity here in this space. The question for Google is how can it take Google Earth to the next level? This is where GeoEye becomes interesting as an acquisition target. By owning GeoEye, Google would own the proprietary images it captures from its satellites. There would continue to be the need to invest in future satellite launches to stay ahead with the most up-to-date technology but Google certainly has the capital and the interest in space to do this. Owning the satellites also allows Google to develop the tools and unique services which can become integrated into Google Earth but (perhaps more importantly down the road for Google) its Android operating system which it will roll out on future mobile handsets (think highly unique location-based services here).

Google could sit back and just buy images (as Microsoft and Yahoo! do) from GeoEye and DigitalGlobe, letting them take the risk of launching the satellites, but their opportunities to develop proprietary location-based services would diminish (or become easier for Microsoft, Yahoo! and others to copy down the road).

GeoEye is a more compelling potential acquisition target for Google than Digitalglobe for two reasons: (1) it has the newest satellite in space today with the most advanced features and (2) it has a cadre of tools for using the images which their private competitor DigitalGlobe lacks. These tools came, in large part, from the MJ Harden acquisition done last year by GeoEye. More tools, from Google's perspective, means more usage of Google Earth from its clients and therefore more usage of Google Search and Apps.

Additionally, Google and GeoEye have grown closer in these last few weeks. The two companies agreed that GeoEye would not sell its images from GeoEye-1 to any other online portal. Google's co-founders, Larry Page and Sergey Brin, were at the launch of GeoEye-1 in California last Saturday (Page remember has signed up to be launched into space himself in 2011).

Google doesn't buy GeoEye for $200 million a year in revenues. It buys GeoEye to make Google Earth and Android truly remarkable in the years to come, as well as cementing Google's place in the Government vertical with its core Search and Apps offerings.

A deal before the end of the year would make sense as GeoEye is beginning discussions with other parties about funding its next satellite GeoEye-2. Google has the opportunity to control the specs of what that would look like if they do the deal now instead of waiting and having to share the specs with other parties.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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