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Home Page > News and Society > Philosophy > Google: The search party is over — offer by Www.go-shop.com.au
Google: The search party is over — offer by Www.go-shop.com.au
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Yes, the company is still growing at rates that would be the envy of the rest of the Fortune 500. But its core business is slowing, its stock is down, its Android mobile platform generates scant revenue, and competition (hello, Facebook) is fierce. Can Google find its footing in this brave new world?
Stroll across the Googleplex in Mountain View, Calif., and you are confronted by a world that sparkles a bit more than whatever slightly dreary one you just left. Massive stone busts of ocean explorers like Jacques Cousteau fix their gaze on the cobbled paths that flow into the main Google buildings. At sunny tables outside, Google employees — the coolest, most confident techies you’ll meet — eat their free food and chat animatedly about who-knows-what arcane computer algorithms, or the latest must-do pastime of the young and affluent Silicon Valley set, like kite-boarding or indoor skydiving.
It looks a lot like the midday break at some elite college campus. But almost 12 years after it was launched by precocious Stanford grad students Larry Page and Sergey Brin, Google and its founders are grappling with a very grownup set of problems. Google’s core business, online search, is slowing. That is partly due to Google’s own success; it’s hard to keep posting record growth rates when you dominate a business so thoroughly — Google sites lead the U.S. market with 64% of all searches conducted. But more crucially, the web has changed significantly since Google became a verb. There is (at long last) fresh competition from Microsoft’s Bing, and also a new wave of sites and services that offer alternatives for consumers’ time and attention — and the advertisers that follow them.
The Googlers certainly know this, but in classic Innovator’s Dilemma fashion, the company seems unsure about how to move beyond the core search business that has brought it such massive success. Google has placed expensive bets on acquisitions, chief among them its $1.6 billion purchase of YouTube, a $3.1 billion wager on ad network DoubleClick, and more recently its $750 million purchase of mobile advertising platform AdMob. But none of those deals have yet significantly diversified Google’s $23-billion-a-year revenue stream: Google’s main focus continues to be driving people back to the search box and the ad dollars that Google collects for helping marketers reach highly targeted consumers. Even Google’s most successful new product, the Android operating system for smartphones, generates scant revenue for the company: Google gives the licenses free to mobile-phone operators to facilitate, you guessed it, searches and use of other Google services on mobile phones. And while it lets its whip-smart engineers dedicate a portion of their workdays to dreaming up the coolest products for the web, all that Googley experimentation hasn’t had a huge impact on the bottom line.
That was fine when the search business was expanding at 30% or 40% a year, and Google’s revenue was growing at twice that. Long-term projections for growth in the search business are more in the 15% to 17% range. Yet analysts estimate that 91% of Google’s revenue still comes from the AdWords and AdSense business model that Google built around Page and Brin’s breakthrough PageRank algorithm. Even more telling, an estimated 99% of its profit does too. This year’s projected earnings growth of 18% is a third of what Google averaged over the past five years. A lot of companies would kill for that growth, but for technology companies, and Google in particular, those numbers don’t impress. Google is rounding a corner that all the fruit smoothies at its Silicon Valley campus make it hard to pull back from. This year Google (GOOG) has joined the ranks of just about every great technology company before it, including IBM (IBM), eBay (EBAY), Cisco (CSCO), Microsoft (MSFT), and Oracle (ORCL). Google, against its will, and defying its massive cash hoard, is transitioning from a growth company to — and there is no kind way to put it — a cash cow. That ranks right up there with being a former supermodel, but it is a taint Google can’t seem to shake right now, at least not on Wall Street. It’s a big part of the reason that Google shares are down 21% since Jan. 4, underperforming the Nasdaq (up 1%).
Up against the ever-changing web
Some investors also worry about Google’s ability to keep pace with consumers’ evolving use of the web. Say you want to buy running shoes to train for a marathon. Five years ago you would have simply Googled it, looked at the list of results, weighed your options, and made the purchase, perhaps by clicking on one of the sponsored links that accompanied your search. Today you might still do that, but increasingly you might pose the question “What running shoes should I buy?” to your friends on Facebook, or maybe write “Who knows about training for marathons?” on Twitter. By the time shopping service Groupon sends you (and 25 of your friends) an offer for the perfect shoes and registration for a race, you’ll probably just pounce on it.
And what if you don’t even have a question to pose? What if you just need help? Consider the case of American graduate student James Buck. Egyptian police detained Buck for taking photographs of a protest in a city outside Cairo. Using his cellphone and his Twitter account, Buck broadcast a single word, “arrested.” Buck’s network alerted officials at the University of California at Berkeley, who ultimately got the U.S. State Department and a local lawyer involved. Buck was out of jail in 24 hours. Try that with a keyword search.
This is the phenomenon Google is up against. In the decade-plus since Page and Brin came up with PageRank, the web and the way we use it have changed dramatically. As Buck’s example shows, the web experience is increasingly mobile and social. We take it everywhere, and are connected almost all the time. Google needs to find real success in this new world — or invent the next major evolution of the web. It isn’t easy to create new multibillion-dollar businesses, but the rewards are great for the companies that do: Consider former Google ally Apple (AAPL), which has dominated add-on businesses (music players, retail) that are more profitable than the one that brought it prominence (computers). Apple is just killing it, and it is now the most valuable technology company in the world, with a market cap of $236 billion vs. Google’s $156 billion. Thus far Google has been tight-lipped about plans for a world beyond search. Marissa Mayer, head of search at Google, says the company doesn’t provide financial guidance, but contends that Google doesn’t need a huge second act, a collection of smaller businesses will suffice. The original search business will always dwarf any subsequent new units. And Page, Brin, and Google CEO Eric Schmidt simply haven’t articulated a vision for Google’s future. “That is what is scaring investors,” says Sameet Sinha, a senior analyst with JMP Securities in San Francisco. “There is no clear path toward what Google is doing, or wants to do.”
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There are good reasons why companies, and tech companies in particular, want to maintain the mantle of Growth Enterprise. For starters, Wall Street values you differently. A growth company stock commands a premium price/earnings multiple based on its future potential that, in turn, helps it lure employees with stock options. Just as important, being a growth company affords employees and founders (and even shareholders) a huge psychological boost: You’re driving the economy, you’re changing the world. Facebook and Twitter are packed with engineers who’ve left formerly hot tech companies. As soon as early adopters smell a whiff of last year’s technology, they are on to something new.
That particular odor has never attached itself to Google since it launched in 1998, crushing all comers. You may recall AltaVista, Infoseek, Lycos, and HotBot. Google’s edge was better technology (see “smart engineers,” above), so it must be somewhat worrisome in Mountain View that Bing is gaining in popularity — Microsoft sites had about a 12.7% share of searches in June, according to comScore, up from 12.1% in May — partly due to its interface and other features. Indeed, Google has dispatched Ben Ling, a former YouTube wizard, to help improve the quality of its mainstay business.
“Google is not the hot company anymore,” says Marc Benioff, CEO of Salesforce.com (CRM). “Their stock has been mostly flat for five or six years now. How can you claim to be a leader with equity performance like that? That’s starting to look like Microsoft or Yahoo (YHOO). They have to get into some other place, and quickly.”
Microsoft is an apt comparison, except the software company found a second engine of growth to supplement its Windows computer operating system business eight years after MS-DOS hit the market. That business would become Office, the world’s most profitable application software, which today accounts for roughly 40% of Microsoft’s earnings. Of course, Microsoft has been struggling since to find its next big winner. Its server business chugs along. Its gaming console, Xbox, could still be an engine of growth, but it hasn’t moved the needle yet. Once Office saturated the workplace and then some, Microsoft lost its growth-company status.
So what is Google’s best shot? It won’t be international growth. Google dominates search in developed countries, and it will be a long slog in other parts of the world, such as Russia and China. (In China, where Google recently renewed its license despite strained relations with the government, Google’s 30% share trails China’s homegrown search king, Baidu (BIDU).) Google has plenty of real estate on the web to which it can attach more advertising, such as Google Maps and Google Images. And indeed, during the recession Google boosted its ad revenues by opening up inventory on its sites to marketers. But those are incremental gains, not a big new source of revenue.
Searching for Google’s next big thing
The company’s recent acquisitions and product launches fall into four main avenues of business: the mobile Internet (Android, AdMob), display advertising (splashier, graphics-heavy ads with DoubleClick), YouTube and video, and applications. A fifth area, social networking, is likely to be a big push for Google and holds the most potential. The company is widely rumored to be pursuing a “Google Me” project to do battle with Facebook.
Google does not report specific financials of businesses outside of search, but Sandeep Aggarwal, an Internet and software analyst with Caris & Co., estimates that mobile, display, YouTube, and apps generated about $1.5 billion in revenue in 2009, and this year should bring in about $2.1 billion in sales. On a bottom-line basis, that translates to about $1.44 in earnings per share this year. That’s peanuts today — Google is expected to earn $27 per share in 2010 — but those are areas that are already outpacing traditional search in their rates of growth.
Amazingly, Google’s biggest and most promising opportunity to date, its successful Android operating platform for mobile phones, doesn’t produce much revenue or profit for Google — by design. The company in 2007 made the technology available to all comers in a bid to make the web more accessible on smartphones and in turn to encourage consumers to do more Google searches on their mobile devices. The strategy worked. Encouraged by this easy access to Android, handset makers began churning out multimedia phones, and the Android platform has been a consumer success: Google says some 160,000 new Android devices are activated each day, and device makers from Motorola (MOT) to HTC have all released popular phones on the Android platform. But Google doesn’t make gobs of money on those devices. (Google dabbled in phones but discontinued its Nexus One after only six months.) Apple, on the other hand, also stoked the smartphone market with its iOS, but with very different financial results: Last year the company posted an estimated $15 billion in iPhone sales, a benefit of making the hardware and the software.
So where will Google’s next $20 billion come from? It may not come from one blockbuster new business but rather from a handful of smaller opportunities. Google insiders are optimistic about YouTube, which accounts for 10% of all the time spent online worldwide, according to comScore. (The only greater time-suck on the web is Facebook, at 17%. We’ll get back to social networking.) Four years after buying the money-losing video site for $1.6 billion, Google seems to have figured out a way to eke out operating profits by selling video and display ads against a growing pool of professionally produced programming, including infomercials and other content created by marketers. Likewise, Google’s $3.1 billion acquisition of DoubleClick, the ad exchange that’s been folded into Google’s display network, will help expand Google’s ability to place multimedia and display ads on websites, including its own properties: It essentially hopes to do for online display what it has done with text ads. But few analysts see those businesses, in the short term at least, becoming Google’s next huge follow-on business — its Office equivalent, to use the Microsoft analogy.
Could its Office equivalent be, well, an Office equivalent? It’s a long shot, but one of the more profitable efforts at Google, and one that doesn’t have a thing to do with advertising, is its nascent business-software operation, Google Apps. For an annual licensing fee of $50 per head, Google provides corporate customers with Gmail, collaboration tools, and other services that are delivered via the Internet. Some companies have started ditching traditional software vendors (including Microsoft) for the Google Apps’ cheapness and flexibility (adding or dropping a new account takes just a few clicks). In June, Google announced that more than 2 million businesses were using Google Apps for Enterprise. That sounds like a big number, but analysts peg revenue from Apps this year at about $350 million, or just $175 per business. Nikesh Arora, Google’s president of global sales operations and business development, told analysts at a technology conference in June that he expects the number of apps customers to double in the next few years.
The net effect of all these efforts? Analyst Aggarwal pegs revenue from Google’s nonsearch businesses at $5 billion to $8 billion in 2013. For any other company, that might be enough, but Aggarwal estimates that the company’s search revenue will be about $40 billion three years down the road. In that context, nonsearch revenue still isn’t enough to make a huge difference in how Google is valued. For the foreseeable future Google will remain a search company.
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The real shift going on within the Internet
Mike McCue has had a front-row seat watching the web grow up, and as far as he is concerned, the search box is all about the past. McCue was an early Netscape guy, and he recently launched tablet software company Flipboard, which takes all your Facebook updates, your Twitter feeds, all the news sites you like and subscribe to, and in a very elegant way publishes a constantly updated magazine of text, photos, and video. “There is no need to do a search,” McCue says. “We almost view it as a bug if we have the user search for something.”
At Google, where every problem is waiting to be solved by some form of search query, that is tantamount to blasphemy. But Flipboard sums up the shift going on within the Internet, one that is arguably the biggest change to the web and the way we use it since Google came on the scene. Your network simply provides you with answers, stories to read, bargains to buy — and you often don’t even need to ask a question.
In this new phase of the web, one of the largest threats to Google and its core search business is the expanding Facebook footprint around the world. Not only because social networks (and those used for work like LinkedIn fall into that same category) offer a substitute for search for consumers, but also because they offer a substitute for advertisers as well. In display advertising, for example, Facebook has a 16% share of the roughly $9 billion market, according to comScore (Google sites have 2.4% of the market), and advertisers say they’re looking for more ways to plug into Facebook.
“Facebook has got Google in its sights,” says Debra Aho Williamson, a senior analyst with eMarketer. “Advertisers get the best of both worlds — a mass audience but also the ability to target more than anyone else. Who are the advertisers? In a lot of cases, they’re Google’s advertisers.”
Most alarming to Google is that much of this new social and real-time world is closed off to Google’s core search business, and its index of the world’s information. Facebook, LinkedIn, and Twitter are essentially “closed” platforms. “It’s a growing chink in their armor,” says a former Googler now working at a popular social network. “They know that. The question is, What can they do about it?”
Google’s Mayer believes the answer lies in delivering better-quality — almost intuitive — search results. Mayer calls this implicit or passive search. It’s the sort of thing that makes connections between, say, a friend who is an amateur expert on travel in Australia and your upcoming trip Down Under. A keyword search could not only flag hotels and tourist hot spots but also find blog posts, e-mails, messages, and even pose questions to your friend about where to go shopping or dining in Sydney — without bothering the rest of your network. “Who you are, your context, what you are doing, who your friends are — if all of that comes in as the search input,” she says, “what is the right output?” (The key word in her quote? “Friends.”)
Mayer won’t say what Google is building (perhaps the rumored “Google Me” service?), but clearly she is pushing the company in a more social direction, which means changing users’ perceptions of Google. “You need to create a place where it’s okay to be social,” Mayer says. Google doesn’t have that yet, and in fact, its efforts so far have been widely panned: Remember Google Buzz, which drew the ire of consumers for automatically sharing Gmail users’ lists of friends? If would-be rivals are worried, they aren’t letting on. “Google is smart to figure out how to make its stuff social,” says Chris Cox, head of product at Facebook.
But critics question whether Google can make the leap. “They are just not that good at it,” says Tom Coates, until recently the head of product at Yahoo’s defunct Brickhouse lab. “Google is very good at building these utility-type products — search, e-mail, and messaging. They are sort of like the power company of the Internet. But what they lack is a sense of how people share and collaborate.”
Coates’s point is that you don’t have friends on Google, you have contacts and tasks. These services reflect an engineering culture that’s all about utility, but one that makes it hard for the company to create something that’s friendly and social. But if Google can change its utilitarian ways, the company stands a real chance of tapping into that next growth engine. Imagine if it added that social layer to its core search business and to Android, and blew it out on YouTube, giving people a reason to hang out on Google sites for long periods. Advertisers would come flocking. If it can get that right, as the former Googler now working in social media sees it, “Google would be unstoppable.” Just like it used to be.
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