Are Google's Best Days Behind It?

Few companies have made a splash in the tech industry as big as Google has. Launched by Larry Page and Sergey Brin from Page's Stanford University dorm room in 1998, the company became a $27 billion titan overnight when it went public six years later. Soon it was the darling of Silicon Valley, sweeping competitors aside and taking Microsoft head on. For a while, at least, it seemed Google could do no wrong.

On June 30, 2011, Larry Page closed his first full quarter as Google's new CEO, succeeding Eric Schmidt. Page has never led a public company, and the pressures of leading Google certainly differ from when he last held the helm in 2001. In January, Page told the New York Times, "One of the primary goals I have is to get Google to be a big company that has the nimbleness and soul and passion and speed of a startup."

But that may be wishful thinking. Not only have more experienced CEOs seldom managed to strike such a balance, but Google is no startup. Today the search giant's full-time head count is almost 30,000 employees. It has offices in 42 countries on six continents. In terms of market capitalization, it's bigger than Ford, GM, Starbucks, FedEx, United Airlines, and Viacom combined.

With Google's rapid growth have come new challenges. It faces intense competition in all of its major markets, even as it enters new ones. Its newer initiatives have often struggled to reach profitability. It must answer multiple ongoing legal challenges, to say nothing of antitrust probes in the United States and Europe. Privacy advocates accuse it of running roughshod over individual rights. As a result, it's becoming more cautious and risk-averse. But worst of all, as it grows ever larger and more cumbersome, it may be losing its appeal to the highly educated, impassioned workers that power its internal knowledge economy.

Despite Page's best intentions, Google's salad days may be over. The hard days may already be on their way.

Google's River of Money

Not that the search giant isn't successful. Last year, Google reported $29.3 billion in revenue, and it's on track to earn even more in 2011. But Google is unique. Unlike most tech companies, which make their money by selling or licensing products and services, fully 97 percent of Google's income derives from a rather more prosaic source: advertising.

In one sense that's a good thing. Think of Google's revenue as an endless river of money flowing in from advertisers -- those that want to advertise on Google's sites and those that want to reach other sites through Google AdSense, AdWords, and DoubleClick. Whenever Google has an idea for an innovative new technology or service, it just dips a bucket into the river.

But in the bigger picture, Google's total reliance on advertising means innovative product development isn't truly central to its business model. Google spent $3.8 billion on R&D in 2010, or about 13 cents of every dollar it earned. That level of investment has to justify itself somehow -- and yet, in 2010 Google earned just $1.2 billion from all nonadvertising sources combined.

That may limit the search giant's reach into markets that offer fewer advertising opportunities. For example, enterprises don't want their data mined for targeted ads, which means products such as Google Apps for Business must be underwritten by customer subscriptions. Yet the subscription fees Google earned in 2010 were just a tiny fraction of the $18.6 billion that Microsoft Business Division, which produces Office, earned over the same period.

Google stands little chance of making further inroads into that lucrative market as long as its product development is so completely subsidized by advertising. After all, it makes little sense to prioritize feature requests from customers that make up less than 3 percent of your business. It's only logical that customers of its ad-supported offerings, which drive the most revenue, get the most attention. And which upgrade will do more to bolster Google's bottom line -- improving Gmail's UI, or refining its email indexing algorithm to deliver more targeted ads?

Your Privacy Is Your Concern

Google's reliance on the ad market may further impair its ability to shore up new revenue streams, as the need to monetize its services through advertising may influence Google to innovate in ways customers might not like. In particular, Google has demonstrated a tin ear for individual privacy concerns. The watchdog group Privacy International has gone as far as to describe the company as "hostile to privacy."

In 2004, Sergey Brin told Playboy magazine he had been surprised by public outcry over the use of targeted ads in Gmail. The email service came under fire again in 2010, when Google began mining Gmail users' personal data for its Google Buzz social network without their consent. That same year, Google admitted that it had inadvertently intercepted emails, website addresses, and passwords as part of a Wi-Fi mapping project.

The Wi-Fi snooping earned Google at least seven class-action lawsuits. The Google Buzz blunder triggered an inquiry by the Federal Trade Commission, and the search giant now must submit to independent privacy audits for the next 20 years. Google has also drawn legal challenges in several countries over privacy issues related to Google Street View.

But none of this may be enough for Google to learn its lesson. The supply of ad dollars isn't infinite, and competition is heating up. The temptation for Google to increase the value of its ads by mining ever more personal data from its users must be great, as must the temptation to focus its efforts on products that increase its share of the overall ad market. Both could come back to bite Google, particularly if the legal climate around individual privacy grows more hostile to advertisers.

An Elephant's Graveyard of Products

Diversification could help the search giant reach new markets, but as much as Google insists that it won't shy away from innovative, risky projects, its track record for turning them into successful products is spotty at best. If a particular product fails to capture the public's imagination, Google is often quicker to pull the plug than to invest in making it a more attractive offering.

A few such aborted initiatives include Google Wave, a much-hyped messaging technology that we were told would reinvent Internet communications; Google Health, an ambitious effort to kick-start electronic medical records; PowerMeter, a tool for monitoring home energy consumption; Realtime Search, an aggregator of up-to-the-minute information from Twitter and other social networks; and Lively, a 3-D virtual world similar to Second Life. Still other ideas aren't quite dead, yet lumber along listlessly -- remember iGoogle?

Part of the problem may simply be too many ideas. Google's product development tends to be scattershot and engineering-driven, leading to a company with its hands in too many pies at once and too few marketable products to show for it. Google's stated mission is "to organize the world's information and make it universally accessible and useful," yet it currently has initiatives under way covering everything from Web browsers to mobile phones, e-books, streaming music, video on demand, programming languages, social networking, home automation, cloud computing, and even self-driving cars.

Google also tends to fixate on its favorite ideas even when they seem impractical. For example, it has invested heavily to develop Chromebooks, an attempt to reinvent the PC as a dedicated Web browsing terminal. But this idea shows few signs of gaining traction with either businesses or consumers, no matter how near and dear it is to Google's heart.

In other cases, Google can't seem to grasp what customers really want. The market for video on demand is exploding, yet the ballyhooed Google TV effort has fallen flat, with Logitech reporting returns of its Google TV boxes now exceeding new sales.

Next: Following, Not Leading, Wars of Attrition and more

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