Google's seven-year itch

Google's seven-year itch

Google's stock price recently topped US$400 per share. Online advertising, its main source of revenue, is expected to continue growing by leaps and bounds for the foreseeable future. Within online advertising, Google is a leader in the market's largest segment: paid search. Titans like Microsoft and Yahoo have significantly adapted and changed their business and technology strategies based on Google's moves. To boot, Google has the resources to steal Internet luminaries like Vint Cerf from competitors. Clearly, Google is invincible. Right?

Not really. Despite its success, Google, which celebrated its seventh anniversary in September, faces many challenges. How it deals with those challenges will determine whether the company will still be considered a winner seven years from now.

For starters, it faces white-hot competition in its core search market from Yahoo and Microsoft, as well as from nimble start ups, such as Blinkx. While it fights to protect its territory in search, Google is also venturing into other areas, which could lead it to lose its focus.

Then there is the company's reliance on one form of online advertising -- paid search -- for most of its revenue, which some say puts it in a vulnerable position, particularly since this ad model is susceptible to click fraud, a serious industry-wide problem.

A related question is whether Google will succeed in other forms of online advertising it may explore in the future, or in other entirely different businesses, such as enterprise search, where it is a relatively new player.

Another challenge that can't be ignored is the company's fast growth, both in terms of size, scope of operations and geographic reach. Finally, there is the increasing number of controversies Google finds itself in as it grows in size and importance in the industry, which can harm its brand and corporate image.

Losing its focus

Google built its reputation and its fortune by providing the best Web search service and generating advertising revenue from it. However, Google has made it clear that it doesn't just want to be a provider of search-engine services.

Google owns one of the most popular blogging services, Blogger, and as such plays in this increasingly popular market of people and organizations that have embraced this online journaling phenomenon.

Google also owns Picasa, an application to organize, edit and share photos. Another nonsearch service in Google's arsenal is Gmail. This year Google launched its own instant-messaging service, Google Talk. The company also has a social-networking service, Orkut.

As if that wasn't enough, it recently submitted a proposal to San Francisco to provide wireless Internet access throughout the city, and got the green light to provide this service in Mountain View, California, where its headquarters are. The company also caters to IT departments with its enterprise-search products and to professionals in industries such as real estate, architecture, engineering and government with its Google Earth mapping products.

With efforts in so many different areas, Google could lose its focus, says Citigroup analyst Mark Mahaney. "It could be. That's a risk," he says.

Allen Weiner, a Gartner Inc. analyst, contrasts Google with Apple Computer, a company that goes in many different directions with its products, but whose groups work in unison. "What's missing in Google is that framework [that Apple has]," Weiner says.

The danger is not so much that Google will lose its focus, but "rather of not having domain expertise in all of the areas it wants to be in and then creating the hierarchy that blends it all together," Weiner adds.

Particularly, Google badly needs to hire executives who are experienced in the media world -- television, movies, music -- so that it can draft a clear path for what it wants to do in, for example, video search, Weiner says.

Jupiter Research analyst Gary Stein, however, thinks Google is doing well to cover all the key bases in online services. By having a stake in each, Google will be able to piece together a complete picture and fulfill its long-term mission of being a users' partner in the digital world.

"Google is open to exploration. I don't see a risk of them losing focus," Stein says.

A question remains on whether Google, which now has such a broad variety of online services, should be reclassified as a Web portal, like Yahoo and Microsoft's MSN, or whether it should still be considered primarily a search company.

The official Google line on this is that it is not a portal, and that what it does is meant to support its mission: to organize the world's information and make it universally accessible and useful.

That hasn't stopped competitors from taking Google to task for its refusal to acknowledge it is a portal. At the recent Web 2.0 Conference in San Francisco, Yahoo Chief Executive Officer Terry Semel took a few shots at Google, saying it didn't seem like there was a plan behind Google's launch of online services and that "as a portal, they would probably be rated number 4."

Competition from the big and small

While Google broadens its menu of products and services, the search-engine space continues to get crowded, as companies explore an increasing variety of search services in addition to general Web search, such as searching for local businesses, news, images, multimedia (audio/video), blogs, podcasts, jobs and classifieds, as well as searching from mobile devices.

Google must strive to maintain its lead in search technology, as it faces competition not only from Yahoo and Microsoft, but also from many startups. "That's one of the major challenges for Google going forward," says Philip Remek, a financial analyst with Guzman & Company.

"Each [area of search] offers opportunities for both the current leaders and the new entrants to gain a significant part of the search market," Remek adds.

And, as seemingly anyone with some knowledge of the search market can point out, the search user experience still needs to evolve from providing users with thousands of links, to giving users specific answers to their queries.

Google and all search providers are aware that there is a very big demand for search services that supply users quickly with the information they are looking for, and are thus more intuitive and intelligent. This "holy grail" of Web search is still up for grabs, and certainly Google must make sure it doesn't get edged out in that race.

Dependency on paid search advertising model

Meanwhile, some caution Google's revenue is too dependent on paid search advertising, making the company vulnerable. Google should diversify its revenue streams by, for example, expanding into other forms of online advertising, such as display ads and classifieds, some say.

"Google is riskier as an investment because of its reliance on that one type of online revenue. Yahoo, for example, develops and sells advertising in all the major online ad areas," Remek says.

Google has stated its intention to offer branded ad options to its advertisers, but "at this point they have very little to show for that," Remek says.

This almost total reliance on paid search may not affect Google now, considering how fast the spending on that type of ad is growing, but it may be a problem later on. "We think it's going to be an issue in the future: maybe two years out," Remek says.

Jupiter's Stein says that there are advertisers that just aren't drawn to paid search, and to reach them, Google needs to offer other types of ad models, such as branded/display ads and video ads.

"Ultimately, Google will need to evolve its ad offerings so that it can appeal to these other advertisers," Stein says.

Managing growth

Another risk lies in Google's fast growth. Google closed its third quarter on Sept. 30 with 4,989 fulltime employees, up from 4,183 as of June 30 and up from 2,668 fulltime employees as of Sept. 30, 2004.

Not only is Google's staff growing, but the company is also broadening its operations globally, always a challenge for any company, as it involves learning how to do business in multiple local markets.

"The first challenge for Google is managing growth," Citigroup's Mahaney says. "There's an organizational challenge to managing that growth and making sure they grow efficiently."

Guzman's Remek concurs. "Google is increasing its headcount so fast that managing growth is an issue. It's definitely a challenge," Remek says.

Along with the rapid growth comes an increase in capital expenditures, which adds complexity to managing the operations and protecting margins, he says. "As the investment in people and technology increases, it's a challenge to keep track of all of that," Remek says.

The controversies and their effect on the Google brand

Then there is the steady stream of controversies in which Google has been finding itself since early last year. These controversies can tarnish its image and hurt its brand, along with support from users and advertisers.

"That's possible. There are some potential risks here," says Mahaney. "Especially as Google gets bigger, it will certainly attract more attention, including legal attention: copyright issues, online fraud. There are some issues that could hurt this company."

The first big one erupted with the introduction of the Gmail Web mail service in April 2004. Privacy advocates chided Google for its decision to include ads in the body of e-mail messages based on a computer analysis of the messages' text. For example, an e-mail mentioning "basketball" or "football" could be accompanied by ads from sporting-goods companies.

Google defended itself by saying that it's not snooping on users' e-mail messages, because the technology used to analyze the text of messages isn't more intrusive than the technology used to scan e-mail messages for viruses and to filter out spam.

Another loud controversy Google found itself in was its dismissal early this year of an employee, Mark Jen, who said his blog postings about the company were the reason, or at least a key reason, for his firing.

Google, which never commented on Jen's dismissal, got a lot of heat for what appeared to be a very negative attitude toward employees blogging publicly, and over the irony that the company owns Blogger.

More recently, Google has drawn the wrath of various publishers and authors who object to the company's ongoing scanning of books at five major libraries for the library portion of the Google Book Search program. Google Book Search's stated goal is to make searchable the full text of as many of the world's books as possible.

The Authors Guild and three writers filed a class-action suit in September charging Google with massive copyright infringement. In October, the Association of American Publishers (AAP), a national trade organization of the U.S. book publishing industry, also sued Google for similar reasons.

The library portion of Google Book Search, announced in December, is a project to scan all or portions of the library collections of the University of Michigan, Harvard University, Stanford University, The New York Public Library and Oxford University. Google says the full text of books in the public domain can be viewed, but only excerpts of a few sentences of copyright books will be available.

Google Book Search's library scanning program isn't a bad idea, but Google didn't present it well to the public and the publishing industry, Weiner says. "Google needs to learn to be a little bit more public-relations savvy. That will take them a long way," Weiner says.

Jupiter's Stein says it's impossible for a company with the size and breadth of services of Google to avoid controversies: it comes with the territory. The important thing isn't whether Google gets into public-relations jams or not (it will) but rather how it deals with these problems, Stein says. So far, Google seems to be learning from its mistakes and taking steps not to repeat them, and that is the key in this area, he says.

Ultimately, the best way to prevent controversies from affecting the company is to continue winning the favor of users and advertisers with the quality of services, says Remek.

"Google remains the leader in search. It's the site most people go to first when they want to conduct a search. That's what matters. All the rest is noise," Remek says.

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