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Summary:

Yahoo CEO Carol Bartz has been taking a lot of flak for saying in an interview with the BBC that Google needs to diversify its business, because it is still “99.9 percent search.” But you know what? She’s right. The search giant does need to diversify.

Plenty of people have been having fun with some comments that Yahoo CEO Carol Bartz’s made in a BBC interview about the company’s competitive position vis-à-vis Google. The notoriously outspoken Bartz, who took over as CEO from co-founder Jerry Yang in 2009, told the British news service that Google was going to have “a problem” if it didn’t diversify its business, and that it was going to have to find a way to do “a lot more than search.” Mike Arrington at TechCrunch suggested that Bartz must have been smoking something in order to come to this conclusion, while Kara Swisher at All Things Digital said that the Yahoo CEO was “trash talking” its larger rival.

Let’s face it, it’s pretty easy to make fun of Yahoo — in fact, in some ways, it’s like shooting fish in a barrel. For at least the last several years, it has been a perennial also-ran in virtually every category that matters online, whether it’s social networking or search or keyword advertising or content. After trying and failing to beat (or even match) Google at its own game, Yahoo was finally forced to accept a deal with Microsoft, which was also failing to have much success on its own. The two companies are now propping each other up and trying to do together what they couldn’t do separately, but are still so far from setting the industry on fire they might as well be in a different game.

But you know what? Carol Bartz, who has gained a reputation for calling a spade a shovel, also happens to be right. Yes, Yahoo is sucking wind in most departments, as most people writing about her comments have pointed out, and so the company is hardly in a position to tell Google what to do — especially when Google reported revenue growth of 23 percent in the last quarter, something Yahoo would kill to do. But she is still right: After years of trying to broaden its business, Google is still 99.9 percent search (OK, 95 percent).

Obviously, that business is doing just fine, and Google is expanding it through acquisitions such as AdMob, which does mobile advertising. And the company continues to come closer to generating meaningful revenues from YouTube and other properties. But the reality is that virtually all the company’s revenues still come from search-related keyword advertising. That may be a great business right now, but what if it stops being so great? What if social search and social advertising becomes a bigger threat to that business, as Liz argued in a recent GigaOM Pro report (sub req’d)?

Some analysts are becoming concerned about Google’s lack of ability to broaden its business even a tiny bit. After the latest earnings report, Barclays Capital analyst Douglas Anmuth dropped his price target for the stock to $650, citing a lack of growth momentum beyond search and advertising. “A significant revenue driver beyond core search has not materialized and it’s becoming tougher for the company to beat numbers,” Anmuth said in a research note.

Chris Baggini, an investment manager with Aberdeen Asset Management, also wants to start seeing some other revenue sources. “Google continues to gain share, but I’d be very disappointed if four years from now they were not getting revenue from other sources,” he said. And the way the company has rolled out new products such as Buzz and Wave and the Chrome OS, without any clear model for how they are going to contribute to the business, has some concerned as well. “Google has the problem of too much money and not enough control over what to do with it,” Rob Enderle, an analyst at Enderle Group, said recently. “As a result, they are building complexity at an alarming rate, and that complexity should eventually choke them, much as it did Microsoft.”

Is Google in danger of imploding — or even slowing down substantially — any time soon? Hardly. But that doesn’t mean Carol Bartz is wrong, and we shouldn’t let ourselves be blinded to that just because her company isn’t doing very well.

Related GigaOM Pro Content:

Post and thumbnail photos courtesy of Flickr user Yodel Anecdotal

  1. Let’s see. The biggest reason to poke fun at Bartz is that she suggest Google should diversify at the same time she’s effectively undiversified and pulled out of search. I know, I know — she doesn’t think she’s done that, it’s just a search “chip” she’s building around yada yada. And yet, since coming on, Yahoo has lost search share to Bing. Not to Google, to Bing, according to comScore. And the Bing deal hasn’t even been done.

    So, she’s not really in a position to talk about diversification. In addition, she either knowingly ignores or willfully pretends to act like Google doesn’t offer email, or a portal, or news, or or or a lot of things that compete with Yahoo. Things that as with Yahoo, pay for themselves with ads.

    With leads ot the 99% search thing. Not true. Google doens’t get 99% of its revenue from search. I think it’s like 95% of its revenue comes from advertising. Search is a big chunk, but all those AdSense units across the web. Those are effectively display ads — you know, the think Yahoo’s supposed to be so diverse in.

    So what percentage of Yahoo’s revenue comes from ads versus Google. Isn’t the vast majority of income from ads, as well. So how’s that make Yahoo more diverse than Google?

    Yeah, I don’t think Google needs to be taking business advice right now from Bartz, who is selling off her search assets that in 2008, Microsoft valued at billions but in 2009 decided it could take without any payment at all.

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    1. Danny, you are totally right about all of that, as I tried to acknowledge in my post. But that doesn’t make her wrong. Or are you saying Google doesn’t need to diversify?

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    2. rainier seidel Friday, April 30, 2010

      Google’s margin on those pesky adsense Ads that you talk about is low when you consider traffic acquisition costs. In contrast, Yahoo’s display ads are on owned and operated properties.

      The primary reason Google drives Adsense is that it offers a huge strategic advantage with regard to indexing the long-tail. Google knows of long-tail content as soon as it is created. And Bing is locked out.

      So whilst Bartz may be right or wrong, the threat to Google is not Bing or complexity-creep. It is the Anti-trust folks at the DOJ.

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  2. I think I have to agree with Mike Arrington on this one.

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  3. I think diversification is probably not at the top of things Google needs to worry about. We’ve just come through one of the worst economic downturns ever — including an ad downturn — and Google was just fine. They need to diversify to overcome what particular problem, then?

    I think investment types are concern they might not grow as much as in the past. Yeah, they might not, but that doesn’t mean they won’t be an incredibly wealthy company.

    They’ve got a diverse range of products. They’ve got plenty of time to build a more diverse revenue stream. But just running out to in different directions just because they need to look “diverse” isn’t necessarily the best business strategy.

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    1. They are just fine, yes. And you are right that they have tons of cash. And they have a diverse range of products — all of which rely in some way on advertising, whether it’s banners or keywords or whatever. That feels like a monoculture to me. A very profitable one at the moment, but still pretty much a monoculture. That’s not a good long-term strategy in any business.

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      1. Does GoogleApps rely on advertising?

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    2. Diversity like many things requires balance. Too little as Mathew points out creates monocultures which die of by either exhausting resources or by outside force it can not react to fast enough. To much diversity creates stress and some parts of the environment will die due to that. Same goes for the human mind, dark single cells can lead to self destruction and to much stress will result in the same.

      So both of you could be right and wrong at the same time. Since in real life we hardly find the conditions we create in studies. Then there is the factor of speed, or how fast change is introduced or levels of. No study comes to mind, but my feeling here is that companies slow down because they hire the same “kind” of people. It doesn’t matter how “smart” they are, same background leads to the “same” kind of thinking.
      Throw in a superiority complex at group and individual level, mix in a monoculture environment and you are moving in the direction of small dark cells. Looks like a case study for future Psychologist to me.

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  4. Diversification within ads is still diversification. It is like you saying 99% of Apple’s revenue comes from sales (of products) and hence they should diversify. Or someone else can coming and saying – Kraft gets all of its revenue from food products and hence they should diversify.

    If you diversify too much you loose synergies and pretty much become a holding company (like Berkshire Hathaway).

    Enough of my rant – the point I wanted to make was there can be diversification even within the ad world – (and like broadcast television companies have lot of channels – all of which mostly still make their money through ads.)

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  5. [...] Carol Bartz Is Right: Google Does Need to Diversify [...]

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  6. In a series of GigaOm Pro reports and presentations last year (http://bit.ly/aMpP5V), I outlined key elements of Google’s emerging mobile strategy. These efforts are reshaping not just Google’s core business but entire industries as well – consider the impact of Android on mobile devices and the fortunes of various OEMs (beneficiaries, Motorola and HTC; wounded, Palm and Nokia); Street View and Google Maps on geodata (NAVTEQ); Google Navigation on PNDs (casualties, Garmin and Tom Tom); and others. I also argued in a recent report on Location-based Innovation (http://bit.ly/9ugm2M) that Google’s investments in image recognition and geo – together with its recent acquisition of AdMob and renewed focus on Google Places – are setting the board for significant new revenue streams. While building on Google’s core strengths, collectively these efforts represent an extraordinary push into new businesses that extend well beyond search.

    One key area where Google has stumbled is social media – despite the Buzz, Google hasn’t slowed the momentum of Facebook or Twitter. As users increasingly rely on trusted sources in social media, this represents a key vulnerability.

    Dr. Phil Hendrix, immr and GigaOm Pro analyst

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  7. Bartz is right: 97% of Google’s revenues come from one thing: ad distribution. No matter who says it, Google needs to diversify,

    Google has tried very hard to develop other lines, but none of them cover their own costs. All of those other items account for 3% ($720m) of the $24B annual revenues and the servers alone cost $3B/yr to maintain. If the ads go, the Google search box disappears.

    Ironic, no? Google’s search engine can’t produce enough to even pay for its operating costs.

    Could Google slip in ad revenue? 2010 is not good for Google.

    Facebook creates a web where you don’t need Google search. Kids prefer Bing because it’s pretty. Facebook ads work better because they allow better targeting. Traditional SEO doesn’t work in Facebook.

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    1. If traffic goes, google search box / ads disappear not: if ads go search box goes..

      Ads will be around for a long time regardless.

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  8. [...] Carol Bartz Is Right: Google Does Need to Diversify [...]

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  9. [...] Carol Bartz Is Right: Google Does Need to Diversify [...]

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