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What If Google Is Just a One-Trick Pony?

One of the justifications that Google (s goog) provided for former CEO Eric Schmidt’s move into the chairman role and the re-emergence of co-founder Larry Page as chief executive was the need to become more flexible by speeding up decision-making at the search giant. BusinessWeek magazine looks at that issue in a new cover story on the company, which describes how Google is trying to save itself from “the ossification that can paralyze large corporations.” But what if Google’s biggest problem isn’t a lack of flexibility or the speed of its decision-making, but a fundamental cultural inability to create new lines of business that can keep the company growing? What if it’s just a gargantuan one-trick pony?

When asked about this possibility last year, Schmidt effectively said that Google might be a one-trick pony, but it’s a hell of a trick (as Oracle founder Larry Ellison once put it). In other words, if you’re going to be a company with just one “trick,” it might as well be one that has revolutionized the world of online advertising, stolen billions of dollars in revenue from traditional media entities and pours vast rivers of cash into Google’s coffers every month, regular as clockwork.

Obviously, Google is doing pretty well with just that trick — it has a market value of $200 billion, and just reported revenue growth of 26 percent for the most recent quarter. Although its search results still need some work (which could cause problems for newly-public Demand Media (s dmd), even if the content producer disputes this), and there is some competition on the search front from Microsoft’s Bing, no one is going to be writing the company’s obituary any time soon.

But is that enough? It might be enough if all you want is a company that dominates the search-related keyword advertising business. Google will likely fill that role for the foreseeable future, and that’s worth a certain amount — but how much is it worth? Does it justify the price-to-earnings multiple of 24 times that Google’s stock currently trades at? Maybe not. This has been the issue with Microsoft (s msft) over at least the past decade: The company generates huge amounts of cash, and is profitable as heck, but what investors are willing to pay for has continued to decline. This is why many have started to ask the question: Is Google the new Microsoft?

Google’s biggest problem is that it has consistently failed to produce any new lines of business apart from keyword-related advertising, which still produces over 90 percent of its income. It’s true that — as the company took pains to point out during its recent earnings call — Google is making money from display advertising, YouTube views, mobile, etc. But this is (comparatively, at least) peanuts. The web giant is famous for giving its employees “20-percent time,” and these projects can turn into great services, such as Gmail and Google News — and there’s also the company’s expanding Android efforts and other initiatives. But do these generate new revenue or profits for the company? To the extent that they help drive search traffic, yes. But that’s still just a variation on the same trick.

Even Microsoft has been able to create a new — and profitable — business that wasn’t really related to its core software business: namely, the Xbox consumer-gaming system. Google repeatedly acquires companies like Dodgeball then smothers them, or fails to take advantage of what they bring to the company, or takes their engineers and makes them do other things. And as a result, it has failed to produce a Foursquare competitor, or a Twitter competitor (unless you are one of the five people who use Google’s Buzz regularly), and it has certainly failed to produce anything that has a hope of competing against the social-networking wave unleashed by Facebook.

Is Larry Page going to help the company do any of that? No one really knows. But just getting more “flexible” — whatever that means — or making decisions more quickly isn’t necessarily going to do it. And it is a growing problem, at least for anyone who is (or wants to be) a long-term Google investor.

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Post and thumbnail courtesy of Flickr user Batikart

32 Responses to “What If Google Is Just a One-Trick Pony?”

  1. Google has one ~$30 billion trick, and several others that are nowhere near as big, but might grow to be substantial. I hope they don’t fall into the trap that Intel has, which doesn’t want to be in any businesses that generate less than $3-5 billion/year, because guess what? There aren’t a whole lot of $5 billion ideas (at least not that many that Apple hasn’t thought of). Which is why Intel is a one-trick pony, a complete waste of potential, capital, and engineering prowess.

    I don’t see any other company, Facebook included, regularly coming up with $20 billion products (and if we’re going to talk about companies with only one trick, Facebook should be included in that conversation, although they have yet to demonstrate how they will reach $20 billion in revenue). OK, maybe Apple, but it’s easy for them because their competition is so pathetically inept.

    Google is using their vast resources wisely – investing in all kinds of research and products. If one of 100 initiatives creates a $10B revenue stream, they will be far more successful than most VC firms. If they come up with 10 $200M – $2B products, I would call that a success.

    Speaking of their product successes, I think it is safe to call Android a success, as it generates more revenue than it costs them to develop and maintain. Google maps is pretty good, also, and should be considered a success. I love google voice, and hope to see its adoption grow. I thought YouTube was a bad investment at the time when they bought it, but I think they have proven that wrong. If they devoted any marketing budget to google checkout, it would be a success also (maybe they are waiting for NFC to be introduced to drive that service).

  2. Written from a different angle, this story could have been:

    Google has less than twice Facebook’s reach, and more than ten times Facebook’s revenue. Their revenue growth alone beat Facebook’s gross revenue.

    Questions for Facebook’s management include: How do you plan to take a piece of your users’ real (not virtual) goods purchases? How will you address professional users in a way that supports your consumer side? How do you plan to pull these things off before you are regulated as a utility?

  3. BenHill123

    Google is a one trick pony, but that trick is more successful than Microsoft, Apple and Facebook’s tricks put together. Claiming Google is just a search company, is like claiming Apple is just a glorified hardware vendor, Apple makes 96 percent of its profits from hardware sales, what if tomorrow motorola or Sony or RIM or someone else or makes a great phone greatly desired by consumers. Apple’s empire will come crumbling down as and when idevices cease to grow, as their market cap is so high, mostly based on iDevice’s projected growth figures. What if a black swan like moment hits Apple. Facebook has so many achilles heel, it is actually funny, facebook is more vulnerable than google, world can split into multiple social graphs each graph dominated by some company or the other. Microsoft is of course already facing heat on a lot of fronts.

  4. Google’s problem isn’t that it’s a one trick pony, it’s that it has survived on its technological brilliance and never had to compete on the basis of style and sexiness which it is completely devoid of. If I were Larry, I would offer Jonathan Ive, me or someone like us the free rein to bring all it’s undercurrent brilliance into a ‘keep it simple stupid’ format which feels cool and also create a new contract between them and the consumer which gives them a tangible sense of ownership in their digital identity and offers the same privacy protection one would expect from your bank or decent democratic civil liberties laws. As a sidebar, Google also has an established two way relationship with billions of people so could so easily make Facebook look mean socially by allowing people to monetize their own digital identities. But all of this is academic if they can’t bridge the gap between geek genius and sex appeal!

  5. Perhaps it is that the web itself is a one-trick pony. Google sits near its centre and extracts the lions share of value from anywhere on the web. The web may continue to increase in value and competitors may emerge to reduce Google’s share. But unless they also bring a new business model, which Google could usurp and bring up to scale there’s really nowhere else for Google to go. So far this has not happened and I think Google’s scorched earth strategy of offering everything free may be part of the reason why alternative business models are not getting established.

  6. I’m with Schmidt–they are most likely a one helluva trick pony. And the real danger is to not get this reality soon enough, and squander away capital on other tricks that never deliver sufficient returns.

    This is the Microsoft problem–getting into a game late and then engaging in a perpetually losing trench warfare. Better off defending the cash cow trick and delivering the returns to shareholders.

    Google had its chance for a second huge trick–social. But just as Microsoft missed the web, Google missed social. Game is already over–FB had already won a couple of years ago. Now the real strategic questions in consumer IT are all with FB–i.e., how far can they profitably extend the platform in all the different directions that are available to them, and what will be the impact on other players, especially Google.

    Google looks to be sandwiched by Microsoft and FB, as well as nipped at by Apple. Just keep honing that trick . . .

    • BenHill123

      Social is only one of the key trends, what about mobile, local, cloud, enterprise, online video. How does social fit into all of this ? And what makes you think google will not make enough on all of this. Google’s display revenues alone makes more money than facebook’s entire revenues. Facebook has not won the entire social war, not by far. The social graph is now splintering into a variety of social graphs like into twitter, foursquare, linkedin etc. Despite what financial/tech analysts/blogger/journalists think, there is no one way to do ‘social’

  7. What is Googel’s barrier to entry? My guess is, infrastructure.
    Now one can try to spend on equal footing and good enough results, but good luck with that one. Or one can do what Google calls search before you know it (autonomous search), hence the sub seconds response times are not necessary.

    Also as Google knows this is based on Context, only Google is not leading the effort to get there(at least not public). If somebody eliminates the search box(Context, social, apps, or most likely a mixture), all the infrastructure won’t help.

  8. I think they could be more than a one trick pony but they have to stick to what they are/know – They are a left-brain, data-driven company. They will never be good at anything requiring a right-brain thought. They should stick to their knitting and quit chasing Apple , Facebook and every other consumer-facing company. Search is consumer-facing but it didn’t take a whole lot of right-brain to do the simple search box interface.

  9. Given what Google does and the importance of scale and their developer talent, they’re a one-trick pony more like an oil company. Precious few can compete in their main business due to scale and it’s so large it just dwarfs everything else. It only has a couple competitors, and internationally it’s more diverse only because of nationalism, it seems. Just like oil. It’s going to be around forever, and it will always require bleeding edge tech at scales most can’t fathom.

    So you say it’s 90%, but that’s only because it’s that HUGE. It’s not like Youtube is small potatoes, it’s bigger than Hulu, it’s making nearly a billion a year. That’s better than MS has managed online, and you’re complaining that it’s a pony? It’s a clydesdale sitting next to an elephant.

    Think about this: if Youtube were still independent it would dwarf Hulu, and be in the same size as Yahoo and Facebook.

    • Google’s “product” is the attention of search users- which they sell to advertisers..

      It is dependent on the idea that the focused attention of users is the best way for advertisers to target their message to their desired market. While this was true for the past decade and is largely true now, there are a couple of disturbing trends.

      1- People spend more time on Facebook. Remember, attention…

      2- The quality of information inherent in people’s social network may lead to a higher conversion rate for targeted advertising.

      3- (Purely my conjecture) People don’t click on mobile ads from their smartphones. I haven’t seen market research on this, but purely anecdotally, I don’t know a single person who has ever (purposely) clicked on a mobile ad, aside from curiosity when iAds first launched. The gestalt of mobile- location, always-on, directly addressable users, etc,- is just different than the browser on the PC world where Google rakes in cash.

      Android is a successful gaining market share (giving away a software platform will do that), but no one, other than carriers, makes a bunch of money from it. Google sure doesn’t. I remember Eric Schmidt, when asked about this, said that there’s got to be a way to monetize having a billion people using your product. Which may be true, but they sure haven’t figured it out yet.

      Not to say Google’s going to disappear or fall apart next year, but they need to show that they can exploit other market opportunities. So far- in social media and mobile, from a business perspective, they have not.

      • BenHill123

        Android is already profitable, multiple people have said it like Andy Rubin, Eric Schmidt etc. You don’t know anyone who has clicked a mobile ad, I don’t know anyone who has clicked a google search ad. Yet Google rakes in huge amount of money from search advertising. And I don’t know anyone who has clicked a facebook ad either, yet facebook is also making decent money from ads.

  10. Matthew-

    Have you been listening in on my phone calls? lol. I have had this EXACT conversation with an associate a couple of times in the last week. Apparently this is more “obvious” than I thought (that, or the invincibility veil is finally being lifted)…

    Thanks for confirming that I’m NOT the only one who sees their “Achilles Heel”…


  11. Kind of “Apples and Oranges” ( no pun intended )

    Microsoft xbox and Apple iPhone/pad/pod are durable goods, which operate through wholesale channels, sales and product fulfillment done in large pre-ordered blocks. Google is pure software, web based at that. There is no wholesale order for one million “Youtubes” pending from Walmart.

    The risk exposure nd liabilities that Microsoft and Apples *ONE TRICK PONIES* carry offset what is being describe here as “lackluster”.

    One political upheaval in say Tiawan, and xboxes and iPhones instantly offline. One blood mineral coup d’Tate means Apple and Microsoft write a big zero in their quarterly report to the stock holders.

    Pure software not subject to the advantages and potential disaster durable goods are.

    • I agree, Alan — and there’s no question that a trick like this can be very profitable and very successful. The more important question (at least for investors) is how much that is worth, compared to other companies that are doing more. And maybe a company like Apple that can just continually extend its businesses into brand new multibillion-dollar areas is an anomaly, I don’t know.

      • Hi,

        Facebook is the Apple of the web.

        Which is intensely frustrating, when you know that Apple could be a $1Tn m’cap company within 7 years if only it inverted itself and became a web service-provider as well.

        The relevance to this discussion is that Google is complacent, exactly in the way that Microsoft was, on so many fronts, about new technologies and competitors.

        They had the foetus of 4Square, a precursor to Groupon/yelp and Jaiku when twitter was not established, and smothered them all. They’ve been more mercenary with the other acquisitions of advertising, youtube and Android.

        There’s still growth opportunities, around advertising, mobile, commerce, productivity suites and social, but to date, the momentum is transferring to Facebook and innovative start-ups.

        Google used idealabs PPC concept, Facebook could use Google’s Adsense concept – when your garden has 600m+ regular visitors, the wall doesn’t much matter!

        Who’s more capable of a virtual cable system, proprietary content supply, lower friction/serendipitous content/service serving, when the home page is your browser who needs an os/separate search, and the potential of a paper currency that is growing in value, for acquisitions?

        When you’ve built the war-chest that Google has, just as Apple and Microsoft have, it’s possible to rebuild and reengineer, but with pure web-services, how many chances, and time, do you get – at least Google has always lived by the ethos of it only needing a click for any user to switch!

        Once Facebook proves itself, as Paypal did for ebay, Microsoft could always buy it, and with so much overlap, with Android being open-source, what if Google and Apple were to merge.

        One trick ponies aren’t so secure in the digital world. Web-history is littered with examples, but they’re a great platform/method to start out for quick traction, from twitter to .edu-facebook to google search.

        Yours kindly,

        Shakir Razak

    • The investor question is an interesting one, typically as growth slows you have to seduce ’em with dividends. Any cursory analysis shows Google is topping out on its first mega “S” curve

      Apple and IBM are the 2 companies that have successfully followed a few separate “S” curves, but in both cases they had to firstly hit the buffers (the only way you typically get enough freedom to make the changes necessary to succeed) and secondly had to bring in new ideas and people from outside.

      I know its rude to link to oneself (twice even) but I’m b*ggered if I’m rewriting my own blog post again here :-)

      More thoughts on moi blog over here: