With revenues up 39% last quarter, it's far too soon to declare the death of Google. Even in techville, where things happen quickly, the multi-year string of double-digit higher revenues insures survival – at least for a while.
However, there are a lot of problems at Google which indicate it is not a good long-term hold for investors. For traders there is probably money to be made, as this long-term chart indicates:
Source: Yahoo Finance May 3, 2012
While there has been enormous volatility, Google has yet to return to its 2007 highs and struggles to climb out of the low $600/share price range. And there's good reason, because Google management has done more to circle the wagons in self-defense than it has done to create new product markets.
What was the last exciting product you can think of from Google? Something that was truly new, innovative and being developed into a market changer? Most likely, whatever you named is something that has recently been killed, or receiving precious little management attention. For a company that prided itself on innovation – even reportedly giving all employees 20% of their time to do whatever they wanted – we see management actions that are decidedly not about promoting innovation into the market, or making sustainable efforts to create new markets:
- killed Google Powermeter, a project that could have redefined how we buy and use electricity
- killed Google Wave, a product that offered considerable group productivity improvement
- killed Google Flu Vaccine Finder offering new insights for health care from data analysis
- killed Google Related which could have helped all of us search beyond keywords
- killed Google synch for Blackberry as it focuses on selling Android
- killed Google Talk mobile app
- killed the OnePass Google payment platform for publishers
- killed Google Labs – once its innovation engine
- and there are rumors it is going to kill Google Finance
All of these had opportunities to redefine markets. So what did Google do with these redeployed resources:
- Bought Motorola for $12.5billion, which it hopes to take toe-to-toe with Apple's market leading iPhone, and possibly the iPad. And in the process has aggravated all the companies who licensed Android and developed products which will now compete with Google's own products. Like the #1 global handset manufacturer Samsung. And which offers no clear advantage to the Apple products, but is being offered at a lower price.
- Google+, which has become an internal obsession – and according to employees consumes far more resources than anyone outside Google knows. Google+ is a product going toe-to-toe with Facebook, only with no clear advantages. Despite all the investment, Google continues refusing to publish any statistics indicating that Google+ is growing substantially, or producing any profits, in its catch-up competition with Facebook.
In both markets, mobile phones and social media, Google has acted very unlike the Google of 2000 that innovated its way to the top of web revenues, and profits. Instead of developing new markets, Google has chosen to undertaking 2 Goliath battles with enormously successful market leaders, but without any real advantage.
Google has actually proven, since peaking in 2007, that its leadership is remarkably old-fashioned, in the worst kind of way. Instead of focusing on developing new markets and opportunities, management keeps focusing on defending and extending its traditional search business – and has proven completely inept at developing any new revenue streams. Google bought both YouTube and Blogger, which have enormous user bases and attract incredible volumes of page views – but has yet to figure out how to monetize either, after several years.
For its new market innovations, rather than setting up teams dedicated to turning its innovations into profitable revenue growth engines Google leadership keeps making binary decisions. Messrs. Page and Brin either decide the product and market aren't self-developing, and kill the products, or simply ignore the business opportunity and lets it drift. Much like Microsoft – which has remained focused on Windows and Office while letting its Zune, mobile and other products drift into oblivion – or lose huge amounts of money like Bing and for years XBox.
I personalized that last comment onto the Google founders intentionally. The biggest news out of Google lately has been a pure financial machination done for purely political reasons. Announcing a stock dividend that effectively creates a 2-for-1 split, only creating a new class of non-voting "C" stock to make sure the founders never lose voting control. This was adding belt to suspenders, because the founders already own the Class B stock giving them 66% voting control. The purpose was purely to make sure nobody every tries to buy, or otherwise take over Google, because the founders will always have enough votes to make such an action impossible.
The founders explained this as necessary so they could retain control and make "big bets." If "big bets" means dumping billions into also-ran products as late entrants, then they have good reason to fear losing company control. Making big bets isn't how you win in the information technology industry. You win by creating new markets, with new solutions, before the competition does it.
Apple's huge wins in iPod, iTouch, iTunes, iPhone and iPad weren't "big bets." The Apple R&D budget is 1/8 Microsoft's. It's not big bets that win, its developing innovation, putting it into the market, shepharding it through a series of learning cycles to make it better and better and meeting previously unmet – often unidentified – needs. And that's not what the enormous investments in mobile handsets and Google+ are about.
Although this stock split has no real impact on Google today, it is a signal. A signal of a leadership team more obsessed with their own control than doing good for investors. It is clearly a diversion from creating new products, and opening new markets. But it was the centerpiece of communication at the last earnings call. And that is a avery bad signal for investors. A signal that the leaders see things likely to become much worse, with cash going out and revenue struggling, before too long. So they are acting now to protect themselves.
Meanwhile, even as revenues grew 39% last quarter, there are signs of problems in Google's "core" market leadership is so fixated on defending. As this chart shows, while volume of paid ads is going up, the price is now going down.
Source: Silicon Alley Insider
Prices go down when your product loses value. You have to chase revenue. Remember Proctor & Gamble's "Basics" product line launch? Chasing revenue by cutting price. In the short-term it can be helpful, but long-term it is not in your best interest. Google isn't just cutting price on its incremental sales, but on all sales. Increasingly advertisers are becoming savvy about what they can expect from search ads, and what they can expect from other venues – like Facebook – and the prices are reflecting expectations. In a recent Strata survey the top 2 focus for ad executives were "social" (69%) and "display" (71%) – categories where Facebook leads – and both are ahead of "search."
At Facebook, we know the user base is around 800million. We also know it's now the #1 site on the internet – more hits than Google. And Facebook has much longer average user times on site. All things attractive to advertisers. Facebook is acquiring Instagram, which positions it much stronger on mobile devices, thus growing its market. And while Google was talking about share splits, Facebook recently announced it was making Facebook email integrated into the Facebook platform much easier to use (which is a threat to Gmail) and it was adding a new analytics suite to help advertisers understand ad performance – like they are accustomed to at Google. All of which increases Facebook's competitiveness with Google, as customers shift increasingly to social platforms.
As said at the top of this article, Google won't be gone soon. But all signs point to a rough road for investors. The company is ditching its game changing products and dumping enormous sums into me-too efforts trying to catch well healed and well managed market leaders. The company has not created an ability to take new innovations to market, and remains stuck defending and extending its existing business lines. And the top leaders just signaled that they weren't comfortable they could lead the company successfully, so they implemented new programs to make sure nobody could challenge their leadership.
There are big fires burning at Google. Unfortunately, burning those resources is producing a lot of heat – but not much light on a successful future. It's time to sell Google.
great observations! thanks for sharing.
Tell me this how does one equate hits to more. More time spent on the site does not meant more time spent usefully. Facebook has become a collection of useless links which others share that only a very small % are useful. Tell how many influential people use Facebook for their primary means of commmunicating their followers? Twitter. The average value of a conversation in G+ is far better. The fact that you share it with a limited set of people who know that you can contribute and add value to conversations is huge adavantage. It has built a niche with photographers.
Lets talk mobile – Why did they purchase Instagram. One answer their Mobile app sucks big time! The recent G+ app on iPhone is a winnner in several ways.
FB is currently doing great things which is played out in a desktop world. Things will radcially change once majority moves towards tablets.
Bigger question – Does higher facebook likes / comments and views guarantee business for advertisers? Simple answer is no because there is no connection with the product that makes the user experience a need for the product. Its a game no one has cracked yet. FB is leading it with the 800 million leverage currently.
The market is wide open for anyone else to come in and crack it. Unlike traditional businesses which has real assets FB’s 100 billion valuation is very fragile. Itd would take a lot a bets to go right even for them to justify it for even a couple of years.
India and China are as yet have quite a bit of untapped populations.
Last but not the least Google Glass – If that was not exciting then seriously I don’t know what excitement means in the tech world.
Adam, much as I like your posts, I’m going to have to disagree with this one. While I agree that some of those projects they killed had long term potential, what I believe Google sees is the change in times as the world finally frees itself from the chains of a stationary computer, and computing in general becomes mobile. That is why they are hedging their bets on investing in all things mobile, including Android. I don’t see this simply as a startegy to defend and extend their core business (search). If it were, they would have simply come up with an app or two for the leading mobile platforms and be done with it. But by investing in building an ecosystem of its own, killing the projects that do not align with the mobile strategy (everything you have mentioned), and focusing on those that do instead (Android, Chromebooks, docs, drive, acquiring Motorola Mobility, that large bandwidth projct, and of course, Google glasses, etc), I think they are poising themselves for innovations in tomorrow’s market, as for the first time in history, the computer goes where its owner does.
killed Google Powermeter – could just be an app
killed Google Wave – I’m sure innovations from the project will be integrated into G+. Meanwhile, the project itself has been opensourced and is availabe from the ASF website.
killed Google Flu Vaccine Finder – seasonal, could just as easily be done as an app
killed Google Related – wasn’t even aware something like this existed till now
killed Google synch for Blackberry – makes sense, why expend resourses an (increasingly irrelevant) competetior? Let them make their own app
killed Google Talk – Really? I still have it on my android phone
killed the OnePass – Succeeded by Google wallet?
killed Google Labs – I believe the new innovation engine is the Android Market
p.s. Please hire someone to fix the commenting system, the text box is way too small.
I don’t think it’s the right time to say goodbye to Google. Not yet. I think the investoirs still have good chances to make money out of it.
well you can’t get them all right I suppose
You are right Brad. I am disappointed in all the projects Google did not complete – but I misjudged just how long Google could ride the digital ad market growth. I tend to see emerging wins very early – which is good for investors. But when I see problems early it can lead to exiting far too early. Someday Google will have to build a huge business beyond adwords and ad placement – and let’s hope they do it prior to flattening of Google’s growth in digital ad sales/search.