Sell Google – Lot of Heat, Not Much Light

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:

Google long term chart 5-3.12
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. Google price per click 4-2012

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.

Using White Space to learn and grow – Google v Microsoft

Google keeps on growing.  While many companies bemoan revenue losses and poor results in 2008 and 2009, Google keeps new products flowing out the door and revenues continue to increase.  New markets are being developed.

This Google revenue growth is powered by use of White Space, as CNN.com reported in "Gmail holds Graduations and Funerals.GMail labs is a White Space team that develops new applications and uses for Gmail.  Its operating premise is that it should develop the products rapidly, then push into the market to get feedback.  Then the team can determine what to modify and test further, what to push into the market as non-beta and what to kill.  As recently demonstrated in the headlined behavior, Google is ready to keep some things and kill others based upon market feedback – not just what the internal people or analysts think.

  • "This isn't the first time Gmail Labs has graduated and killed some test
    features since Gmail Labs started in June 2008, but the event does
    underscore an idea that Google says is key to its success as an
    innovative company: Let people create products they'd use themselves,
    get those products out to the public as soon as possible, and make
    consumers think it's OK for things to break
    ."
  • ""At Google, in general, the philosophy is to get things out quickly in
    front of our users and not make huge promises
    ," said Ari Leichtberg,
    another Google engineer"

Nothing is more accurate than real market feedback, as readers of this blog have heard me say often.  Scott Anthony of Innosight recently took up this mantra in a Harvard Business Review blog "How to Kill Innovation: Keep Asking Questions."  He relates how a large company with a new idea kept asking "what if" questions about a new idea.  Each piece of research led to more "what if" questions.  With its massive resources, the company could keep asking and researching forever, never getting real market input and never getting the innovation to market.

In traditional companies, with a new product funnel and stage gate implementation process which can take years to run through, once something moves into the market the internal "champions" are so vested in the innovation they can't stand for it to fail.  Far too often, if the innovation were to fail the champions would lose their jobs – or see their careers tank.  Too much analysis causes too few ideas to make it to market, and causes the organization to overspend on the innovation that does.  After launch market feedback is often ignored, or manipulated, to allow the innovation to be pushed harder and longer on the hopes that with "just a little more time and effort" it will succeed.

What keeps Google growing, and attracting top talent, is its willingness to use White Space.  It is willing to develop ideas quickly and obtain real market feedback.  Then decide what to keep, and what not to keep. Because it moves quickly, market input shapes the offering.  Market input allows the company to see what people really use, and thus worthy of additional investment.  Or what people don't use, and thus needs to be dropped before too much is sunk into the idea.

When Microsoft decided to add "clippy" to its products it was a herculean effort to install it across all products.  This computerized help tool has had little use, and is often despised by users.  Microsoft decided to create this feature based on almost no market input, instead relying on some customer focus groups.  After making the enormous investment – in lieu of many other opportunities passed over internally – Microsoft simply became "married" to the innovation.  Now "clippy" is still on the applications, but is almost never used.  And it gives Microsoft's products no user advantage.

All companies can grow in 2010.  You need to act more like Google.  Develop early stage products quickly, and get them into White Space projects which will market test them.  Don't spend too much time, money and effort "what iff-ing" or doing "market research" trying to predict future customer behavior.  Listen carefully for market input, then modify.  Have more than one opportunity in White Space, because you don't want to over-invest in any single idea that ran the internal gauntlet.  Be ready to move forward quickly with things that work, and abandon those that don't.  If you use give yourself permission to test new things in White Space, and resources, you too can grow in 2010 and climb out of this recession.