Google rolled out its newest social media product this week. Unfortuntately for Google investors, this is not a good thing.
Internet usage is changing. Dramatically. Once the web was the world’s largest library, and simultaneously the world’s biggest shopping mall. In that environment, what everyone needed was to find things. And Google was the world’s best tool for finding things. When the noun, Google, became the verb “googled” (as in “I googled your history” or I googled your brand to see where I could buy it”) it was clear that Google had permanently placed itself in the long history of products that changed the world.
But increasingly the internet is not about just finding things. Today people are using the internet more as a way to network, communicate and cooperatively share information – using sites like Facebook, LInked-in and Twitter. Although web usage is increasing, old style “search-based” use is declining, with all the growth coming from “social-based” use:
Chart source: AllThingsD.com
This poses a very real threat to Google. Not in 2011, but the indication is that being dominant in search has a limit to Google’s future revenue growth through selling search-based ads. And, in fact, while internet ads continue growing in all ad categories, none is growing as fast as display ads. And of this the Facebook market is growing the fastest, as MediaPost.com pointed out in its headline “On-line Ad Spend up, Facebook soars 22%.” In on-line display ads Facebook is now first, followed by Yahoo! (the original market dominator) and Google is third, as described in “Facebook Serves 25% of Display Ads.”
While Google is not going to become obsolete overnight, the trend is now distinctly moving away from Google’s area of domination and toward the social media marketplace. Products like Facebook are emerging as platforms which can displace your need for a web site (why build a web site when all you need is on their platform?) or even email. Their referral networks have the ability to be more powerful than a generic web search when you seek information. And by tying you together with others like you, they can probably move you to products and buying locations you really want faster than a keyword Google-style search. BNet.com headlined “How Facebook Intends to Supplant Google as the Web’s #1Utility,” and it just might happen – as we see users are increasingly spending more time on Facebook than Google:
Source: Silicon Alley Insider
So, you would think it’s a good thing for Google to launch Google+. Although earlier efforts to enter this market were unsuccessful (Google Buzz and Google Wave being two well known efforts,) it would, on the surface, seem like Google has no option but to try, try again.
Only, Google + is not a breakthrough in social media. By all accounts its a collection of things already offered by Facebook and others, without any remarkable new packaging (see BusinessInsider.com “Google’s Launch of Google + is, once again, deeply embarrassing” or “Google Plus looks like everything else” or “Wow, Google+ looks EXACTLY like Facebook.”) With Facebook closing in on 1 billion users, it’s probably too late – and will be far too expensive, for Google to ever catch the big lead. Especially with Facebook in China, and Google noticably not.
Like many tech competitors, Google’s had a game-changer come along and move its customers toward a different solution. Google Plus will be in a gladiator war, where everyone gets bloody and several end up dead. NewsCorp is finally exiting social media as it sells MySpace for a $550m loss – clearly a body being drug from the colliseum! Even with its early lead, and big expenditures of time and managerial talent, NewsCorp was thrashed in the gladiator war.
Google may have a lot of money to spend on this battle, but shareholders will NOT benefit from the fight. It will be long, costly and inevitably not profitable. Yes, Google needs to find new ways to grow as the market shifts – but trying to do so by engaging such powerful, funded and well-positioned competitors as the big 3 of social media is not a smart investment.
And that leads us to why Google + is really problematic. Resources spent there cannot be spent on other opporunities which have high growth potential, and far fewer competitors. BI‘s headline “Google kills off two of its most ambitious projects” should send shudders of fear down shareholder backs. Google had practically no competitors in its efforts to change how Americans buy and use both healthcare servcies and utilities such as electricty and natural gas. Two enormous markets, where Google was alone in efforts to partner with other companies and rebuild supply chains in ways that would benefit consumers. Neither of these projects are as costly as Google+, and neither has entrenched competition. Both are enormous, and Google was the early entrant, with game-changing solutions, from which it could capture most, if not all, the value — just as it did with its early search and ad-words success.
Additionally, Chromebooks is now coming to market. Android has been a remarkable success, trouncing RIM and with multiple vendors supporting it rapidly taking ground from Apple’s iPhone. Only Google has made almost nothing from this platform. Chromebooks offers a way for Google to improve monetizing its growing – and perhaps someday #1 – platform in the rapidly growing tablet business against a very weak Microsoft. But, with so much attention on Google+ Microsoft is given berth for launching its Office 365 product as a challenger. With so much opportunity in cloud computing, and Google’s early lead in multiple products, Google has a real chance of being bigger than Apple someday. But it’s movement into social media will not allow it to focus on cloud products as it should, and give Microsoft renewed opportunity to compete.
Google is setting itself up for potential disaster. While its historical business slowly starts losing its growth, the company is entering into 3 very expensive gladiator wars. First is the ongoing battle for smartphone users against Apple, where it is spending money on Android that largely benefits handset manufacturers. Secondly it is now facing a battle for enterprise and personal productivity apps based in cloud computing where it has not yet succeeding in taking the lead position, yet faces increasing competition from Apple’s iCloud and Microsoft’s new round of cloud apps. And on top of that Google now tells investors it is going to go toe-to-toe with the fastest growing software companies out there – Facebook, Linked-in, Twitter and a host of other entrants. And to fund this they are abandoning markets where they were practically the only game changing solution.
There’s a lot yet to happen in the fast-moving tech markets. But now is the time for investors to wait and see. Google’s engineers are very talented. But it’s strategy may well be very costly, and unable to compete on all fronts. You may not want to sell Google shares today, but it’s hard to find a reason to buy them.