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It flourished during the first phase of the internet. The next one may be
tougher
The internet
Dec 2nd 2010 | SAN FRANCISCO | from PRINT EDITION
Eurocops say: Don t be evil.
GOOGLE is not a conventional company. We do not intend to become one, wrote
Larry Page and Sergey Brin, the search firm s founders, in a letter to
investors ahead of its stockmarket flotation in 2004. Since then, Google has
burnished its reputation as one of the quirkiest companies on the planet. This
year alone it has raised eyebrows by taking a stake in a wind-energy project
off the east coast of America and by testing self-driving cars, which have
already covered over 140,000 miles (225,000km) on the country s roads.
Google has been able to afford such flights of fancy thanks to its amazingly
successful online-search business. This has produced handsome returns for the
firm s investors, who have seen the company transform itself in the space of a
mere 12 years from a tiny start-up into a behemoth with a $180 billion market
capitalisation that sprawls across a vast headquarters in Silicon Valley known
as the Googleplex. Google also stretches across the web like a giant spider,
with a leg in everything from online search and e-mail to social networking and
web-based software applications, or apps.
Much of its growth has been organic, but Google has also splashed out on some
sizeable acquisitions. In 2006 it paid $1.7 billion for YouTube, a website that
lets people post videos of their children, kittens and Lady Gaga
impersonations. The following year it snapped up DoubleClick, an
online-advertising network, for $3.1 billion. More deals are likely. Google is
bidding for Groupon, a trendy e-commerce business, using some of the $33
billion sitting in its coffers.
All this has turned Google into a force to be reckoned with. But now the
champion of the unorthodox is faced with two conventional business challenges.
The first involves placating regulators, who fret that it may be abusing its
considerable power. On November 30th the European Union announced a formal
investigation into claims that Google has been manipulating search results to
give an unfair advantage to its own services a charge the firm vigorously
denies. In America, Google faces a similar investigation in Texas and is also
battling with a bunch of online-travel companies who have been lobbying the
government to veto its recent purchase of ITA Software, a company that provides
data about flights.
The other challenge facing Google is how to find new sources of growth. In
spite of all the experiments it has launched, the firm is still heavily
dependent on search-related advertising. Last year this accounted for almost
all of its $24 billion of revenue and $6.5 billion of profit. Acquisitions such
as YouTube have deepened rather than reduced the firm s dependence on
advertising. Steve Ballmer, the boss of Google s arch-rival Microsoft, has
derided the search company for being a one-trick pony .
Ironically, investors biggest worry is that Google will end up like Microsoft,
which has failed to find big new sources of revenue and profit to replace those
from its two ageing ponies, the Windows operating system and the Office suite
of business software. That explains why Google s share price has stagnated.
The market seems to believe this could be like Microsoft version two, says
Mark Mahaney, an analyst at Citigroup. News of the formal EU antitrust enquiry
will no doubt invite further comparisons with Mr Ballmer s firm, which fought a
long and bruising battle with European regulators.
Is such a comparison fair? Those who think it is point to several changes that
could damage Google. The first is the rise of new ways in which people can find
information online. They include social networks such as Facebook, which saw
traffic to its site in America surpass that to Google s sites earlier this year
(see chart 1), and apps offered by Apple and other firms that help people find
information without using a web browser.
Appalled by walled gardens
Another cause for concern is that firms such as Facebook and Apple are hoarding
customer data, thereby making them inaccessible to Google s search engine. The
rise of such walled gardens on the web clearly bothers Google s top brass.
Two years ago I would have told you this isn t a problem, says Eric Schmidt,
Google s chief executive. Now I will tell you it is a threat. Google recently
clashed publicly and caustically with Facebook over the latter s data
practices, warning potential users that the social network had become a data
dead end .
The search firm is seeing barriers go up elsewhere too. Take media companies,
which are now thinking twice before licensing content to Google or making it
freely available on the web. The biggest producers of television content in
America are wary of supplying programming to new internet-enabled television
services such as Google TV. And the rush towards tablet computers by newspaper
companies hungry for new sources of revenue means that many of them are
withdrawing free content from the internet.
Google could also suffer from any backlash against companies that are perceived
to have violated users privacy online. If governments tighten rules in
response, they could make it harder for the firm to carry on minting money from
ads. And pressure for action is growing: on December 1st America s Federal
Trade Commission said it favoured a plan to allow consumers to choose whether
or not their web-surfing habits are tracked by others.
Eurocops say: Don t be evil.
Vexed in the Googleplex
Lastly, there are problems inside the Googleplex itself. The company has lost a
number of stars, such as Omar Hamoui, the founder of AdMob, a
mobile-advertising company that Google acquired last year, and Lars Rasmussen,
who led a project called Wave to create a new kind of online collaborative
tool. Mr Rasmussen recently moved to Facebook, complaining that it had become
impossible to get things done at Google because of the bureaucracy at the
company, which now boasts 23,000 employees.
Admittedly, Mr Rasmussen may still be sore that Google shuttered his project,
which flopped. But his complaint resonates with some Xooglers (the nickname for
former Google employees), who say decision-making has become painfully slow as
the firm has grown. Jon Holman, an executive recruiter, reckons Google is going
through what he calls a Darwinian evolution that could make it harder to
attract top talent in future.
Does all this mean that Google s glory days are over? Don t bet on it. True,
the firm s revenue growth slowed from 56% in 2007 to 9% last year, but that was
still respectable considering that the global economy fell howling off a cliff.
And there are signs that the company is picking up steam again: its
third-quarter revenue rose by 23% to $7.3 billion, which beat most analysts
expectations.
Moreover, Google is well placed to benefit from several important trends. One
is the rapid growth in the amount of data being produced worldwide, which
provide the raw material on which Google s search engine feasts. For instance,
YouTube is now taking in 35 hours-worth of video content every minute of the
day, up from about six hours-worth in June 2007. That suggests there is still
likely to be a big role for a general-purpose search engine, even if people do
use apps and social networks more often to get information.
Google also stands to gain as more advertising moves to the web. Morgan
Stanley, an investment bank, finds that Americans spend 28% of their media time
online, yet only 13% of total ad spending is devoted to the internet. If ads
ultimately catch up with eyeballs, an extra $50 billion-worth of advertising
could be shifted online each year, Morgan Stanley estimates.
Then there is the rise of the mobile web, which looks as if it will form the
cornerstone of Google s second act. At the heart of that act lies Android, the
firm s smartphone operating system, which it lets telecoms firms and
phone-makers use for nothing. Some critics have hammered Google for giving
Android away when other companies such as Microsoft charge for their operating
systems. But the firm wants as many people as possible to adopt Android, which
acts as a platform that encourages them to explore other Google services,
including e-mail and search.
This approach seems to be working. From practically nothing a couple of years
ago, Android now accounts for an impressive 26% of the market, rivalling Apple
s popular iPhone (see chart 2). To support it, Google has been developing its
own library of online apps, and it is looking at other ways to please
smartphone users, such as e-commerce. The firm also hopes that an operating
system it has developed around its lightning-fast web browser, Chrome, will
prove popular. This might be ideal for powering netbooks (small laptop
computers), for example.
Your phone is watching you
Google is particularly excited about the commercial prospects for its mobile
activities because smartphones make possible revolutionary developments in
areas such as voice-commanded search (you say holidays in Spain and your
handset finds you a villa on the Costa del Sol). If this technology catches on,
it should drive up the total number of searches conducted. Moreover, because a
mobile phone knows where you are, Google will be able to send you ads for a
shop or restaurant only a few paces away. Such ads are expected to lead to lots
of sales, so Google will be able to charge a premium for them. This may explain
why Google is so keen on a company like Groupon. The rumoured price tag sounds
excessive, but it would bring Google some badly needed muscle in local search,
where it is relatively weak.
Google has also been building up its activities in online display advertising,
which is a very different business from the more straightforward ads that it
serves up alongside search results. Display ads tend to be more complex than
search ads and are designed primarily to enhance a company s brand rather than
to clinch a sale. Google s market share in this business is tiny, but Susan
Wojcicki, who oversees DoubleClick and other operations, reckons there is a
lot of friction in the system that it can still remove.
Indeed, there are already encouraging signs that Google s big bets on mobile
phones and display advertising are starting to bear fruit. It recently revealed
that mobile advertising is now on track to generate $1 billion a year in
revenue. And it reckons that display ads will bring in about $2.5 billion.
Analysts estimate that roughly half of this amount will come from ads on
YouTube.
Even as it looks for a second act, Google has been investing heavily in its
first one, which accounts for roughly two out of every three online queries in
America and handles some 2 billion searches a day. Earlier this year the firm
unveiled Google Instant, an enhancement that displays search results before
users finish typing a query, shaving two to five seconds from the average
search. By helping users find information faster, the company is betting they
will conduct more searches. And every time they do, Google can ping carefully
targeted ads at them.
Boy billionaires at play
Looking ahead, Google executives depict a world in which the firm not only
helps people to find information they are looking for, but delivers it to them
before they know they need it. To do this, it will use data about them which
they have given Google permission to use. For instance, such a serendipity
engine could alert someone to the publication of a new book by one of their
favourite authors. Creating these capabilities will be hugely difficult
technically, but Udi Manber, who oversees Google s search activities, says his
team is inspired by doing things that are on the cusp of the possible .
All this suggests that Google s one-trick pony is really more of a
thoroughbred. And the company s nurturing of its mobile business and its
success in display advertising indicates that there is plenty of life left in
it yet. Google is also trying to get to grips with areas of weakness, such as
social networking. Rather than try to create a competitor to Facebook, it plans
to introduce a social layer across its existing products in the coming
months. So, for example, people using YouTube with such a layer in place will
be able to see what their friends have been watching on the service, assuming
Google has been given permission to share such data.
The sheer number of projects running at Google at any one time raises the
question of whether the company may be trying to do too many things at once. In
some ways, Google represents the internet-era equivalent of Bell Labs or Xerox
PARC legendary corporate research outfits that shaped the evolution of
technology in earlier periods. The difference is that most of Google s novel
ideas come from people embedded in the company s core operations rather than
cloistered in a stand-alone brains trust.
The firm s senior executives argue that the ferocious rate of experimentation
they encourage is precisely why Google will avoid the sclerosis that typically
sets in when a firm gets too big. Every McKinsey consultant will tell me I m
spreading things too thin, says Jonathan Rosenberg, Google s head of product
management. But you only win if you innovate faster than the players in the
rest of the system.
To keep winning, the firm will need to hang on to its remarkable talent pool.
Google has been so successful partly because it has created a kind of paradise
for software engineers, which offers perks such as massages, free gourmet meals
and the like. But competition for talent in Silicon Valley is now reaching
fever pitch. Facebook, in particular, has been a merciless poacher from Google.
Not only does it pinch some of Google s best geeks; it even pinched one of its
best cooks.
Google says its attrition rate has not changed in seven years, but it has
clearly been rattled by some of the most recent departures. Last month the
company gave all of its workers a 10% pay rise plus a $1,000 bonus. And it is
rumoured to have made multi-million-dollar counter-offers to keep especially
valuable personnel from jumping to Facebook or elsewhere. This has sent a clear
signal to rivals that it intends to fight to keep its most valuable assets. The
firm has also been using acquisitions of small businesses to bring in new ones,
as well as to beef up its expertise in certain areas. Its purchases this year
include Slide, which makes social-networking software, and Social Deck, which
makes social games for mobile devices.
Google is also making a rather conventional move to create business units whose
heads have more autonomy over the way their operations are run. The aim is to
hang on to talented folk who might otherwise leave and do their own thing. Andy
Rubin, the tech whizz who oversees the Android empire, reckons Google can be a
start-up that is home to many other start-ups run by the entrepreneurially
minded. The firm has also launched a venture-capital arm that can take stakes
in businesses that Xooglers might set up.
Dynamos and dinosaurs
But money and decision-making power alone won t secure the services of the
smartest software types, who want work not only to reward them but also to
inspire them. That is why projects such as green energy and driverless cars
matter so much. Some of these ventures may seem like long shots, but that is
the point. People work for Google in part because it uses technology in cool
ways that might make a real difference to humanity. Ambition is a very
important part of our culture, says Mr Brin, and the depth of science you can
do at Google is [like] nowhere else in the world.
Google s quirkiness is embodied in a bronze replica of a skeleton of a
Tyrannosaurus rex, nicknamed Stan, which stands near the entrance to a building
in the Googleplex. It might seem a bizarre symbol for a high-tech powerhouse.
But Stan is a salutary reminder that the internet dynamo needs to keep evolving
fast if it is to avoid becoming a digital dinosaur.
from PRINT EDITION | Business