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2010-12-21 12:09:07
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