A $50 Billion "One-Trick Pony"?
Google (GOOG ) could not have predicted the value of
a few lines of text. Search engine advertisements --
typically a sparse 10 to 15 words in length -- have
almost single-handedly propelled the Web search giant's
net sales up 468%, to $2 billion, over the past two
And yet, a handful of analysts increasingly are questioning
whether Google's laser-like focus on search may be something
of an Achilles' heel. Google remains almost entirely
dependent for growth on search -- a business that's
poised to slow. In the maturing U.S. market, Forrester
Research Inc. predicts growth will drop from 45% to
30% this year.
OVERSEAS POTENTIAL. The expected cooling-off prompted
two analysts to downgrade Google's stock in February,
helping to lower the price 5% for the month, to $185.
"Google is a one-trick pony," says Forrester
analyst Charlene Li. "It's a nice trick, but it's
all they do."
Of course, the stock is still up 121% since the August
initial public offering; Google's market cap now tops
$50 billion. And executives remain confident that the
text ads displayed around search results will continue
to drive growth. They see plenty of room for expansion
overseas, which accounts for more than half its searches
but only a third of sales.
Google is also just beginning to entice big traditional
advertisers to search. Of the world's 1,000 largest
companies, Google can boast only 227 as advertisers.
"It's very much an untapped market," Google
Chief Executive Eric E. Schmidt told analysts in February.
G-MAIL TRY. But Google's belief in search may be blinding
the company to other opportunities. To see what they
risk missing out on, Google execs need look no further
than key rival Yahoo! (YHOO ), which tirelessly looks
for new business models. While search accounts for 45%
of Yahoo's sales, the portal also snares one-third of
its revenues from so-called display ads that contain
graphics and multimedia, as well as 16% of sales from
subscription services, such as online personals and
fantasy football. By comparison, Google gleans 98% of
its sales from text ads, primarily placed around search
It's not as though Google isn't investing in other businesses.
Fully 30% of the money it spends on product development
goes into projects other than its bread-and-butter search
business. Not bad, but most of these projects end up
falling under its text-advertising umbrella.
Take Google's ballyhooed foray into e-mail, dubbed G-mail.
Instead of charging users $10 or $20 per month for jumbo-size
accounts, Google is delivering text ads alongside e-mail
messages, targeted toward the content in the e-mail.
A message about an upcoming Boston Celtics game, for
instance, might trigger ads from online ticket brokers.
So even if targeted e-mail ads take off -- a questionable
proposition, since most industry observers believe e-mailers
are far less likely to click on links than searchers
-- the money will come from the same budgets that buy
the rest of Google's ads.
ODDLY SECRETIVE. Meanwhile, one of Google's best shots
at building a new revenue stream receives scant attention.
Last May, the company began experimenting with display
ads -- which run atop or along the side of a Web page.
It's enticing for big advertisers who are often as concerned
with building their brand as they are with driving traffic.
But Google is reluctant to showcase such ads on its
own site for fear of cluttering its Spartan interface.
Rather, it acts as an intermediary between the content
providers and relevant advertisers. For example, Google
might match luggage advertisements from its network
of customers with an online New York Times story about
Still, 10 months after uncorking this service, Google
is being strangely closemouthed. It won't divulge specifics
about the number of participating publishers or advertisers.
And the topic came up just once during Google's four-hour
meeting with analysts on Feb. 9. All this, while Yahoo's
comparable business rocketed 39% in 2004, to $857 million.
"This is where Google has got to broaden out,"
says John Tinker, analyst at ThinkEquity Partners. "Companies
like Ford (F ) and General Motors (GM ) are going to
say, 'Search is great, but let's get a little creative
Google, rightly, has plenty to tackle in its core business
of search. But those aren't the only opportunities for
the search kingpin. Others deserve exploration, lest
its narrow focus become a case of tunnel vision.