One of the justifications that Google provided for former CEO Eric Schmidts move into the chairman role and the re-emergence of co-founder Larry Page as chief executive was the need to become more flexible by speeding up decision-making at the search giant. BusinessWeek magazine looks at that issue in a new cover story on the company, which describes how Google is trying to save itself from the ossification that can paralyze large corporations. But what if Googles biggest problem isnt a lack of flexibility or the speed of its decision-making, but a fundamental cultural inability to create new lines of business that can keep the company growing? What if its just a gargantuan one-trick pony?
When asked about this possibility last year, Schmidt effectively said that Google might be a one-trick pony, but its a hell of a trick (as Oracle founder Larry Ellison once put it). In other words, if youre going to be a company with just one trick, it might as well be one that has revolutionized the world of online advertising, stolen billions of dollars in revenue from traditional media entities and pours vast rivers of cash into Googles coffers every month, regular as clockwork.
Obviously, Google is doing pretty well with just that trick it has a market value of $200 billion, and just reported revenue growth of 26 percent for t! he most recent quarter. Although its search results still need some work (which could cause problems for newly-public Demand Media, even if the content producer disputes this), and there is some competition on the search front from Microsofts Bing, no one is going to be writing the companys obituary any time soon.
But is that enough? It might be enough if all you want is a company that dominates the search-related keyword advertising business. Google will likely fill that role for the foreseeable future, and thats worth a certain amount but how much is it worth? Does it justify the price-to-earnings multiple of 24 times that Googles stock currently trades at? Maybe not. This has been the issue with Microsoft over at least the past decade: The company generates huge amounts of cash, and is profitable as heck, but what investors are willing to pay for has continued to decline. This is why many have started to ask the question: Is Google the new Microsoft?
Googles biggest problem is that it has consistently failed to produce any new lines of business apart from keyword-related advertising, which still produces over 90 percent of its income. Its true that as the company took pains to point out during its recent earnings call Google is making money from display advertising, YouTube views, mobile, etc. But this is (comparatively, at least) peanuts. The web giant is famous for giving its employees 20-percent time, and these pro! jects ca n turn into great services, such as Gmail and Google News and theres also the companys expanding Android efforts and other initiatives. But do these generate new revenue or profits for the company? To the extent that they help drive search traffic, yes. But thats still just a variation on the same trick.
Even Microsoft has been able to create a new and profitable business that wasnt really related to its core software business: namely, the Xbox consumer-gaming system. Google repeatedly acquires companies like Dodgeball then smothers them, or fails to take advantage of what they bring to the company, or takes their engineers and makes them do other things. And as a result, it has failed to produce a Foursquare competitor, or a Twitter competitor (unless you are one of the five people who use Googles Buzz regularly), and it has certainly failed to produce anything that has a hope of competing against the social-networking wave unleashed by Facebook.
Is Larry Page going to help the company do any of that? No one really knows. But just getting more flexible whatever that means or making decisions more quickly isnt necessarily going to do it. And it is a growing problem, at least for anyone who is (or wants to be) a long-term Google investor.
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Post and thumbnail courtesy of Flickr user Batikart
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