By Ben Elgin Even 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 years.
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 results.
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 travel.
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 here.'"
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. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau