Google Is the New Microsoft. Uh-Oh.
Google prints money. It made $56 billion in revenue and earned $13 billion in its last full fiscal year.
All of that cash has kept Google shareholders happy for a very long time, so happy that they didn’t seem to care when the company opened up the door to competitors or missed a few pivotal trends. Even as Google's growth slows and the company matures, I’m sure that shareholders could stay happy for a little while longer. Analysts say the company will add $31 billion in search revenue alone over the next five years.
But money doesn’t mean that all is well in Mountain View, California. Tiny fissures have appeared in Google's façade. Its share of the U.S. search market fell to 75.2 percent in December from 79.3 percent a year ago. That piece of the pie could get smaller this year if Apple cancels its deal to use Google as its default mobile search engine. That would be a big loss. Citigroup analyst Mark May says that 60 percent of Google's mobile search revenue in 2014 came from the Apple deal.
Google stock has underperformed. It’s down 11 percent over the last year, versus a 14 percent gain for the Nasdaq and a 36 percent gain for Facebook.
The Google of 2015 is not unlike the early 2000s Microsoft – a hugely profitable company that is having a hard time innovating around its core product. Unless something is done, it will likely go through spasms of flailing and discontent that will be familiar to longtime veterans of the Redmond, Washington software giant.
For all of its innovation, best captured by Eric Schmidt’s “How Google Works,” Google is a 55,000-person behemoth, and it’s nearly impossible for any company to move quickly and creatively at that size. Among tech giants, only Apple has managed to innovate after becoming so big. Hewlett Packard? Nope. IBM? No way.
Despite all the talk about Google’s much vaunted moonshots - self-driving cars and Google Glass, internet-connected balloons and drone deliveries - the company is still basically a purveyor of cheap online ads that it sells at massive volume against the things that we search for online. Advertising accounted for $51 billion of the company’s $56 billion in revenue last year.
The most valuable thing that the official moonshot incubator, Google X, has produced isn’t innovative products that will maintain Google’s search dominance. It’s good PR. It codified the idea that Google is always trying new stuff and failing because that’s what true, crazy, bountiful innovation looks like.
With the Google X mythology, Google has cover for all sorts of (sometimes expensive) failures, including the aforementioned smart glasses. It also has cover for failed products that could be more germane to the core business' success, like social networks (R.I.P. Google Plus and Google Buzz), payments (Google Wallet, in remembrance) and storage (wither Google Cloud Platform?).
The willingness to fund a division like Google X means that Google wants to test the boundaries in lines of business where success doesn’t really count in the here and now. But that hasn’t saved Google from stagnating in ways that do.
Let’s return to the Microsoft comparison because I think it’s very apt. Microsoft was stymied by a huge headcount and, more importantly, legacy products that no one inside the company wanted to mess with for fear of killing the golden goose. Windows, Office and the server business weren’t perfect, but they were dominant. Even when those commanding positions were eroded at the margins, it was hard to see a world in which Microsoft wouldn’t be the backbone of a PC-centric tech industry. It took a dramatic shift in the tech landscape (perpetuated in part by Google) for executives to realize that their caution was going to get them in deep trouble.
Google, too, has a suite of products that are the backbone of post-Microsoft tech growth, which has long been all about the Internet, and it’s been hard to see a day when we wouldn’t use Google search to sort through massive amount of data online. YouTube is indexing all of the world’s video information. Our personal data is being stored in our Gmail and, to some extent, our Google Docs.
As it always does, tech has shifted seismically once again, and right beneath Google’s feet - thanks to mobile computing and apps and social networking. Google hasn’t effectively responded to those trends so it hasn’t been innovative where it counts.
Facebook captured 28 percent of the advertising moving from offline to online in 2014, up from 22 percent the year before, while Google grabbed 55 percent of that market, according to the bank Stifel.
Meanwhile, Google could lose the international search market, given that big countries like China and Russia prefer homegrown products like Baidu and Yandex for that service. While Google dominates text and video search (thanks to YouTube), Pinterest is way ahead in image search. Amazon and other huge e-commerce sites like Alibaba dominate commerce-related search. Apple is poised to be the big tech company winner in mobile payments. In the race to dominate search apps, there’s no clear winner - yet.
Forget about a moonshot catapulting Google to the forefront of innovation. The worse case scenario for Google is that it continues on its Microsoft-like path and lets the world change even more dramatically, leaving it further behind.
Google should be buying innovative companies, as it did with YouTube, and letting those bets flourish with the company’s ample backing. Would it be so crazy for Google to go out and buy Pinterest, Dropbox and Snapchat? Probably. But can Google ever catch up in image search, storage and messaging (which will soon anchor products like payments and on-demand apps)? Probably not.
Look north to Redmond, Googlers, and worry.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Timothy L. O'Brien at firstname.lastname@example.org