The bloom has fallen off the Google (GOOG) rose. It is likely to stay off, in our opinion, until Google demonstrates a compelling revenue ramp in a new product that can eventually pick up where the search business is leaving off.
Before we get to that, though, it’s worth noting that much good can come of the company’s current slowdown. Google will now be forced to become more disciplined about resource allocation, management, product development, and expense control–none of which it had to pay much attention to in the last few years. Improvement in these areas will eventually stabilise profit margins, revenue, and the stock. Once the global economy stops collapsing, it should also allow Google to grow its existing search business at a modest rate for several more years.
The search product cycle is coming to an end, however, and if Google wants to become an exciting growth company again–if it wants its stock to become a winning growth stock again–it needs another huge product to pick up where AdWords and AdSense (mostly AdWords) are leaving off. Specifically, to invoke the great growth company of the last tech wave, it needs to find the Office to accompany its Windows (AdWords).
Google’s size here actually has a downside: Compared to Google’s $20 billion revenue base, even huge opportunities are small. (We estimated yesterday that Google has a $1 billion search-ad opportunity on YouTube, a brand that absolutely dominates a massive and fast-growing new market. This would add only an additional 5% to Google’s already enormous annual revenue, however.) To complement AdWords, Google needs to find another $30-$40 billion market, and there aren’t that many of them around.
Google’s most promising opportunities, it seems, lie in four areas:
- Corporate cloud-based apps
- Display ads
Google has a toehold in each of these (more than a toehold in video), and it is trying to make them into big businesses. As yet, however, none of these opportunities have produced much in the way of revenue. And Wall Street is tired of waiting.
Eric Schmidt has spent much of the last year touting mobile as an opportunity that is bigger than Google’s PC-based opportunity, but he has yet to describe a single compelling example of mobile advertising that Google can cash in on (other than normal PC-style search on a mobile phone, which, so far, is just an expansion of an existing product market). Google has also made a huge investment in Android, but other than potential search revenue, it’s hard to see what business model this might eventually lead to.
Eric has also candidly admitted that a compelling YouTube ad product hasn’t been invented yet. Google Apps are making headway at the low end of the market, but are still a relatively small business. Google’s attempts to break into TV, print, and radio advertising have been flops. Google’s display ad opportunity could be big, but only if it deigns to put display ads on its own properties. (Which it should probably think seriously about).
Short of implementing display ads, Google will likely continue to try to compete in all of the other areas at once. Given the competition it faces in each, however, success will be difficult. Its strongest competitive position, by far, is in video. It faces far fiercer competition in mobile and corporate apps (Apple, Microsoft, Salesforce, etc.).
As Microsoft is illustrating, no company can do everything. There may come a day when Google has to choose among the four big opportunities (or another one altogether). In the meantime, Google is now a “show me” stock, and Wall Street will likely wait to see actual evidence that one of these products is going to shoot the lights out before piling into the stock again.
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