Google's Achilles' Heel - InformationWeek

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Google's Achilles' Heel

Wall Street loves it. Consumers are begging for more of it. Other companies want to be it. But Google has its vulnerabilities--excessive reliance on search advertising, lawsuits, eroding public trust, lack of focus and the competitive threat from Microsoft. How long can Google's run last?

Does Google have an Achilles' heel?

Based on recent events, you have to wonder. Its stock price reached $475 after two significant announcements--Google Video Store and Google Pack--at the Consumer Electronics Show earlier this month. Then, just 10 days later, Google announced the $102 million purchase of dMarc Broadcasting, which develops an online system for advertisers to buy radio airtime. Google said it plans to move its advertising juggernaut into radio.

How hot is Google?

- Google's market cap, now hovering at around $132 billion, is bigger than IBM and Chevron.

- Piper Jaffray analyst Safa Raschtchy said the stock would likely soar past $600 this year.

- Unlike high-flying Internet bubble companies of the 1990s, Google is profitable, with revenues growing an average 110% quarterly since it went public in August 2004.

- Google has a war chest of $7.6 billion for doing whatever it pleases.

- Google is one of the top 10 Web brands in the United States, and the second-fastest-growing Web site, building traffic 29% in the past year, according to Nielsen/Net Ratings. Only Apple's Web site is more popular; Yahoo and MSN lag far behind.

- Google is king of search-related advertising, and search-related ads are the fastest-growing sector of the online ad business, which is growing at 41% annually, Piper Jaffray said.

- Google has almost twice as many search ad clickthroughs as runner-up Yahoo. In December, Google had 16.5 trillion ad clickthrough, compared with Yahoo's 9 trillion, according to Nielsen/NetRatings.

- Google earned $3.64 billion from U.S. online ad revenues in 2005, representing 69% of all paid search advertising, according to eMarketer.

Still, some prominent pundits are predicting a stumble for Google this year.

"Google isn't invulnerable, and in general the risks are where most people aren't looking," said Scott Kessler, an equity analyst with Standard & Poor's, who bucked the tide last week by saying in a research note that Google's stock was overvalued, downgrading the stock from hold to sell. Google stock prices took a hit as a result.

Google faces risks from being too dependent on search advertising, an onslaught of lawsuits--particularly one involving click fraud--eroding support from the public, lack of focus, and the competitive threat from Microsoft.

Google declined to comment for this article.

Too Dependent On Search Advertising

Google's chief strength--its dominance in the search advertising business--is also its main vulnerability. Currently, 99% of its revenue comes from search-related advertising. The remaining 1% comes from sales of its enterprise search appliance.

"Google needs to broaden its horizons," said Martin Pyykkonen, an analyst with Hoefer & Arnett, pointing to the fact that although Yahoo also gets the bulk of its revenue from advertising--85%--those dollars are divided 50-50 between search and display, or "branded" ads.

Online advertising is divided into two types of ads: search and display advertising. Search-related ads are the simple text-based ads that appear on the right side of the page after completing a search. Display, or branded, ads include the banner ads commonly displayed on Yahoo and America Online; they contain graphics and, increasingly, video and animation, and are placed on pages specified by the advertiser.

Display advertising is an area that Google has yet to venture into. And although Google owns nearly 70% of the paid search advertising market, it only controlled 28% of the $12.9 billion market for all online advertising in 2005, according to online market-research firm eMarketer.

"Google needs to make that leap into display advertising," said Charlene Li, a Forrester analyst. "Right now, their advertising base is really comprised of direct marketers, not traditional brand marketers, and they really don't have the expertise and credibility that Microsoft and Yahoo and AOL have in that area."

The foray into radio advertising with the dMarc acquisition is a step in the right direction, Li said.

David Schatsky, an analyst with Jupitermedia, agreed, "It's in the very early stages, but this radio venture is a natural new marketplace for Google to apply its advertising expertise."

And in general, competition in the search-based advertising segment is heating up, and will at some point restrain the revenue growth of Google and dampen its momentum.

Yahoo, especially, is a competitor to watch in the pursuit of search advertising dollars. "Yahoo has been a strong No. 2 for Google since early 2002, and continues to improve when it comes to search and related advertising," said Kessler. In 2005, Yahoo had a "solid" year, made substantial investments in people and technology related to search, broadened its index substantially, and continued to work toward investment in an improved algorithm.

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