Technology

Google: In search of growth

Threatened by spammers and rivals, Google is facing its "Sputnik moment."

On Jan. 25, President Barack Obama stood before Congress for his State of the Union address and declared the U.S. a nation of “Google and Facebook.” The remark was part of his push for Corporate America to beef up its investment in innovation, and Obama placed the social network and the search giant alongside the likes of the Wright brothers and Thomas Edison. This is America’s “Sputnik moment,” the president said, warning that the country was in danger of falling behind its rivals.

But could the same be said of Google?

This is certainly a critical time for the iconic company. Over the past decade, what started with a blinking cursor on a simple white landing page has metamorphosed into a fast-spreading empire with 20,000 employees. Yet even as Google’s sales and share price continue their impressive growth, the company appears less invincible than it once did. Its almighty algorithm is being foiled by so-called content farms that sully the search results with marginally useful content. Its ballooning size and the resulting bureaucracy have hindered its ability to develop and launch successful products. Its business is threatened by the rise of “social search,” and it’s losing talent to Facebook, which looks set to eclipse it as the most recognizable name on the web. Add the fact that Google’s revenue still overwhelmingly comes from a single source — search advertising — and the one-time spry up-and-comer is increasingly looking like a lumbering tech giant struggling to find its next winning strategy.

Even some of the company’s biggest advocates are voicing concern over the obstacles it’s facing. Jeff Jarvis, author of What Would Google Do?, recently wrote an op-ed suggesting that perhaps Google’s biggest challenge — one directly affecting all the others — is its cumbersome management model. The lack of necessary agility and focus was evident in the company’s conflicted operating-system strategy that pitted its Android and Chrome products against each other, and in the unimpressive launches of new initiatives like Buzz, Wave, and Google TV. It seems clear, Jarvis wrote, that the company needs “clearer vision and strategy, and more decisive communication and execution of [them].”

Last month, Google moved to remedy that very problem by announcing that Eric Schmidt, CEO since 2001, was stepping aside in favour of co-founder Larry Page. The company said the shift represents an effort to streamline decision-making and make it more “nimble.” The reaction, however, has been skeptical. While Page is a tech legend, critics say he isn’t exactly cut from Jobs-ian cloth, being infamously shy and lacking executive experience.

The first item on Page’s agenda will likely be fixing Google’s bread-and-butter business. After years of offering trusted results, Google is finding its algorithm increasingly manipulated by online media firms such as Demand Media and Answers.com, reputed to employ armies of freelancers to produce cheap, low-quality content. They use keywords and search engine optimization (SEO) to ensure their material appears high in search results, vastly improving their click-through rates and advertising revenues.

In mid-January, Google declared war on search spammers in a blog post by the company’s principal engineer, Matt Cutts. Google’s focus, wrote Cutts, has shifted from combating “pure web spam,” now in decline, to fighting content farms. In 2010, Google launched two major algorithmic changes aimed at weeding out low-quality sites, but Cutts acknowledged that user dissatisfaction was “loud and clear,” and stronger action was needed. “The fact is that we’re not perfect, and combined with users’ skyrocketing expectations of Google, these imperfections get magnified in perception,” he wrote. “However, we can and should do better.”

The commitment was welcomed, but critics quickly pointed out that Google has a conflict of interest in any large campaign against content farms. The network revenue from its AdSense advertising program, which runs on the sites of affiliated publishers — including Demand Media — accounted for US$2.5 billion, or 30%, of Google’s total sales in the fourth quarter of 2010. Significantly cracking down on such AdSense partners could cause a hit to the company’s financial results. (Days after Cutts’s blog post, Demand Media’s IPO valued the company at US$1.5 billion — more than the New York Times Co.) Seattle-based SEO and marketing strategist John Andrews, for one, says Google’s real quality line is its page 1 search results, and he doubts any crackdown would extend much to the “essentially free money” in page 2 and page 3 content, where the risk of user complaint is lower.

The other growing challenge to Google’s search ad revenue is the rise of social search. The partnership between Facebook and Microsoft’s Bing search engine integrates comments from users’ networks of friends, providing arguably more personal, tailored results. This search competition adds another element to the already fierce rivalry between Facebook and Google for marketers’ online ad budgets. Estimates put Facebook’s 2010 worldwide ad revenue at US$1.86 billion, a 151% increase over 2009 estimates. While that pales next to Google’s more than $2 billion monthly ad revenue, the growth is nevertheless significant.

Some observers believe Google is set to make the transition from a growth company to a mature cash generator, like Microsoft, Oracle and eBay did before it. Salesforce.com CEO Marc Benioff recently compared Google’s stock performance to Microsoft and Yahoo. “Google is not the hot company anymore,” he told Fortune. “They have to get into some other place, and quickly.” Others question the giant’s ability to keep pace with the web evolution, especially in the social networking arena, and doubt it can maintain its high price-to-earnings ratio of 23 amid the challenges of finding new revenue to maintain growth.

Google and its supporters are aggressively countering such naysayers. For starters, they point out that the company’s share of U.S. paid search advertising actually grew last quarter to 82.6%, as Yahoo-Bing fell to 17.4%. In the final quarter of 2010, Google’s revenues beat expectations, surging ahead by 26% over the same quarter the previous year. David Hallerman, an analyst at research firm eMarketer, argues that Google’s growth statistics need to be put in the proper context. “The [percentage] growth at Facebook is so phenomenal, it dwarfs Google’s, but you have to look at real dollars,” he says. “The market Google dominates is still so huge that their [U.S.] revenue growth rate in 2010 is fantastic.” Facebook, he notes, is growing from a smaller base. “To be a giant [like Google] and to grow at that size means your new dollars coming on board are way beyond any other company.”

As for the long-standing criticism that it has only one true business line, the company points out that its success last year was due in large part to growing display advertising (within images and video, as opposed to simple text), doubling revenues for YouTube (which made a profit for the first time) and continuing strong adoption of Android. That operating system is already the world’s most popular mobile platform and sees 300,000 new phones activated every day.

Mobile, in fact, is the most promising source of continued growth for Google. Of course, everyone is declaring mobile the highest of priorities, but Google, through Android, has opened a huge window through which to reach more users. What’s more, the operating system’s high adoption rates are boosting app developers’ confidence in its market potential. The wide range of devices and networks that support Android initially made it difficult to establish a simple, consistent app environment for users and developers. At a January tech conference in San Francisco, Android platform manager Eric Chu even expressed disappointment with app sales so far. But the company is making moves to raise those sales by improving the app marketplace’s ease of use. This month, for example, Google introduced in-app payments, enabling users to make purchases within a mobile app, including paying for apps themselves.

Google has done a good job of adapting its traditional business of search and display advertising to the mobile space, with particular success on the highly buzzed local front. Hugo Barra, Google’s product management director for Android, points to products that give advertisers geo-location targeting abilities, such as “click to call,” which enables users to reach an advertiser by phone with one click on an ad. “There are plenty of products we’ve launched that are either optimized for mobile or uniquely mobile,” says Barra, singling out the company’s Voice Actions program that allows users to text and search by voice command. The display ad network with AdSense for mobile apps, as well as the AdMob mobile network, have both been “tremendously successful” at generating sales, says Barra, and have created a “thriving monetization ecosystem for app developers.”

The potential for growth in mobile is indisputable. And, answering President Obama’s call for action, Google continues to invest in innovation, with promising new products like Google Art Project, which offers virtual tours of some of the world’s top art galleries, and programs such as the global-initiatives think-tank Google Ideas, for which it plucked former U.S. state department star Jared Cohen last fall. In January, the company announced plans to hire more than 6,000 workers in 2011, its biggest expansion yet. Also last month, it launched Google Offers to compete with the online discounter Groupon, which had spurned its reported US$6-billion acquisition offer in December.

The question is whether any of these initiatives can even partly replicate the success of search, and in so doing, significantly diversify the company’s revenues. Google seems unbowed by the barrage of questions about its growth prospects. Its betting on mobile, and betting big. “Anything we do to get more users connected to the Internet with their mobile phones will benefit Google,” says Barra. “It’s really as simple as that.”