LARRY PAGE'S NIGHTMARE: How Google Could Stumble And Fall Apart

Larry Page looking down
Bob Lee via Flickr

After 13 years, including more than 7 as a public company, Google is still on top of the tech world.

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The company generates an astonishing $3 billion+ in free cash flow every quarter, and is on track to earn around $10 billion on sales of more than $36 billion this year. That would be sales growth of more than 25%.

That's not a sick company.

Yet, we've heard rumblings from big investors like Roger McNamee, as well as venture capitalists and ex-Googlers speaking on background, that Google's best days may be behind it. The company has peaked.

And from the peak, there's only one direction: down.

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With that in mind, we decided to take a serious look at all the things that should keep Google CEO Larry Page awake at night -- and working hard during the day to prevent them from happening.

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1. Google is still mostly a one-trick pony.

pony
Doyle

The biggest problem with Google as a business is its dependence on a single source of revenue: search advertising.

Although Google doesn't detail its revenue by business segment, about 2/3rds of its gross revenue comes from Google Sites, with the remainder coming from partner sites (Google Network). The company also has significant traffic acquisition costs -- mostly revenue paid out to network partners.

So for instance, last quarter Google took in $6.74 billion in ad revenue on its own sites. That's mostly search, although YouTube may be approaching a billion.

But Google took in only $2.60 billion in network revenue. And it paid out $2.21 in traffic acquisition costs.

In other words, it's a safe bet that the majority of Google's revenue and the VAST majority of its profit still come from search advertising.

So what could go wrong with Google's search business?

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2. Google's search traffic goes flat.

flat tire
Lachlan Hardy via flickr

Search traffic is still growing across the board, and Google still has the lion's share of that traffic -- more than 80% worldwide, and around 65% in the U.S.

But that could start to change if the following things happen:

  • Microsoft's Bing and Yahoo keep chipping away at Google's share, especially if Yahoo's ongoing organizational dysfunction gets resolved.
  • Floods of new users coming on to the Internet in developing economies turn to local alternatives -- particularly Baidu in China.
  • The search spam problem gets so bad that users start turning away from search altogether.
  • A wild card, like Facebook beginning to feature Bing search more prominently, could steal more users.

But it's not just about market share...

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3. Users turn elsewhere to find product information.

Whisper/Secret
Flickr/Jason Hargrove

More important than Google's search share is its share of COMMERCIAL searches -- searches where a user is researching or buying a product. Those are the searches that get users to click on ads, where Google makes most of its money.

But there are increasingly lots of other places for users to turn:

  • Social network contacts -- friends on Facebook, and people they follow on Twitter -- become perceived as more reliable sources for product information than Google's mysterious algorithms. Just like real-world purchases are often driven by word of mouth.
  • Mobile users get product information directly from apps. This particularly benefits vertical sites with search engines like Kayak or Yelp -- instead of going to Google to find travel info or restaurant listings, users can just search these providers directly from their apps.
  • Amazon sells millions of Kindle Fires and possibly other mobile devices. Those users buy their products directly from Amazon -- no search necessary.
  • Daily deals sites like Groupon pick off bargain-conscious shoppers.
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4. Google runs out of levers to pull to increase revenue per search.

levers airplane cockpit
DieselDemon via Flickr

Even if Google's search share flattens or decline, Google has lots of other ways it can increasing the amount of revenue it gets from search advertisers.

The most obvious way is to tweak its algorithms to make sure that the most relevant ads appear at the top of every search query. That increases clickthroughs and also (arguably) helps users by giving them more relevant ads.

Google might have other levers to pull as well.

But at some point Google's search ads will reach a theoretical maximum efficiency -- advertisers will be getting the maximum bang for their buck and therefore won't bid up keyword prices, and users will be clicking on the ads as frequently as they ever will.

At that point, advertisers might start shopping around for alternatives...

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5. Social networks prove better results for advertisers.

mark zuckerberg jack dorsey facebook twitter
Illustration: Ellis Hamburger

Search ads are among the most effective form of advertising ever invented -- the user is already searching for a particular type of information, which means the ads are much more likely to be relevant than (say) a car commercial during a TV show. Plus, they're measurable -- advertisers know exactly how many clicks a search ad provides, and how many of those customers are buying a product online, and can adjust their spend accordingly.

But social networks like Facebook and Twitter may become even more effective. Those companies not only know what their users are doing right now, they have a store of information about their interests over time, and a map of all their relationships to friends and brands.

Last week, marketing firm Zenith Optimedia predicted that Facebook would surpass Microsoft to be the number three ad seller on the Web this year, behind Google and Yahoo. Two years ago, it wasn't even on the map.

More interesting, Twitter cofounder Jack Dorsey recently told us that sponsored tweets are getting a 3% to 5% response rate, with some -- like a Volkswagen ad -- getting a 50% response rate. That's a lot higher than even the most effective search ad campaign.

But isn't Google+ supposed to fix that?

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6. Google+ gets a lot of sign-ups, but not a lot of long-term engagement.

Bank of America Google Plus
TalkingPointsMemo

So far, Google+ is off to a great start: the social network has more than 40 million users after less than six months, and Google is starting to connect Google+ to every part of its network -- from Gmail to YouTube to search results.

But all the links in the world may not be enough to get users to devote a lot of attention to Google+. Social networking is a zero-sum game -- the more time you spend on one, the less you have for others. Facebook already has all your friends, LinkedIn your professional connections, and Twitter the people you want to follow.

If Google+ engagement drops off next year, Google won't be collecting the same kind of social data that its competitors already have.

But search isn't the only form of advertising Google sells...

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7. Display advertising slumps.

YouTube headquarters slide
Matt Rosoff Business Insider

Google's next logical big multibillion dollar business is display advertising. It runs a growing display network plus the biggest (by far) video site on the Web, YouTube.

But the display market is reportedly showing a slump this quarter, even if search is still growing. In general, Google faces more competition there, and the market is more vulnerable to swings in the economy.

At least there's still mobile ad revenue, right?

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8. Android spins out of control.

android fragmented
Lifehacker

The business case for Android is simple: Google gives the operating system away and lets hardware makers and carriers modify it to their own ends. But if a phone maker wants to sell an official Google certified Android phone, it has to do certain things -- like bundle links to Google search and other products.

Android has achieved dominant smartphone market share in less than three years.

But that hasn't yet translated to much mobile revenue. In fact, Google recently testified that two-thirds of Google's mobile searches come from Apple's iOS.

It could get worse, too. Companies are increasingly taking the core Android technology and bending it to their own ends. This is what Amazon did for the Kindle Fire, it's what Facebook is reportedly doing for its own phones, and it's what a lot of so-called "bandit' phone makers in China and other developing countries are doing to build their own OSs.

But soon, this won't matter because Google will own its own phone company, Motorola, which it can use to take on the iPhone head to head.

Unless....

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9. Feds block the Motorola deal.

sanjay jha motorola mobility ceo beaming
Ellis Hamburger, Business Insider

Antitrust regulators in the U.S. have taken a close look at several potential Google deals in the past. They've only blocked one: a search partnership with Yahoo, struck after Yahoo rejected Microsoft's buyout offer. That drove Yahoo into Microsoft's hands.

It probably won't happen again. But it could.

That would also make Android more vulnerable to patent litigation from Apple, Microsoft, and other competitors.

And that's not the only government risk Google faces....

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10. The EU cracks down, hard.

eric schmidt
Screenshot

The Motorola deal isn't the only place where Google is vulnerable to government intervention.

The European Union is currently in the second phase of its antitrust investigation against Google. It has the power to fine the company up to 10% of its annual gross revenue.

But the real hurt would come if the EU demands control over Google's search algorithms to make sure it treats competitors fairly. From then on, every time Google wanted to tweak its algorithms, it would have to check with the EU. Every time it wanted to make a major design change or roll out a new product with any kind of business listings -- same thing.

The U.S. Senate is also sniffing around, which could lead to investigations by the Department of Justice or other agencies.

The end result: a much more timid company that's afraid to roll out sweeping improvements to its core product.

But what about all those other businesses?

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11. Lack of focus and slipshod product releases sink efforts to build a thriving new business.

sleeping-dog
Daniel Goodman/Business Insider

Google is in about a million different product areas at once: search, mobile phones, local listings, e-commerce, self-driving cars, even shipping.

The company also seems to have gotten lazy with its product releases: the first version of products are too often unfinished, like Google TV (as per Logitech's CEO, who called it beta software), Google Music (which launched without a music store, then got only three of the big four record labels on board), and even Google+ (which launched without APIs for developers).

As its traditional businesses come under assault from market forces and government intervention, Google may wake up to find out it no longer knows how to buckle down, focus, and create a runaway market-changing hit like it did with search, Gmail, and Google Maps early last decade.

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WAKE UP! You're dreaming.

larry page
Flickr/Esther Dyson

None of this is going to happen.

Google will keep growing its search business by a billion a year for the foreseeable future. Google+ will become enough of a hit to keep advertisers interested. Those advertisers will keep buying display ads, particularly on YouTube, which will become a multibillion dollar business. Android will find the key to unlocking revenue without compromising the openness that got it so much market share, the government will stay out of Google's business, and Page's relentless culling of unnecessary products will give it the focus and drive it needs to create great new products.

It was all just a bad dream.

Or was it?

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