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Google, Mighty Now, but Not Forever

FEB. 11, 2015

Photo

A Google employee preparing his gear before setting out to capture images of Liberty Island in New York for Google Street View. Credit Michael Appleton for The New York Times

Farhad Manjoo

STATE OF THE ART

Technology giants often meet their end not with a bang but a whimper, a slow, imperceptible descent into irrelevancy that may not immediately be reflected in the anodyne language of corporate earnings reports.

Old kingpins like Digital Equipment and Wang didn’t disappear overnight. They sank slowly, burdened by maintenance of the products that made them rich and unable to match the pace of technological change around them. The same is happening now at Hewlett-Packard, which is splitting in two. Even Microsoft — the once unbeatable, declared monopolist of personal computing software — has struggled to stay relevant in the shift from desktop to mobile devices, even as it has continued to pump out billions in profits.

Now Google is facing a similar question about its place among tech’s standard bearers. And like those companies before it, its strength today — a seemingly endless reservoir of ads next to search results — may turn out to be its weakness tomorrow.

“I’m not saying that Google is going to go away, just as Microsoft didn’t go away,” said Ben Thompson, a tech analyst who writes the blog Stratechery. “It’s just that Google will miss out on what’s next.”

At first glance, the Mountain View, Calif., company looks plenty healthy. It generated $14.4 billion in profits in 2014 and revenue was up 19 percent from the year before. Google accounts for three-quarters of the world’s web searches, and the company also controls Android, by far the world’s most widely used mobile operating system, and YouTube, the world’s most popular video site.

Yet a look behind the search bar shows cracks. Growth in Google’s primary business, search advertising, has flattened out at about 20 percent a year for the last few years. The company’s financial results have failed to meet consensus analysts’ expectations for five straight quarters. And its stock price has fallen 8 percent over the last year.

Although Google has spent considerable resources inventing technologies for the future, it has failed to turn many of its innovations into new moneymakers. About 90 percent of Google’s revenue is from ads, most of that on its search engine.

But as smartphones eclipse laptop and desktop computers to become the planet’s most important computing devices, the digital ad business is rapidly changing. Facebook, Google’s archrival for advertising dollars, has been quick to profit from the shift.

Google’s place in the future is less clear.

In a much-discussed article published last fall, Mr. Thompson argued that the search company is ill suited to capitalize on the huge cache of ad dollars that marketers now spend on TV — a bundle of money that is slowly shifting to mobile apps.

Here’s why: The advertising business is split, roughly, into two. On one side are direct-response ads meant to induce an immediate purchase: Think classifieds, the Yellow Pages or catalogs.

In 2000, Google began running text-based ads alongside its search results. These ads quickly became one of the world’s most successful forms of direct-response advertising. In 2014, Google sold about $45 billion in search ads.

But Google’s enormous search haul is only a slice of the $550 billion global advertising market, according to the research firm eMarketer. As Mr. Thompson pointed out, most of that money is not in direct response ads like Google’s.

Instead, the bulk of the ad industry is devoted to something called brand ads. These are the ads you see on television and print magazines. They work on your emotions in the belief that, in time, your dollars will follow.

Google is great at information but it is still learning emotion.

This gets to the crux of Mr. Thompson’s argument that Google has peaked. The future of online advertising looks increasingly like the business of television. It is likely to be dominated by services like Facebook, Snapchat or Pinterest that keep people engaged for long periods of time.

“Google doesn’t create immersive experiences that you get lost in,” Mr. Thompson said. “Google creates transactional services. You go to Google to search, or for maps, or with something else in mind. And those are the types of ads they have. But brand advertising isn’t about that kind of destination. It’s about an experience.”

Google disputed the idea that it may face a challenge in brand advertising. “The brand and video advertising opportunity is huge and we feel well positioned to invest with confidence and excitement,” a spokesman said.

YouTube attracts more than a billion users a month, and the company thinks that if ad dollars begin flowing from TV to the Internet, a lot of that money will flow to YouTube.

At YouTube’s headquarters just south of San Francisco, Google built a huge workshop it calls BrandLab, where sales people shepherd representatives from big advertisers like Coca-Cola and Toyota through online advertising lessons.

Google has also created technology to measure how marketers’ ads affect potential customers, which was not so easy to do in the predigital era. And it keeps investing in its formidable ad infrastructure, including technology to serve up and measure how ads are performing, and a staff of thousands of sales people.

The problem for Google, though, is that its efforts aren’t impossible to replicate. In less than five years, Facebook has also built an enviable ad-technology infrastructure, a huge sales team that aims to persuade marketers of the benefits of Facebook ads over TV ads, and new ways for brands to measure how well their ads are doing. These efforts have paid off quickly: In 2014 Facebook sold $11.5 billion in ads, most of them on mobile devices. That was up 65 percent over 2013.

Any number of up-and-coming social services, including Pinterest and Snapchat, could also do well. So even if YouTube does very well, it will be only one of several services where marketers want to spend their money.

“The movement of brand advertising into digital will probably not be winner-take-all, like it was in search,” said Ari Paparo, a former advertising product director at Google who is now the chief executive of an ad technology company called Beeswax. “And if it were to be winner-takes-all, it’s much more likely to be Facebook that takes all than it would be Google.”

Google would still make a lot of money if it doesn’t dominate online ads the way it does now. But it would need to find other businesses to keep growing.

Perhaps this explains why Larry Page, the company’s co-founder and chief executive, recently delegated responsibility for most of Google’s products to a subordinate, allowing Mr. Page to focus on strategy. It could also explain why Google’s research and development spending increased to $2.8 billion in the fourth quarter, from $2.1 billion in the same quarter a year ago.

That spending, on projects like a self-driving car, Google Glass, fiber-optic lines in American cities and even space exploration, generates plenty of buzz for the company.

But the far-out projects remind Mr. Thompson of Microsoft, which has also invested heavily in research and development, and has seen little return on its investments.

“To me the Microsoft comparison can’t be more clear,” he said. “This is the price of being so successful — what you’re seeing is that when a company becomes dominant, its dominance precludes it from dominating the next thing. It’s almost like a natural law of business.

NYT