Can Google's Search Ad Revenue Sustain YouTube, Diverse Ventures?

By Clint Boulton  |  Posted 2008-08-25 Print this article Print

Google has buttered its bread in advertising as the largest search engine. But some industry observers wonder whether Google's reliance on search to buoy its YouTube property and other investments, including Google Apps in the SAAS messaging and collaboration sector, is sustainable in the long run. Don't count out Google yet, as the company has spawned considerable application development efforts such as Android, which could be a big hit in the mobile and wireless smart phone space.

Is Google a one-trick pony?
That's a claim more than one Microsoft executive has made to dismiss the search giant, whose alleged one trick, its paid keyword business, has helped the company earn some $17.6 billion last year in online advertising.

At about 70 percent in the United States, Google's share of the search market and the ad revenue it generates as a result of this share is staggering. But the San Jose Mercury News published a story Aug. 22 in which sources questioned the company's financial strengths beyond search advertising.

The piece, by Chris O'Brien, is interesting and brings several supporting points to the table.

One, O'Brien argues that Google's ad sales growth slowed in the second quarter and that its margins could continue to dwindle. I refuse to hit the panic button after one weaker than usual quarter from Google and will reserve judgment until the end of the company's fiscal year in January.

Two, Google said in a filing to the SEC it believed its $1 billion investment in AOL was impaired, which is to say, the investment is looking like a washout. It's hard to argue with this. Watching AOL slowly slide downward is painful and I feel a bit of pain for any person or company vested in it, including Google.

Three, Google has purchased a lot of companies, two of which cost more than $2 billion combined. YouTube cost Google $1.65 billion while SAAS security unit Postini was $625 million. O'Brien notes YouTube, Google Checkout and other assets are not material, which is to say they don't make money for the company.

Google CEO Eric Schmidt has repeatedly discussed the importance of cracking the video advertising enigma to monetize YouTube and, while in-video ad tests proved promising, Google's skipper believes no one has found the bigger piece of the video ad puzzle.  

Then there is a litany of other smaller buys that have yet to pay dividends. Mobile social networking startups Zingku and Jaiku come to mind, as does VOIP (voice over IP) service GrandCentral. Google bought Android more than three years ago.

While the Android mobile operating system software stack exists, there still isn't a device on the market running it, though that is expected to change this fall. Don't tell me relax, these things take time. Three years is enough time for a company of Google's talent base.


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