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

    By
    Clint Boulton
    -
    August 25, 2008
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      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.

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

      =Page 2}

      O’Brien offers some good points, and I realize it was a column-style piece, but he only quotes bearish analyst Trip Chowdry, who challenges him to name anything Google has been successful in besides search. Ouch. That’s like saying two-thirds of the company is driftwood carried along by the online ad tide.

      Further, Chowdry said Google’s board and management needs a total overhaul. I’m not sure anyone else agrees with that given the current lofty position Google enjoys, though at least one other pundit agrees that Google’s success has been rather one-sided.

      IT expert Stephen Arnold, known for eternally poking the Big Search Bear, agreed with O’Brien’s article in this Aug. 25 blog post. He noted, among other things, that Google built its empire around search and has been riding that wave for nine-plus years, while other assets have yet to flourish.

      Given Google’s reliance on its search ad business for the bulk of its earnings, it’s hard to argue with people building a case against Google’s staying power in the face of an online ad market crash or the emergence of formidable competitors, such as Microsoft.

      But O’Brien, Chowdry and Arnold fail to consider a key component of Google that is challenging the perception that Microsoft is the only vendor that matters in desktop productivity and collaboration.

      For some reason, the piece ignores Google Apps. Now, we don’t know how much (or little, for that matter) Google makes from its Apps, since Google won’t break out numbers that would no doubt be shamed by Google’s ad business. After all, Google gives Apps away for free and casually tries to wrangle $50 per user per year for a premium edition.

      But I have talked to several Google Apps customers and, despite some recent outages that stung users and the company, they are thrilled that they have an alternative office suite to turn to. They say it’s good enough for their needs.

      This will eventually trickle over to big businesses. I’d argue Postini, the security foundation for Google Apps, along with the handful of SAAS word processing and presentation purchases, are paying dividends.

      I’m not saying Google Apps will become a multibillion-dollar business later this year, or next. But I do believe Google’s powerful search ad business can float the company until Google Apps, YouTube and some of the company’s other risky investments begin to bear some tasty fruit over the next three to five years.

      Even Arnold noted in his post:

      I’m not sure I want to count Google out just yet. Google is one tiny step from becoming a commercial publisher and a video production company. The company has mow [sic] through other business sectors quickly and only put effort into those where money begins to flow. That’s what makes Google a threat in the short term and for the longer term as well.

      I couldn’t agree more with that assessment. With knol, YouTube and other services, Google is looking more and more like a new media company.

      Clint Boulton
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