Brace yourself for an unthinkable (and potentially earth-shattering) idea:
Google (NASDAQ:GOOG) doesn’t walk on water anymore.
Five years ago, the idea would have been unthinkable. Now … well, it’s still relatively unthinkable, but only because investors have become so used to things being a certain way that it’s tough to imagine anything else. Change happens, though, and often when we least expect it.
There’s little doubt that merely positing the idea will enrage Google die-hards. Before anyone from that camp overreacts, however, take a deep breath and re-read the theory.
It’s not suggesting Google is no longer the king of web search, and therefore no longer the king of online advertising. It’s just suggesting that Google has been demoted from “great” to just “good.” However, that means investor expectations need to be adjusted accordingly.
It’s the Little Things
The suggestion that Google is losing its luster isn’t based on one monumental setback. Rather, it’s based on a lengthening string of little things that — in sum — paints a bigger picture. Those little telling stumbles include:
- Google’s “search” market share isn’t growing; it might even be shrinking. The numbers vary slightly from one study to the next, but none of them show Google as winning any new significant market share for the past few years. Compete.com indicates that Google’s market share in the search arena — which includes powering the AOL (NYSE:AOL) search engine — stood at 65.7% for August. That’s significantly below the 68.3% market share it held a year earlier. And it’s not like it’s losing market share to a powerhouse like Facebook (NASDAQ:FB). Microsoft (NASDAQ:MSFT) saw its Bing search engine ramp up its market share from 15% of all web searches in August 2011 to 19.2% in August 2012. It wasn’t very long ago that Bing was the butt of the search engine industry’s jokes. Now it’s growing faster than any of them.
- Facebook beat Google to the punch when it came to selling the idea (and proving the benefit) of real-time ad bidding. Contrary to popular belief, Google has been offering real-time ad bidding since 2011, while Facebook only unveiled it a couple of months ago … largely because investors were proverbially standing at Mark Zuckerberg’s doorstep with pitchforks and torches in hand. Yet, many advertisers already have tapped into Facebook’s new Ad Exchange real-time ad bidding platform and still don’t know that Google offers the same service. Given that the approach (real-time) is the future of online advertising, investors should have expected Google to lead the way.
- Google is facing more and more legal headwinds (that ultimately crimp profits). Linux, oogle.com, Viacom (NASDAQ:VIAB) and Apple (NASDAQ:AAPL) are just some of the companies that have won a case against Google during the past year or so. Countries that have somehow won a court case against Google within the past several months include Australia, Germany and Italy. Now Vringo (AMEX:VRNG) is making what has turned out to be a surprisingly strong case against Google that could end up rocking the company to its core. The plaintiff is arguing the algorithm that has made Google such a popular search engine is actually a Vringo-patented approach — and what’s more, it’s starting to look like the court, as well as the public, agrees.
Any one of these stumbling blocks by themselves might be dismissible as bad luck. But when you see all of them materialize around the same time — along with a slew of other nagging headaches — a bigger picture starts to get painted.
What’s Really Going On?
There are a few different ways to say it, but there’s just one overarching theme in play here: Google has become a big, bureaucratic machine, and made it completely possible for its employees to focus on their projects without keeping in mind that the whole point of running a business is to make an ever-growing amount money.
Don’t misunderstand. Google is profitable, and will be profitable for the foreseeable future. It’s a victim of its own success, though … growing so big that it’s no longer run like a startup. The problem is, that startup mentality is the only thing that made Google truly great in the first place, as it was more proactive than reactive then.
Google’s unwieldy size also is a big reason why its acquisitions don’t seem to help much anymore.
For instance, the acquisition of YouTube and SketchUp in 2006 really meant something for the top and bottom line. Bringing DoubleClick into the fold in 2007 meant something, too. More recently, the acquisitions seems to be reiterations of prior acquisition, or relatively unhelpful. The pick-up of Motorola Mobility in late 2011, for instance, should have been a game-changer. Now it’s not all that clear whether the company has an idea of how to fully leverage the acquisition.
Bottom line? Google looks like it’s on its way to becoming the typical all-American big company.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.