Google (GOOG): Once Goliath, Now Ordinary

Google’s (GOOG) earnings disappointed Wall St. and pushed the stock down nearly 8%, but the message from the numbers is more profound than a little shortfall. Google’s net was up 35%. The firm reported revenue of $5.37 billion for the quarter, an increase of 39% compared to the second quarter of 2007. From 2004 and 2005, Yahoo!’s (YHOO) revenue rose 47%. That is not so long ago.

Yahoo! is now simply an also-ran portal being fought over by raider Carl Icahn and Microsoft’s (MSFT) Steve Ballmer.

It would be a mistake to draw to fine a comparison between Yahoo! and Google. In 2002 and 2003, Yahoo! had made a decision to focus on being a content company and had calculated that search was of secondary strategic importance. It was ignoring the rise of Google, betting that display advertising was the profitable route to the future. Yahoo! made its own bed. Google, in focusing on search, seems to have made a better one by focusing on a market that almost all observers feel is the long-term growth engine of the internet’s future.

The sum of the wisdom of almost all observers can sometimes be wrong.

Google has run up against the analyst’s cliche, the "law of large numbers". A company its size cannot grow at 60% forever. It would be bigger than GE (GE) in the blink of an eye.

Google’s earnings do reinforce the one concern that some on Wall St. have. The firm has decided to focus on search, largely to the exclusion of other promising businesses in its stable. It knows one trick, and it knows it well. Perhaps too well.

Google has not done much to financially exploit its YouTube franchise, as dominant in online video as Google is in search. Its applications business, a clear threat to Microsoft, has not been rapidly updated or aggressively marketed.

Google does not run advertising in its extremely large News section or its more modest Finance product. Even though the display advertising market has modest growth potential, Google has not done much to use its superior targeting software to make its mark and take share from weaker competitors.

Google is betting that its Android product will get it a large foothold in the mobile handset business, but there is no evidence that its products for this market are beating Yahoo! and Microsoft the way that the search company beats them on the PC.

Google has decided that its strength is worth nearly its entire focus, and that, in and of itself, is the company’s weakness.

Douglas A. McIntyre