Google's Party Is Far From Over!

In a recent Fortune cover story, "Google: The Search Party Is Over," Michael Copeland argued that Google (Nasdaq: GOOG  ) is unsure how to move beyond its core business and that it is transitioning from a growth company into a slower-moving "cash cow." I asked Motley Fool Inside Value's new advisor, Joe Magyer, to help us sort through all the odds and ends that are the Google machine.

Jordan DiPietro: First things first. Michael Copeland notes that Microsoft's (Nasdaq: MSFT  ) Bing has gained search engine market share this year (now at 12.7%). Is Bing's potentially rising popularity anything Google should be nervous about?

Joe Magyer: Bing has gained share, but I'd keep in mind that Google still boasts 62.6% of the U.S. search market. Even when you bundle Yahoo!'s (Nasdaq: YHOO  ) 18.9% share, Google is still processing a vastly larger number of searches than its soon-to-be-connected rivals. The more searches that flow through Google, the sharper its search results become. And with Google already owning the sharper saw and processing more searches than a combined Bing and Yahoo venture, that means the quality gap between Google and Bing should only widen.

Overcoming that performance gap is no small feat. If you think I'm just whistlin' Dixie on that, need I remind you that Google, despite years of efforts by Microsoft, still has five times Microsoft's search share here in the States? I'll also add that while Bing has picked up a little bit of share recently, Microsoft isn't positioned anywhere near as well as Google in the fast-growing world of mobile search, of which Google controls a dominant 98% of the market.

That's all to say, yes, Bing is a competitive threat that should keep Google on its toes, but Google is still the biggest dog in this fight and well-positioned to stay that way.

DiPietro: Copeland explains in his op-ed that Google generates about 91% of its revenue and about 99% of its profit from the search business. In essence, he asserts that Google is becoming a "former supermodel" because the growth of the search business is slowing and the company's paltry performance this year can be partially attributed to that fact. Is Google actually becoming a slow-grower, and if so, do you think that's why shares are down so much this year?

Magyer: I'd love to see Google rake in more cash via non-search businesses such as Google Checkout, but I'm not unsettled by the company's reliance on search. In fact, don't even think of Google as a search engine. Think of it as a company with a host of business units (search, Gmail, YouTube, Chrome, Android, etc.) that all happen to derive value from an advanced underlying advertising platform.

As far as growth goes, sure, Google's ga-ga growth days are in the rearview. You can only double your revenues so many times, right? But that doesn't mean Google doesn't still have a growth runway ahead or that its shares aren't attractively priced. The number of searches that flow through Google should rise as more users come online, and its pricing power should rise over time as more and more marketers come to appreciate the targeted, high-ROI value of Web-based advertising.

DiPietro: A significant portion of Copeland's article described the peripheral threats to Google -- the fact that people can obtain information utilizing social options such as Facebook and Twitter. How big of a threat is this to Google's core business?

Magyer: I agree that Facebook is a future major rival of Google's, if for no other reason than it consumes so much user mindshare. It could easily become a rival for advertising dollars, though, should it start better leveraging its vast network and knowledge of its users. Social networking is here to stay, and Google hasn't cracked that code just yet. I'll be closely watching its upcoming forays, though, along with Facebook's creep into advertising.

DiPietro: As you mentioned, Android OS is arguably one of Google's most successful innovations thanks to the help of big-time telco players like Verizon (NYSE: VZ  ) and Sprint (NYSE: S  ) and handset manufacturers HTC and Motorola (NYSE: MOT  ) . That said, it contributes little in terms of profits. Considering the outstanding growth in mobile devices and Google's limited success in the smartphone market, where will Google go next in mobile? Does it want to compete with players like Apple (Nasdaq: AAPL  ) , or does it just focus on advertising?

Magyer: Android is deceptively valuable, quietly growing like wildfire and guaranteeing Google a seat at the OS table for the high-growth mobile market. Thanks to its rapid adoption among consumers and cost-conscious handset manufacturers, the quality of the OS, and the ecosystem developing around it, it isn't difficult to picture Android effectively becoming to handsets what Windows is to PCs. Google is activating about 200,000 Android-powered handsets daily -- more than twice the number from only two months ago.

Like I said earlier, Google wins as more users come online and perform searches on its network. The creation of Android has helped ramp up the smartphone adoption among consumers, driving additive new searches in Google's direction. Mobile search could prove a huge growth driver for Google in the years ahead, not to mention any number of creative ways Google can monetize a large installed base of operating systems. As CEO Eric Schmidt recently put it, "If we have a billion people using Android, you think we can't make money from that?"

What do you think about Google -- are the days of high growth over or have they just begun? Sound off in the comments box below!

Neither Jordan DiPietro nor Joe Magyer owns shares of the companies named above. Microsoft and Sprint Nextel are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers choice. Apple is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2010, at 4:14 PM, Fjnmusic wrote:

    Google is a great search engine, whether you are looking for web pages, images, or how to convert square feet to square meters. That being said, Google's primary income is from advertising--the most annoying part of the Internet. They actually consider themselves successful if you click the X to get rid of those ads on YouTube videos, because it means you've at least acknowledged the ad. If Google is serious about "not being evil," it needs to find a less annoying way to make money and at the same time bring something new to the game, as Apple has done with the iPad. If they want to become the new "Windows of the mobile world," they'll end up with about as much respect as Windows now has.

  • Report this Comment On August 14, 2010, at 6:07 PM, Henry3Dogg wrote:

    No mention of Oracle and Java.

    And how do Google 'control' 98% of the mobile search market considering the size of Nokia, RIM, Apple in mobile browsers. Currently they may channel mobile browse to Google, but that is not 'control'.

  • Report this Comment On August 15, 2010, at 11:54 PM, TMFJoeInvestor wrote:

    @Henry3Dogg,

    I agree that the Oracle suit isn't irrelevant, but I'll add that Google's shares only dropped about 1% on the news. That probably speaks to some mix of the market's skepticism over the validity of Oracle's suit or that the market assigns little value to Android to begin with. Anyone curious to lean more should check out Anders' piece for additional color: http://www.fool.com/investing/general/2010/08/13/what-goes-a...

    Yep, Google doesn't "control" the channels to the same degree to which it gets its share. That said, they're obviously working hard and fairly successfully to change that via widespread adoption of Android. For that matter, I'm still a little skeptical that a quality hawk such as Apple would choose to default to a second-rate search offering (Bing). I know that one has been through the rumor mill several times now and the option probably becomes more and more attractive to Apple as Android gains share, but I'm still a little skeptical that such a deal plays out.

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