Busting the Myth of Innovation at Google

The challenge for any company built on innovation is keeping the innovation flame burning. History tells us that even the most innovative companies don't keep the flame burning for long, and there are signs that that time may be coming to an end for Google (Nasdaq: GOOG  ) .

Google is still a great inventor; that I am not questioning. It can come up with ideas with the best of them. But when I wrote the intro to our "Innovation in America" series, I distinguished the two by saying that "invention is the process of turning money into ideas; innovation is turning ideas into money."

When it comes to turning ideas into money, Google peaked when it came out with AdWords and AdSense (technology it actually acquired) years ago. These revenue streams, driven by the company's algorithm to match content with relevant advertisements, still dominate the company's revenue and are basically the foundation of Google's fortress-like moat.

Efforts to expand the business have been fun and entertaining for those of us using Google products. Google Earth, Gmail, Google+, YouTube, and other applications are fun and productive, and they're great inventions, but they don't drive revenue for Google the way that search does. In this respect, Google is really a one-trick pony, and everything else it does is just an attempt to drive traffic to capture advertising revenue.

Even the emerging smartphone business, where the company has a dominant position, doesn't make the company significant money. Unlike Apple (Nasdaq: AAPL  ) , Google has yet to turn this invention into an innovation, instead relying on smartphone users viewing ads on the Web, YouTube, or another Google ad placement mechanism.

Acquisitions gone wrong
The first major sign I look for that a company is loosing its innovation edge is a company focusing more on acquisitions than growing new products in-house. When Google agreed to buy Motorola Mobility last year, it was just the latest in a long line of product expansion acquisitions that kill innovation and suck the life out of a company. If this week's news that 4,000 jobs would be cut from the newly acquired company is any indication, the deal may already be running into challenges.

Recently the company added Frommer's and Wildfire Interactive to its ranks, costing nearly $500 million in total. Since the start of 2010, the company has made an astounding 60 acquisitions, nearly one every two weeks. This isn't what a company building innovative products does.

For an example of what happens to an innovative company over time, Hewlett-Packard's (NYSE: HPQ  ) challenges can be traced back to when it purchased Compaq, a company that changed the company's focus from innovation to operational excellence in a commoditized business. The company that began in 1937 survived by constantly reinventing itself through innovation, something it has failed to do in the past decade.

Innovation fades fast on the Internet
If you think Google's position atop the Internet's food chain will last forever, just look at history. Yahoo! was once the dominant search engine, MySpace was the innovative social network before Facebook (Nasdaq: FB  ) , and Geocites was the most popular website in 1997.

Things change fast, and Google doesn't seem to be coming up with new businesses that will pad the company's results the way a competitor like Apple can. Instead it's relied on acquisitions, not a normal strategy for a company that's supposed to be an innovator.

Foolish bottom line
Google will continue to grow along with the Internet -- that I don't question. What I am wondering is whether the company will ever be able to branch out beyond search-based products the way innovative companies before it have been able to do.

Google throws a lot at the wall, and some things stick to become useful inventions, but the company's list of moneymaking innovations are few and far between. Google may be the greatest inventor in Silicon Valley, but when it comes to innovation it isn't in the same vicinity as Apple.

So, how has Apple been able to innovate and stay ahead of the competition? Our Apple analyst discusses the company's incredible rise and how the company can stay on top in our report on Apple. Find out more here.

Fool contributor Travis Hoium manages a portfolio that owns shares of Apple. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Facebook, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Facebook, and Google and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (7)

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 15, 2012, at 9:41 PM, aza400 wrote:

    Someone should write an article on why ever article Fool writes about GOOG is negative. "Search is like a moat around google" its the only innovative thing that makes them money, huh?? They bought Youtube and the revenue is growing, they bought Motorola and are cutting 4000 jobs and stream lining and creating gadgets like Nexus 7. They just bought Frommers and Zagats which will allow for better content and lead to advertising. As an investor what am I missing here?? No wonder the site is called Motley Fool.

  • Report this Comment On August 15, 2012, at 9:48 PM, OrangeBurka wrote:

    I am interested in Google Glasses and Google Car as being ground breaking technologies.

  • Report this Comment On August 15, 2012, at 9:54 PM, TMFJoeInvestor wrote:

    You make some fair points, Travis, but ignore a recent monster success -- Chrome, which upended web browsing and brought Google much closer to the customer.

  • Report this Comment On August 16, 2012, at 7:12 AM, skypilot2005 wrote:

    On August 15, 2012, at 9:54 PM, TMFJoeInvestor wrote:

    "You make some fair points, Travis, but ignore a recent monster success -- Chrome, which upended web browsing and brought Google much closer to the customer."

    Yup.

    Sky

  • Report this Comment On August 16, 2012, at 7:51 AM, SuntanIronMan wrote:

    "Things change fast, and Google doesn't seem to be coming up with new businesses that will pad the company's results the way a competitor like Apple can. Instead it's relied on acquisitions, not a normal strategy for a company that's supposed to be an innovator."

    Apple has relied on acquisitions as well. Quite a few of them. The software behind what would become Mac OS X was acquired by Apple. Steve Jobs owned that company and sold it to Apple after he came back. So it isn't quite the same as most acquisitions. But there are others. The software behind what would become iTunes, for example, was acquired by Apple. That's a big one. And there are more:

    Software behind behind Final Cut Pro...

    Software behind Garage Band...

    Technology behind Apple's multi-touch gesturing...

    Technology used in the A4, A5, A5X and probably future processors...

    Software behind iTunes Cloud...

    Software behind iAds...

    Siri itself (already an app before Apple acquired them)...

    Software behind the new Maps app in iOS 6...

    Once you get the size of an Apple or a Google, it just becomes easier to acquire good ideas. Nature of the beast.

  • Report this Comment On August 16, 2012, at 11:12 AM, jinchoice wrote:

    I'm sorry, but it doesn't look like the author really understands Google.

  • Report this Comment On August 16, 2012, at 11:18 AM, ryanalexanderson wrote:

    > You make some fair points, Travis, but ignore a recent monster success -- Chrome, which upended web browsing and brought Google much closer to the customer.

    I could say the same about Android. Travis' main point was this: "invention is the process of turning money into ideas; innovation is turning ideas into money."

    I don't think Google needs to get any closer to the customer; they just need to get a more diversified income than Adsense!

  • Report this Comment On August 16, 2012, at 11:32 AM, TMFFlushDraw wrote:

    @ryanalexanderson

    Thanks for understanding my point.

    The success of Chrome and Android are only ways to expand Google's core business -- search.

    Saying Google is innovative because Chrome and Android are successful would be like saying 3M is innovative because it now makes Post-It highlighters and flags. The big innovation was the Post-It note, everything else is just a line extension.

    These extensions are nice, but they aren't game changing for the business and shouldn't perpetuate Google's innovative reputations. I still use Google search on my iPhone and use Google search whether I'm using Chrome or Safari. Chrome hasn't made me add any other Google products either, much less something I would pay for. How are these things making money? -- Which is what innovation is all about.

    Travis Hoium

  • Report this Comment On August 16, 2012, at 11:37 AM, DCUDFlyer wrote:

    Not sure where to begin on where this article missed the mark, but "If this week's news that 4,000 jobs would be cut from the newly acquired company is any indication, the deal may already be running into challenges." is a great start. I guess GOOG should have just let the wildly successful (sarcasm) Motorola just continue to operate as-is?

  • Report this Comment On August 16, 2012, at 11:57 AM, nabeel1127 wrote:

    While I do see what the author is talking about, my biggest concern is that Android and Chrome are huge for Google. And these products actually do increase revenue for Google. Chrome allows better communication for Google's adsense and more data gathering capabilities. Android employs adSense for all of its advertisements in apps, not to mention the money the Google Play Store makes through application purchases. The purchase of Motorola could also prove to be very smart because it gives Google a hardware manufacturer that could possibly now house the Nexus line... then you've got products like the Google Glasses and the Google Car.

    I'm sure there is much more to be said on all sides of the argument. However, to look at each product with such a shallow perspective hurts your readers.

  • Report this Comment On August 16, 2012, at 12:02 PM, nabeel1127 wrote:

    Also, I would like to say that Chrome and Android are innovations, as well as inventions. They are bringing in money, regardless if it's in a stand alone fashion or if it's by helping to expand a core competency of a company. The methods Google is employing will allow it to stay on top of the internet food chain, unlike Yahoo. This is because it is increasing everybody's reliance on Google products.

  • Report this Comment On August 16, 2012, at 1:07 PM, AlanDJ wrote:

    Sorry to be the grammar police, but the writing on fool.com is usually of pretty high quality. It should be "losing its innovative edge", not "loosing its innovation edge"

    This is an understandable, and forgivable, mistake when made by the many people who write English as a second language. But c'mon, native speakers, you should know better.

  • Report this Comment On August 16, 2012, at 1:23 PM, starz188 wrote:

    I'd be curious to hear what example the author might provide for a company that still continues to innovate (by the author's definition) after it hits a certain market cap. Say, $25B+...

    Pepsi has it's core product (soda). It's acquired many others, like Frito-Lay.

    Cisco has it's core product (networking). It also makes acquisitions.

    Caterpillar has its heavy equipment. Wal-Mart has it's prices.

    All of these major, major companies have built a tremendous business around a core product. Then cue the line extensions, sure. But to say Google doesn't innovate?

    The work they're doing with augmented reality (Glasses) and vehicular automation (Car) is really some serious stuff. Whether it will financially pan out for Google is to be seen...but that's innovation.

    The author seems pretty keen on Apple, and they certainly have been an innovative company. But they didn't create the concept of a mobile phone nor a tablet computer. They simply improved upon the original ideas.

    I don't own shares of any of the companies mentioned, but I can still recognize how a business functions and the NEED to refine and improve upon core offerings while also innovating.

    Perhaps I define innovation differently...

  • Report this Comment On August 16, 2012, at 1:37 PM, cholero wrote:

    Google Play, their content store, is poised to produce a new revenue stream. It remains to be seen of course if it gains traction, but as a consumer who has used it a few times it is a viable to iTunes or Amazon.

  • Report this Comment On August 16, 2012, at 3:34 PM, MatiasR wrote:

    Ok. So Apple is innovatitive by inventing the smartphone, the laptop and the tablet computer, and Microsoft is by making money on the idea "of search" and the idea "of mobile" (oops, it isn't) and Amazon isn't on their ground breaking ideas (oops, it is) - I saw your holdings, long MSFT, short AMZN. I don't think you know much abouth innovation to begin with.

  • Report this Comment On August 16, 2012, at 5:06 PM, HectorLemans wrote:

    Google's stated mission is to organize all the world's information. That alone does not a company make (as Yoda would say). Creating effective ads using that information is how they make their money. If you're investing in Google because you want them to do something besides fulfill one of those two prerogatives, then you won't be a happy investor.

  • Report this Comment On August 16, 2012, at 9:51 PM, TempoAllegro wrote:

    Hi Travis,

    I would like to add to the discussion that it seems to be a difficult matter to determine the difference between invention and innovation at times and sometimes this can only be done in hindsight. I think in reality, Google is just a bunch of smart people sitting around with both a lot of money and new ideas and they are simply trying to figure out how to make more money with those ideas and their current stash of money. What you call it does not really matter in the end.

    And by the way, some of those things you are labelling as inventions - seeming to be less worthy, such as YouTube, may simply be premonitized innovations. Besides, all of the great things Google is into adds to the grand ecosystem, from which synergies will be milked in the future in some kind of monetization scheme one of those bright folks will figure out eventually because it is in their best interest to do so.

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