Is This Google, Inc.'s Biggest Risk?

Every business faces risks. To help investors understand the dangers on the road ahead, the Securities and Exchange Commission requires publicly traded companies to list the most significant business risks in every 10-Q and 10-K filing. "Some risks may be true for the entire economy, some may apply only to the company's industry sector or geographic region, and some may be unique to the company," it explains. In most cases, these risks are listed in descending order of importance, though the SEC doesn't exactly demand management to rank risk factors this way.

I would argue that Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) decided to take liberties with its risk-ranking order.

In the online search and advertising giant's most recent 10-Q filing, Google lists 29 significant dangers to its financial health. No. 1 on that list is a rather boilerplate explanation of the intense competition Google faces, forcing the company to stay innovative if it wants to stay alive.

As a Google shareholder, I don't see this as the biggest business risk. Yes, Google has a ton of serious competitors. But it is also one of the most innovative organizations on the planet. If anybody knows how to stay a step ahead of the competition by sheer innovation, it would be Google. So I'm not particularly worried about the supposedly largest risk that Google reports.

The biggest real hazard: Mobile ads not powered by Google
If there's one risk factor that gives me sleepless nights as a Google investor, it would be the third one in the latest 10-Q rundown:

More people are using devices other than desktop computers to access the Internet and accessing new devices to make search queries. If manufacturers and users do not widely adopt versions of our web search technology, products, or operating systems developed for these devices, our business could be adversely affected.

I was going to boldface the most critical bits of this warning, but it's actually the whole thing that deserves attention.

Let me restate the risk in simpler language: "Mobile apps are replacing the old Web browser as a way to consume the Internet these days. Google makes a ton of money on web page advertising, so we'll lose money if people stop viewing our ads."

Lather, rinse, repeat -- until someone else steals Google's mobile advertising lunch. Source: Google.

This risk first reared its scary head when Apple (NASDAQ: AAPL  ) launched the original iPhone in 2007. Apple's mobile platform quickly made it clear that things were about to change. Whatever you wanted to do online, "There's an app for that!"

Google was, and still is, the default search engine for Apple's mobile browser. And many mobile apps depend on advertising revenue for their very existence. But nobody forces app designers to use Google's AdWords/AdSense/AdMob marketing tools. Google may be the mobile advertising market leader today, but if that ever changes, Big G would be in serious trouble.

What is Google doing about this danger?
This concern ties back to the competition worries mentioned earlier. Apple could come up with a better mobile advertising mousetrap. Facebook (NASDAQ: FB  ) wants to run its own monetization show, and its massive cross-platform traffic presents a big challenge to Google's mobile advertising revenue.

However, you'll recall that I wrote off the competition warning because Google is just too darn innovative. For much the same reason, I'm currently not terribly scared of competing mobile ad platforms stealing Google's lunch.

The key here is, Google doesn't mind extending its products to whatever competing platforms are on the market.

AdMob ads can be built into apps for Google's own Android smartphones and tablets -- but also on Apple's iOS devices and even the Windows Phone lineup.

By contrast, Apple's iAd tools only work on iOS devices like iPhones and iPads. It's an exclusive Apple property.

Facebook's mobile ad tool does support both iOS and Android, but this platform is designed to drive users deeper into the Facebook fold. In fact, it's not so much about making money from in-app advertising, and much more about getting more users for your apps. Get more users this way, and then you'll need something like Google's AdMob or Apple's iAd if you want to get paid.

I don't see Apple stretching iAd onto competing platforms anytime soon. Cooperation like that is simply not in Cupertino's DNA.

Facebook, on the other hand, may very well add money-making properties to its fledgling ad network. This sub-risk is real.

The big takeaway
Google can still fight back if and when Facebook decides to launch a fresh ad platform assault. There may be a brief price war, before both rivals fall back to competing on features, market reach, and demonstrated value.

And of course, Facebook is not the only company that can pull a trick like this. It's simply the largest, most established, and therefore the most dangerous one right now.

Google's risk factors must be taken seriously, and the mobile ad market deserves special attention. Investors like yours truly need to keep an eye on emerging competition, and measure the danger that comes with each new ad network.

Right now, Facebook's mobile ad ambitions should be a Google investor's biggest concern, with Apple trailing far behind.

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