Vertical integration sure can come at a cost, particularly in the form of hostile relationships with former customers turned competitors. That's the situation that Google (NASDAQ:GOOG)(NASDAQ:GOOGL) now finds itself in, according to a recent report from The Wall Street Journal.
When Google first started, it was just a search engine with an innovative new relevance algorithm that disrupted the nascent but growing Internet search industry. Things were simpler back then, and Google served up relevant ads next to relevant results. But things have changed a lot over the past 10 years, and Google's current ambitions seem limitless.
Over the years, Google has consistently grown its services and properties and now provides information from a plethora of industries. Many of the companies within these industries rely on Google's referrals for their own businesses, and pay handsomely for the traffic. Ad revenue is still 90% of Google's business.
Microsoft is doing it
In some ways, there are similarities to Microsoft's (NASDAQ:MSFT) acquisition of Nokia's handset business, but also notable differences. In Microsoft's case, becoming a first-party smartphone vendor means competing directly with the very same OEMs that Microsoft wants to build more Windows Phones. In a similar way, Google is now competing with its advertising customers in delivering information to users.
Of course, the big difference here is that Microsoft had very little to risk in terms of market share, and its acquisition of Nokia's handset business could be seen as a move of desperation. Having little to lose facilitates an ability to make bold moves. In contrast, Google remains the dominant search engine, so in theory it has a lot to lose if advertisers begin to shift away. But if Google can successfully provide its own information and content in a way that keeps users coming back, advertisers have little choice but to keep doing business with the company.
Yelp hears it loud and clear
Last month, some internal Yelp (NYSE:YELP) documents leaked to TechCrunch that showed just how scared Yelp is. Google still accounts for over half of Yelp's website traffic, so it's acutely aware of changes to Google's algorithms or how Google displays results.
Yelp's internal study suggests that even people specifically Googling for Yelp results by including "yelp" in the query will still see Google reviews first. Perhaps Google is still hurt that Yelp spurned its $500 million acquisition offer in 2009, leading to its Zagat acquisition instead.
A similar thing is happening with topics like hotel queries, according to the WSJ. The travel industry includes some of Google's biggest advertisers, and those companies aren't too keen on Google's encroachment.
Google's justification is that the secular shift to mobile platforms necessitates a more efficient delivery method for information. That's in part because usage models have shifted away from mobile-optimized websites toward native apps, and mobile users complete purchases at a significantly lower rate. Those trends require Google to adapt.
In its quest to become a one-stop shop for information, Google risks alienating the very customers that pay its bills. This is an important and relatively new risk factor for Google's business in the years to come. Operating a dominant search engine is a very different business than running a conglomerate of information.
Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Yelp. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.