Google (Nasdaq: GOOG) built its dominance on search. Its competitive advantage -- what separates it from Apple (NYSE: AAPL), Microsoft (Nasdaq: MSFT), and Yahoo! -- is its ability to deliver relevant information to users who seek it. Along the way, Google stumbled upon a way to monetize this through advertising, and this remains 96% of its revenue today.
Fellow Fool Travis Hoium believes that Google’s failure in turning any of its subsequent products into profit marks the decline of innovation at Google. As Travis states, "invention is the process of turning money into ideas; innovation is the process of turning ideas into money." Because Google has not turned Gmail, YouTube, or Android into cash cows, he questions "whether the company will ever be able to branch out beyond search-based products," and gives the innovation title to Apple.
The thing is, Google doesn’t have to branch out. In fact, it shouldn’t.
Rock that competency
Google should never branch out beyond its core competency of search-based products, which connect users to information, because that’s where they can outcompete versus other companies. The brilliant thing is that they don’t have to branch out to be a tech behemoth, as most every technological task deals with connecting users with information. The Internet is made up of communicating information. Google’s position as the gatekeeper between a user and information gives it significant value, power, and advantage over competitors that it can use to continue to dominate -- and innovate.
Apple is not the king innovator
Apple would love to have Google’s position, as it currently only has a grip on the device that a consumer uses to access information. As a sign that Apple is attempting to become somewhat of an informational gatekeeper, it's removing Google Maps from the upcoming iPhone software and providing its own map application. But, Apple will lack the experience that Google has. While the application will carry Apple’s competencies and be beautiful and easy to use, the information itself may end up lacking. And, by creating its own maps, which Google already offers to users for free, Apple itself will simply turn money into ideas – the opposite of innovation.
Additionally, it’s unfair to compare Google’s free services as lacking profitability to Apple’s consumer goods – they are two different industries. While not tantalizingly profitable industries, Google still dominated competitors with its superior talent for connecting users to information. For example, for Google to compete in email, it had to match its competitors’ price: free. Now, Gmail claims 425 million users, compared to Microsoft’s Hotmail at 325 million, and Yahoo! Mail at 298 million. Or, take browsers: from 0% market share in 2008, Google’s Chrome browser now has the majority of the market at a little over 33%. Microsoft’s Internet Explorer comes in a close second at a little under 33%.
Google’s innovative future
While Google has yet to diversify revenue away from advertising, it’s only a matter of time before one of its new products turns into another moneymaker. Unfortunately, not every product turns into gold, but that’s the risk of true innovation and entrepreneurship. Businessweek quotes a representative from the U.S. Patent & Trademark office: “There are around 1.5 million patents in effect and in force in this country, and of those, maybe 3,000 are commercially viable." That makes 99.8% of patents unprofitable. Give Google time to hit another golden idea, like self-driving cars or computers inside glasses, and it will continue to innovate for another century.
In the meantime, Google can bank on the ideas of others that were developed outside the company through acquisitions. While Travis states that the fact Google has acquired 60 companies since the start of 2010 as a negative sign for innovation at Google, I would argue it brings in the entrepreneurial minds that Google needs to keep around from becoming a soulless and stodgy culture.
In addition, as Travis points out, the Internet moves fast with innovation. For example, with Pinterest’s astronomical growth, it could displace Facebook (Nasdaq: FB), as Facebook displaced MySpace. Or, Facebook could fend off these smaller competitors through acquisitions, like it did with its purchase of Instagram. While Google can innovate at breakneck speeds within the company, there’s no reason not to defend its position through acquisitions to remain relevant.
Until Google has its next hit, banking on ad revenue will continue to serve shareholders and the company. For an in-depth look at whether Apple will be able to keep up, including three key areas to watch, and what risks Apple faces, check out our brand new premium report. The report also comes with free updates on crucial Apple news for a year, so grab your copy now!
