Many investors see Google (NASDAQ:GOOG) (NASDAQ:GOOGL) as the 800-pound gorilla of Internet search that swallows up start-ups and disrupts aging companies. However, Google isn't invincible. In fact, it has three glaring weaknesses it can't seem to defend: mobile ads, social networking, and product searches.
Research eMarketer expects mobile display ads to account for 72% of all U.S. digital ad spending by 2019, up from just 38% in 2014. This means if Internet advertising companies can't transition from desktops to mobile devices, they'll be left out in the cold.
In this market, Facebook is crushing Google, the current market leader in all Internet ads. In 2014, eMarketer estimates that Facebook generated $3.54 billion in mobile display ad revenues in the U.S. -- more than triple Google's $1.13 billion. In 2017, it estimates Facebook will generate $7.53 billion in U.S. mobile display ad revenues, compared to $2.38 billion for Google.
Last quarter, Facebook reported that mobile advertising revenue accounted for 73% of its total advertising revenue, up from 59% in the prior year quarter. Its total advertising revenue rose 46% to $3.32 billion. Google doesn't report its mobile ad revenue separately, but total ad revenue rose 11% annually to $15.5 billion last quarter.
Google faces three major challenges in mobile ads. First, its desktop ads still depend on tracking cookies, which can't be transferred between devices. Second, native apps for individual companies hurt Google, since they discourage users from viewing mobile sites in Chrome. To exploit that weakness, Facebook launched the Audience Network, which extends its ads to third-party apps. Lastly, Facebook uses single sign-ons (SSOs) to tether third-party apps and sites back to its News Feed. That information helps it craft targeted ads for users and log "conversions," or actions taken on a partner site after an ad is clicked.
Google utilizes SSOs as well, but they're simply not as attractive as Facebook SSOs, since it lacks a central social network to share information from linked sites and apps. Google+, which will soon be unbundled into stand-alone Photos and Streams services, failed to compete against Facebook and Twitter (NYSE:TWTR) because using "Circles" and "Sparks" never felt as natural as simply friending or following other users.
In late 2013, Google claimed that Google+ had 540 million MAUs, but The New York Times found that half of those users had never visited the social network. Pseudonymous tech blogger Edward Morbius recently conducted an automated survey of Google+ accounts, revealing that less than 6 million people interact with the site on a monthly basis.
Google+ isn't Google's first social networking failure. Orkut, its first social network, didn't gain much traction outside of Brazil. Its photo-sharing service Picasa Web was obliterated by Facebook. Google's microblogging site, Jaiku, was crushed by Twitter. Google Wave's collaborative features confused users, while Google Buzz caused a privacy nightmare by forcibly turning all Gmail contacts into social ones.
As long as Google lacks a popular social News Feed, Facebook will keep weaving together sites and apps with SSOs and the Audience Network. As a result, Facebook's clout in mobile ads will keep growing at Google's expense.
Google is the top search engine in the world, but for product searches, users turn to e-commerce giant Amazon (NASDAQ:AMZN). Last year, Google chairman Eric Schmidt admitted that "almost a third of people looking to buy something started on Amazon [...] more than twice the number who went straight to Google."
When we combine that weakness with Google's vulnerability in mobile ads, a big problem emerges. Last October, research companies The Integer Group and M/A/R/C Research reported that between 2012 and 2014, the percentage of shoppers purchasing goods on mobile devices rose from 25% to 35%. This means that as more people use Amazon's site or app for product searches or purchases, Google's search box becomes less useful.
To make matters worse, Amazon is leveraging that dominance to expand its ecosystem into homes with Amazon Prime services, Kindle tablets, Fire TV set top boxes, Dash Buttons, and Echo. It's also offering same-day deliveries of groceries and other goods in select areas. In response, Google is helping brick-and-mortar retailers provide same-day delivery to select cities with its Google Express service. But even with the support of major retailers like Target, Costco, and Staples, Google Express will have a tough time matching Amazon's massive selection of goods.
The bottom line
Google is great at investing in headline-grabbing "moon shots" like driverless cars, robots, and Wi-Fi weather balloons, but the majority of its revenue still comes from ads. Unless Google can shore up its defenses against Facebook in mobile and social, and contain Amazon's expansion in product searches, its top-line growth could eventually stall out.