I love Google
There's also another side to Google, one that's also endearing if not essential in the company's righteous path to brilliance. Everything starts with the fact that Google built the better search engine, but it's the way that Google has been able to stack incremental goodies on top of that invention that has truly made the company a hottie.
See, some folks quit after they build the better mousetrap. Not Google. It has gone on to market the mousetrap, paint it in different colors, and make a further aggressive push into tasty rat bait.
There's really just one thing that could bring Google down, but let's go over the sheer genius of Google first to see whether you can figure it out for yourself.
A Google is born
Our Rule Breakers newsletter service aims to pick out exceptional companies long before the greater investing public catches on. In Google's case, the company went public late into its consumer-acceptance phase. Last year's successful IPO had it priced at $23 billion -- though it bears noting that the stock went on to more than double from that point.
My first realization that Google had something special came years ago. In the summer of 2000, my parents were kind enough to take their children and grandchildren on a Hawaiian cruise. I packed all the tropical clothing that I could muster, along with a cozy Google t-shirt that I had recently acquired.
At one of the more obscure ports of call, some islanders came onboard to set up makeshift market kiosks selling handmade crafts. I was browsing when one of the merchants pointed to my shirt.
"Google," she said.
I nodded, figuring that she, like so many others on the ship, thought that it was some funny, made-up word. I was wrong. She went on to praise the search engine and referenced all of the obscure Web pages that she was able to uncover thanks to Google. She got it.
I bought a trinket.
Growing in all the right directions
Yes, through algorithmic finesse, proprietary page-rank pinpointing, and active spidering, Google had established the most relevant and complete online directory. It was so good that even the mighty Yahoo!
But wouldn't you know it -- in a tale with parallels to how Microsoft
Imagine Mickey D's serving up Whoppers. Consumers would quickly catch on and make a beeline to the Burger King drive-thru lane. Likewise, more and more Internet users seeing Google on other sites began to go straight to the source. Can I ask for a show of hands to see who has Google.com set as a homepage? I'd be one of that group if I weren't glued to fool.com.
But if Google had settled for offering just search results, it would have had a somewhat futile business model. Then along came a tiny company called GoTo.com. Before GoTo became Overture and ultimately got absorbed into the Yahoo! bloodstream, search engines had the thankless task of drawing only people who wanted to go somewhere else. So GoTo added a twist: Rather than just serve up the most relevant search results, it also featured the sites that had bid the highest for the exposure.
At the time, the idea of paid search seemed to walk an ethical line. Venture capitalists were too busy in the late 1990s throwing their money at eyeball magnets rather than at this second-tier operator, which was actually profiting from people whom it was ultimately sending somewhere else. But then, when the dot-com bubble popped and owners of search engines needed real money instead of page views, they abandoned efforts to expand their portals and turned to what had become Overture to help monetize their search results.
No great idea goes uncopied. Google rolled out AdWords Select just over three years ago so it could sell its own text ads, for which sponsors would bid as little as a nickel for each interested click.
That's when the name of the game shifted from the quantity of eyeballs to the quality of those same peepers. Google had always remained true to its search roots, but now, it found a financial interest in becoming more than just that -- as long as it could make its virtual billboards stick. So it launched its own browser toolbar to hold on to its search-hungry audience. It launched Gmail, where it could place contextual ads alongside the free email service; it also raised storage limits to put a dent in Yahoo!'s and Microsoft's free email offerings. It became a more active e-commerce cheerleader by rolling out Froogle. And it acquired newsgroup reader Deja.com and leading blog site Blogger.com. In every single case, the company recognized that it was venturing further into online real estate that would help further disseminate its AdWords submissions.
Then, while Google and the Overture-blessed Yahoo! were busy courting major sites to feature their ads in exchange for a piece of the action, Google launched its AdSense service, aiming at small and medium-size content sites. Not only did that brilliant move help Google stretch its reach even further -- these days, roughly half of Google's ad revenues come from third-party sites hosting Google's text ads -- but it was also able to wallpaper "Ads by Google" all over cyberspace to help draw in even more sponsors.
The 98% basket
You shouldn't be surprised to find that 98% of Google's business comes from advertising. Although the source of the company's brawn may also be its Achilles' heel, Google's potentially fatal flaw is more complicated than that. See, online advertising isn't going away. It will only get more popular and will become a larger part of any logical marketing campaign. You can't target as effectively or generate tracking accountability as precisely offline. The migration will continue. Don't worry about that.
The real concerns here lie a few layers lower. Four questions need to be answered.
1. Will Google's real estate grow larger than its billboard marketing?
This may not seem like it's really a problem. When you see a bus-stop bench or a vacant billboard plastered with a "Rent This Space" pitch, you don't feel sorry for the source, because you realize that self-promotion fills the void and that, eventually, an advertiser will come along to fill that space with some eye candy. But for Google to grow its page views without an equal uptick in high-paying sponsors creates a disparity. It means that Google's highest bidders have been bled dry and that the nickel bidders are the ones being showcased. In other words, an incremental growth in page views does not result in a similar spike in ad revenue.
2. Will click fraud destroy the medium?
Click fraud takes many forms online. An AdSense publisher can click on the Google ad links on his own site (or can encourage others to do so), and rivals can click on a competitor's ads to bleed the opponent's ad budget dry. These realities make Google's tracking technology critical -- it has to boot out the cheating AdSense publishers and refund assaulted sponsors. For the most part, Google has been ambitious on this front, but if you search for the term "click on the ads" or "click the ads," you'll always find a new wave of deceptive publishers looking to cheat the system. There's also been at least one case in which someone tried to blackmail Google by threatening to unleash a "click-bot" that would spawn invalid clicks throughout the company's network.
Click fraud is a crippler in the long term. Just as an advertiser would be fuming if a magazine fibbed about its circulation size or a mail campaign chucked a bunch of fliers into the dumpster, click fraud is enough to upset any legitimate sponsor. Paid search can be cheap enough to allow for the reality of click fraud if it grows unchecked, forcing sponsors to either bid less or not bid at all through Google's ad network. If that happens, the big G will suffer.
3. Will sponsors bid smarter?
When Time Warner
Yes, your placement dips when you go the minimum, but if a company spent $0.40 a click and then launched the same campaign at $0.20 only to get half as many clicks, it would still only have paid a quarter of what it used to. The first concern, that Google may be growing its ad space quicker than its ads, may even open up the argument for the same company to try its hand at nickel bids. Sure, Google can raise its minimums. Yahoo! Overture has its minimum at a dime. But with supply so critical, and with Microsoft ready to enter the paid-search market, Google wouldn't be making the best tactical move if it did that. There was a time when folks on Overture, like ambulance-chasing lawyers or big-ticket vendors, would bid as much as $50 or $100 for each click. Save for a few naive upstarts that learn quickly, those days are pretty much over.
4. Will clickers click smarter?
Text ads are still an attractive novelty. When graphical banner ads launched in the mid-1990s, they were clicked on just 2% of the time. According to banner-ad specialist DoubleClick
If those questions don't go Google's way, it could spell big trouble. After all, if folks are clicking less and sponsors are paying less per click, Google gets hit with a double whammy. If sponsors grow weary of online fraud while Google continues to grow its page views, how will Google monetize the empty spaces?
I don't think it will come to that. Google has been brilliant until now, and I'll stay optimistic. Then again, I did say that I love Google, and that may be blinding me to the chinks in its armor.
Some other recent movements in Google's world:
- Read up on Microsoft's bold entry into paid search.
- Google is even invading your desktop to grab your attention.
- Find out which next-generation stock Rick is recommending for April in our Rule Breakers newsletter.
Longtime Fool contributor Rick Munarriz really does love Google, but from a comfortable, safe distance that doesn't violate a restraining order. He does not own any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.