Burn, Google, Burn

When Google (NASDAQ:GOOG) shares hit the $300 mark earlier this year, I couldn't have been the only one to sum up the equity's run in bowling parlance. It was a perfect game. A 300. The stock had more than tripled in its first year as a public company by mowing down the pins -- and then some -- when it came time to roll its quarterly frame.

Of course, perfection doesn't exactly have a long shelf life. After a breathtaking ascent, this once beautifully volatile stock has been treading water in a tight range of little more than 10% over the past four months. Has the stock finally found its market equilibrium? Has Google graduated from Halcyon U? Is it now gearing up for predictable trading life?

Don't bet on it. At this point, Google is merely biding its time. Either the good times will resume, or we're at a lofty precipice where the trip down is as jagged as it is certain.

I love Google. I don't mind saying that. I have never owned the stock just because I feel the intimacy would kill our relationship, but I am a card-carrying fan club member. I'm even wearing my "Vote for Sergey" T-shirt today.

That said, I wouldn't be holding out for another triple-bagger in the company's second year as a publicly traded company. It may not be a pronounced sophomore slump, either, but I'd be willing to take one of the later dates in the Google $400 betting pool. And I wouldn't be so sure that when Google finally breaks out of this restrictive trading range, it will be to the upside.

Network news
What has me so concerned? In addition to the four potential flaws for Google that I pointed out earlier this year, I am starting to get worried about the company's network of third-party sites that rebroadcast the company's popular contextual ads. Whenever I hear about a strategic shift or proposed buyout in the dot-com industry, I find myself wondering how this will affect Google. More often than not, the answer lately has been that it will be detrimental.

From Yahoo! (NASDAQ:YHOO) beta testing its Yahoo! Publisher Network to Microsoft (NASDAQ:MSFT) finally making a move worth noticing in paid search with its AdCenter beta, it's getting a little crowded. You'll also see that Google Network publishers are either being acquired -- or being rumored to be acquired -- by potential competitors.

Let's get into how Google revolutionized the online-content industry with its AdSense product. Nearly three years ago, Google took its popular AdWords paid-search advertising product on the road. The company began accepting third-party publishers, big and small, into the program, where they would be able to broadcast Google ads on their own sites. On average, Google lets the websites keep all but a third of the money that the sponsors paid for a relevant ad click.

It's created a dramatic impact on Google's revenue mix, as you can tell by looking at the past few years of the company's income statements.

See how the third-party sites peaked last year? Just 46% of the company's ad revenue came from the Google Network in the most recent June quarter. This isn't worrisome at first glance for two important reasons.

One? For starters, unlike Yahoo!, Google reports its revenues before traffic acquisition costs. That means the revenue sums still don't account for the 67% that the company kicks back to its third-party publishers. So it's not as if Google Networks is the major contributor that it appears to be based on the top line alone.

Two? The company's third-party network is growing just fine, thank you very much. It's just that the company's organic traffic is growing even faster. That certainly wouldn't upset too many investors. It also creates a situation in which net margins improve on their own. That is often seen as a welcome sign of operating efficiency -- even though, in this particular case, it's simply masking the disparity between in-house ad revenue and everything else.

I hope you've had the "Time" of your life
So what's the harm in letting some of its third-party partnerships head on out if it will only fatten margins? Well, there is plenty wrong on that front. Let's take a look at Time Warner's (NYSE:TWX) America Online. It is the largest landlord for Google's ad units. It is the only third-party member of its network that Google consistently singles out in its financial filings. Why? Here's why.

So when reports indicated that Microsoft and AOL were talking about a more perfect union, clearly as a means to have Microsoft supplant Google as an ad provider, why didn't Google's shares crater? Representing a ninth of Google revenues is significant, even if it probably comes out to about 2%-3% of operating profits.

Why didn't Google buckle back in August when iVillage (NASDAQ:IVIL) announced that it was ditching Google in favor of Yahoo! to service its search and contextual marketing needs? Or when IAC/InteractiveCorp's (NASDAQ:IACI) Ask Jeeves announced its Sponsored Listing program after three years of dishing out Google ads? Yes, Ask.com will still rely on Google, but only when there isn't enough inventory of ads of those that it sold directly to sponsors.

You also have entertainment giants gobbling up smaller sites. For those running Google ads, how much longer before those media companies start selling online advertising on their own? If you're Google and you know that CNET Networks (NASDAQ:CNET) -- a Motley Fool Rule Breakers newsletter recommendation -- has recorded $145 million in interactive revenue through the first six months of the year, how can you afford to let a Yahoo! or a Microsoft have at it?

That's why these are challenging times for Google. Investors who see Google growing its organic offerings at a frenetic clip and applaud the architectural splendor of this instant super-portal without understanding why Google is doing this don't get it. Investors who will dismiss slowing revenue growth over the next few quarters because wider margins are good don't get it. There are currents of Yahoo!, Microsoft, Ask Jeeves -- and who knows who else -- looking to replace "Ads by Google" with their own signature.

Google will still be huge. Google will still matter. Yet how it reacts as eyeballs and sponsors are forced to consider Google as only part of the online equation is what will truly define how brilliant Google will ultimately become. I won't wash my shirt until then. But, trust me, I'll bathe.

Time Warner is a recommendation of theMotley Fool Stock Advisornewsletter.

Longtime Fool contributor Rick Munarriz is a huge fan of Google, but he does not own shares in any of the stocks mentioned in this story.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.