For impatient Google investors, "failing quickly" may not seem like a management breakthrough. Growth rates on the company's $24 billion ad operations are slowing, and nothing from Google's stellar portfolio of products -- not Gmail, Google Maps, Google Apps, Chrome, or even acquisitions such as YouTube or DoubleClick -- has demonstrated that it can become the company's next growth engine. Perhaps that's why Google's shares look relatively cheap right now, trading at a forward price-to-earnings ratio of 15.92 and an enterprise value-to-EBITDA ratio of 12.
Still, I think Google's public celebration of its recent product failures strongly suggests that its growth story is far from over. Given the way CEO Eric Schmidt has been talking up the "failure" of Wave, I suspect that Google's confident that it's about to have a big hit on its hands.
Lessons from the Nexus One
Before Wave bit the dust, Google was publicly celebrating another failure last month. The Nexus One smartphone was a shot across the bow at wireless carriers Sprint
Since Google was selling the Nexus One phone directly to consumers online, it controlled the purchase experience, leaving the wireless carriers' retail stores out of the loop. Potentially, this could give Google tremendous leverage over the carriers, in addition to revenue on the sale of the device. Google doesn't make any money today on the purchase of Android phones (phones built on Google's mobile operating system) when they're sold directly by the carriers.
But imagine if Google could sell phones directly to consumers, and force the carriers to compete to win a Google phone customer's business. That competition might even force carriers to pay Google a bounty for each new Nexus One account.
Alas, Nexus One didn't work out that way. Google's online sales were insignificant. The Nexus phone didn't exactly blow the socks off anyone as a competitor to Apple's
Here's what I think Google's Nexus One strategy was all along:
- Use the direct-to-consumer distribution strategy to light a fire under other carriers' support for Android-based phones.
- Accelerate the growth of downloadable applications in the Android Marketplace -- which, while still smaller than Apple's, is much larger than Research In Motion's
(Nasdaq: RIMM)BlackBerry application network.
- Test the waters to see whether competing with the carriers on distribution was preferable to partnering in their retail channels.
Nexus One didn't need to succeed as a stand-alone product or business, as long as Google successfully attracted developers and accelerated the wireless carriers' distribution of Android phones. While I can't prove it, I think Nexus One was critical for Google to achieve both objectives.
The stakes are large here. The developing mobile market is threatening Google's search-advertising dominance. Android is Google's strategy to rule mobile ads the same way it all but owns the traditional Internet. Some forecast that mobile advertising from Google's AdMob acquisition could be generating as much as $6 billion by 2020.
Wave goodbye, or Wave hello?
On another front, Facebook's continued growth has begun to menace Google's core business. In June, Facebook showed that it's nipping at Google's heels, with 141 million unique visitors to Google's 179 million. In response, Google Wave could prove to be the Nexus One of Google's social-networking strategy.
Google Wave combined elements of email, instant messaging, and a Facebook-like news stream. The product was either a confusing mess or a revolutionary integration of these communication platforms, depending on your perspective. While I don't think Wave created the same type of leverage for Google that the Nexus One provided over the carriers, I do think it's critical for Google to demonstrate that it will be a viable player on the social web.
Google needs a sturdy social-networking platform to persuade social-gaming giant Zynga that Google's the right partner to reduce the Farmville maker's dependence on Facebook. Sure, Google's rumored $100 million-$200 million investment in Zynga certainly didn't hurt, but it's not a stretch to say that Zynga doesn't really need Google's money.
Instead, I'll bet the Wave technology, software development team, and technology roadmap were important in making a Google-Zynga partnership a reality. With this week's acquisition of Slide, Google is taking another step to launch a competitor to Facebook, rumored to be a stealth project called GoogleMe. I'll bet the Google Wave team is taking what they learned from their brief product run, and working with the teams from Slide and Zynga to put that knowledge to good use.
You take it from here
Do you think Google's "failures" bode well for the company's future success? Will Google dominate mobile search and advertising? Can Google compete with or disrupt Facebook? Let us know your thoughts in the comments box below, or click over to Motley Fool CAPS to vote on the stocks that you think are most likely to outperform (or underperform) the market.
John Keeling does not own a position in any of the stocks mentioned in this article. Sprint Nextel is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.