Why Google is Not Topping Out

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amy Cover from Ycharts has published an interesting article about Google (NASDAQ: GOOG), analyzing the company's industry and growth prospects. The author has brought attention to the much important subject of Google and the stagnant advertising industry, and the analysis is a very thoughtful one. I believe, however, that Cover may be seriously underestimating the true extent of Google's growth possibilities.

A Growing Company in a Stagnant Industry

The article states that Google is basically a growing company in a stagnant industry. According to this point of view, Google has delivered extraordinary growth rates in the past because it has been stealing market share away from traditional advertisers, mostly magazines and newspapers.

Now that these companies are in such a weak competitive position, there is not much to gain from that competition, so Google needs to go after the TV market, a much tougher rival, to continue gaining share in advertising.

That leaves Google with the daunting prospect of nibbling away at the #1 category: Television, which holds 40% of the ad market. Taking market share from TV may prove especially tough. It has fragmented in recent years, with the proliferation of cable channels, and now offers a stunning variety of programming, much of it very compelling to its targeted audience

Google will no doubt nibble away at TV’s share, too, but obliterating television the way it did print seems less likely

This is a smart observation, and we could take it a little further too. Even if Google gains some share from TV over the next years, you can't continue gaining market share forever,  and this means that Google will end up operating in a stagnant environment once market share gains are exhausted:

 Advertising is advertising regardless of where it appears or how consumers find it. And if it’s a no-or-slow-growth industry, Google is instead a voracious market share devourer, but one that could run up against growth constraints in the near future.

Already Dominant in Online Advertising

Slowing growth in online advertising shouldn’t be such a serious problem if Google could continue expanding its market share in that business at a rapid peace. Unfortunately, that doesn´t seem to be the case since the company is already the dominant player in that space.

According to ComsCore, Google has a 67% share in desktop search versus 16.2% for Microsoft (NASDAQ: MSFT) and 12.1% for Yahoo (NASDAQ: YHOO). Since both Microsoft and Yahoo use the same Bing technology, we could say that Bing is in a solid second position, but still way behind Google.

There are no signs of reversion in this trend, and Google will likely continue outgrowing other search engines due to its superior technology and strong brand recognition, but big gains in online advertising participation don't seem very likely from current levels.

Even worse, Amazon (NASDAQ: AMZN) has been quite successful in product search by leveraging its amazingly low prices and efficient distribution network. Forrester Research reported that 30% of U.S. online shoppers in the third quarter began researching their purchase on Amazon, compared with 13 percent who started on a search engine such as Google.

This is a noteworthy reversal from two years earlier, when search engines were more popular starting points. According to comScore, there were 6.7 billion display ad impressions on Amazon.com in the third quarter, a figure which more than tripled from 2011 levels.

Besides, Facebook (NASDAQ: FB) is not a competitor to underestimate: It has access to enormous amounts of information about its gigantic user base, and the social network is actively working on search technologies too. Facebook reported improving monetization statistics in mobile advertising for the last quarter, a key segment when it comes to growth trends. The company is still no match for Google in terms of market share, but certainly a competitor worth watching.

If online advertising starts decelerating in the middle term, Google will likely be quite affected, because there is not much room for a bigger share in that industry. If anything, competition from companies like Amazon and Facebook is a risk to consider

No Slowdown Ahead for Google

Online advertising has many advantages over traditional advertising methods; it provides an easy way to rapidly achieve global exposure for a conveniently low cost, and it's much more efficient in terms of targeting the right audience, a critical advantage in the advertising business. Measuring effectiveness is also much easier in online advertising, and different sources claim that return on investment is higher too.

I don't really see why Google can't continue gaining market share versus TV, especially considering that people are increasingly reducing their TV time and spending it online. In fact, online video streaming is a fantastic opportunity for Google, and YouTube is by a wide margin the most popular online video platform in the world.

More than 60 hours of video are uploaded to YouTube every minute, or one hour of video is uploaded to the platform every second. Over 4 billion videos are viewed a day via YouTube. The platform has more than 800 million unique visits per month and 3 billion hours of video are watched each month on YouTube. This is fantastic business opportunity on a global scale, and still growing amazingly fast.

The mobile revolution means some challenges for Google, but some very exciting opportunities too, and the company is fantastically well positioned due to the popularity of Android. Google's annual run rate of mobile-related revenue is $8 billion, mostly composed of ad sales but also containing revenue from the purchase of content, like books, movies, music and applications on the company's Play store.

Besides, Google doesn't need to steal each and every dollar of advertising from newspapers or TV companies. Because online advertising is much cheaper and better targeted than other methods, many medium and small sized businesses that don't find a suitable alternative in traditional advertising are venturing into online ads, and this trend will likely continue growing over the next years. Google is a handbook example of a long tail business, so it's growth opportunities are not limited to the size of the traditional advertising industry.

Bottom Line

Online advertising is not like traditional advertising; it's a superior alternative. Google won't only continue gaining market share in the competition versus TV or other traditional advertising companies, it will also attract more customers to the industry. I don't see any material slowdown ahead for Google, at least not due to industry considerations.

acardenal owns shares of Amazon and Google. The Motley Fool owns shares of Amazon.com, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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