Is Google's Reputation for Innovation Overrated?
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For Google (NASDAQ: GOOG) to diversify its earnings will large acquisitions be the only way? Over the past decade the company has been able to continually improve its search engine and develop a host of ancillary products. These products ensure consumers stay within the Google ecosystem and help to drive revenue from Google's ad network. Inspite of all of the innovative products, advertising remains the main source of revenue. Only with the recent acquisition of Motorola has non-advertising revenue crossed the ten percent mark. Google will continue to innovate but if their only source of revenue diversification are mergers and acquisitions, then their long term growth prospects may be limited.
It is telling that Google's major success outside of a web-based product is dependent upon adwords to generate revenue. The development of Android and Google's attempt to compete with the Apple (NASDAQ: AAPL) iPhone has been successful in part. Android has approximately 50 percent of the U.S. smart phone market while the iPhone has only 30%. Android is released for free while Apple makes billions from the iPhone. Android helps to protect Google's market share as a search engine for mobile devices by removing the possibility for Apple to monopolize the mobile OS market.
Innovation has always been a large part of the Google identity. The 20 percent rule allows engineers to spend 20 percent of their time working on their own products. The development of Gmail, Google Maps, and Street View have all been successful innovations in their respective markets. Still Google income statement shows that revenue continues to focus almost exclusively on their advertising network.
The development of a company with a 200 billion dollar market cap is not an easy accomplishment. Over a decade of product and institutional growth has been necessary to make Google the juggernaut it is today. As advertising revenues have been the main driver of this growth I believe that Google's primary identity is that of an ad network. The company tries to promote itself as an engine of innovation and growth for all of humanity. Inspite of their PR almost all of their product development focuses on places more eyeballs in front of their ad network.
The acquisition of Motorola shows that if Google wants to truly diversify its revenue stream it must look outside of the company for innovation. This should be a warning for investors. The successful integration of two companies is not an easy accomplishment. Google has had a great amount of success with the purchase of smaller companies like Admob but in order to drive meaningful growth the size of such acquisitions will need to increase. As Google expands beyond its historic domain in online advertising, executives will face a new set of issues. The culture and infrastructure which has been developed over the past decade to support and grow the ad network will be forced to develop.
Google has a history of innovation, but these innovations are only profitable to the extent that they help ad sales. The company is not a bastion of innovation but ad network which maintains their dominance through a host of quality web properties and a mobile OS. As the AOL TimeWarner fiasco shows, mergers and acquisitions can be a very expensive and a dangerous growth strategy. I believe investors should realize that the long term ability for Google to develop beyond its ad network is not guaranteed nor obvious.
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