Writing Sample 3

Are Google’s best days behind it?

That’s certainly what Scott Devitt of Stifel believes, as he downgraded shares of Google from a “Buy” to a “Hold” last month, claiming that the company’s growth prospects stem from lower margin businesses. Devitt believes Google is in the early to mid stages of saturation in its core business of search advertisements. The company’s efforts to move into vertical search businesses such as travel and e-commerce will be met with stiff competition from other companies like Amazon, and its market share of ad dollars will decrease due to challenges from Facebook.

Indeed, there are signs of worry at Google. In October 2014, CEO Larry Page transferred leadership of core products to Sundar Pichai, giving himself time to focus on the “bigger picture.” The move is likely due to steady concern about Google’s decline in innovation as it ages.

Mr. Devitt is not alone in his worry. Ben Thompson, writer of the widely-read tech blog Stratechery.com, argues that Google’s place in the future is unclear.

Google currently relies heavily on a single source of revenue: showing ads in searches. About 90% of the company’s revenues are generated through this channel. Over the past few years, however, search advertising growth has slowed and flattened to 20% annually. Cost-per-click growth – the amount of money Google makes each time somebody clicks on an ad – has steadily fallen for the past three years. And while Google sold about $45 billion in search ads in 2014, this represents only a slice of the $550 billion global advertising market.

The problem is most of this growing $550 billion market is not suited for Google’s business model.

Here’s why: There are two types of ads, direct response and brand. Direct-response ads are designed to make prospects purchase something immediately, whereas brand ads create emotion in prospects to inspire them to purchase something in the future.

Google’s search advertising relies heavily on direct-response ads at a time when brand image advertising is becoming increasingly popular, as it is more suitable for TV and print, but also for social networks like Facebook, Snapchat, and Pinterest. Emotions and stories still rule consumers’ minds and increasingly their wallets, and Google lacks this emotional, experiential aspect.

How well Google does on this front will depend heavily on YouTube, which attracts more than a billion users a month. The company believes that if ad dollars begin flowing from TV to the Internet, a lot of it will flow to YouTube.

Ari Paparo, a former advertising product director at Google, questions how effective YouTube will be in boosting Google’s bottom line, though. “The movement of brand advertising into digital will probably not be winner-take-all, like it was in search,” he says, “And if it were to be winner-takes-all, it’s much more likely to be Facebook that takes all than it would be Google.”

For Google to reach new peaks, it has to find new businesses to keep growing. While it’s true that the company has its hand in a lot of investments, from Glass to Fibre to an assortment of Artificial Intelligence devices, these products remain unproven and have provided little return. To fund these projects, the company spent $2.8 billion in the fourth quarter of 2014, an increase from $2.1 billion in the same quarter of 2013.

It is very possible none of these moonshots pay off, simply leading to wasted cash flow and distracting Google from its core business. After all, when was the last time Google built and launched a highly successful product? The last product that may be considered a big hit was Gmail, which was over a decade ago. YouTube and Android were acquired. Recent products like Google TV and Google+ have largely been flops. The company has also failed to capitalize on recent trends, having missed mobile messaging (Whatsapp), product discovery (Pinterest), and social (Facebook, Instagram), among others.

In addition, the company faces external issues that may affect its business operations.

In 2014, the EU investigated Google for abusing its dominance in search and online advertising. The two sides settled, but in December the EU took a symbolic vote to force search engines to split other online businesses. This creates the possibility for the investigation to be reopened. The result may be a more timid Google afraid to improve upon its core product.

In terms of people, Google may be suffering from the same brain drain Microsoft experienced many years ago. Many of the company’s top leaders who helped shape the company have been leaving or have left. The list includes Marissa Mayer, who oversaw Google’s design, Vic Gundotra, who built Google’s I/O developer conference and ran Google+, Andy Rubin, who invented Android, and Nikesh Arora, who ran operations for many years.

None of this is to suggest the decline of Google, or that it will go away. Google’s control of online search remains undisputed and the company will likely remain very profitable for the foreseeable future. But the curse of the innovator’s dilemma remains very real, and it’s very possible Google will be unable to dominate new industries like it has with search.

As Ben Thompson says, “This is the price of being so successful — what you’re seeing is that when a company becomes dominant, its dominance precludes it from dominating the next thing. It’s almost like a natural law of business.”