Search: Can Google's Free Model Pay Off?

Google shakes up org structure, hopes for big gains

Google gives away search tools and Android mobile handsets in hopes of driving more traffic to search and display ads. That doesn't seem enough these days to drive profits. Don't misunderstand - Google outperformed earnings and profit forecasts in Q4 2010. Net revenue came in at $6.4 billion, about 4 percent above Macquarie Research analyst Ben Schachter's estimate.

Just before Google released Q4 revenue, the news broke that Google CEO Eric Schmidt was stepping down and Google cofounder Larry Page was stepping in. The moves, effective April 4, were made to "streamline decision-making and create clearer lines of responsibility and accountability at the top of the company," which could be code for projects or platforms that weren't getting pushed out as quickly as they had hoped. And, profits weren't high enough to excite investors.

Sergey Brin, Google's president of technology, will put the focus on strategic projects and new products. Schachter expects announcements from Google regarding payment systems, social, mobile, and media such as music, video and video games.

Apple and Facebook may become Google's only rivals in coming months. Each have different business models and product offerings, though Apple, has ability for higher revenue and profits.

Facebook's global advertising offerings, estimated at $1.2 billion for the first nine months of 2010, firmly established itself as a cost-effective marketing destination for many major brands, according to Vincent Létang, senior analyst and head of advertising research for ihs, an iSuppli company.

With Page at the helm, Google will find other services to augment search, such as display. It puts into question whether the "free" model can remain sustainable. As search becomes more of a commodity and less profitable, Google also will look at other ways to generate revenue and higher profits. The company will lean more toward emerging applications for technologies such as near-field communications and radio-frequency-identification technologies in emerging markets like mobile.

Google began testing a new feature in January that lets consumers move their existing telephone number to Google Voice, an online phone service. The service became available on Android devices and iPhones, as well as Gmail. The service also provides voice-to-email transcription. It isn't easy to switch to, and Google is still working out the kinks. The Google Voice service may prove profitable for small businesses needing a tool to forward phone calls or take messages.

Multinational U.S.-based brands also will begin to look more seriously at expanding campaigns across Asia and Europe. While some will spread dollars thinner to cover more ground, others will pour new funds into the overall budget.

IHS Screen Digest, the research division of El Segundo, Calif.-based iSuppli, pegs the global search advertising market at $30.4 billion in 2010, up 17 percent from $26.1 billion in 2009. This represents a strong acceleration after the slowdown of 2009, caused by the global advertising recession, when search growth declined by 11 percent in Europe and by 1.5 percent in the more mature u.s market. Still, 2011 looks promising for search engines and marketing.

The year, however, didn't begin on a positive note for all search engines. Two-year old Collecta threw in the towel, shutting down its real-time search business, API and publisher widgets. The company follows OneRiot, another real-time start-up that sold its assets to Topsy, one of two engines still operating, the other being Wowd. The demise sends a signal to the industry that free and real-time search might not work for all

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