Can Google Afford To Make Mistakes?

The browbeating Google is getting from shortsighted investors for increased capital investment in social media (where it's behind), online advertising (which it commands) and cloud servers (to meet exploding demand) is a bad sign.



It also is not good that Google CEO Larry Page is refusing particulars on upping investments last quarter over 50% to more than $1 billion each in acquisitions, in online sales and marketing, and in research and development. Without the latter, there is no innovation -- although spending alone is no guarantee, as demonstrated by Google flops such as the Chrome browser and not-so-social Buzz.

More than $35 billion in cash reserves and a rigorous acquisition spree have not saved the Internet giant from missing the social-media train. Although Groupon (being valued at about $20 billion) rebuffed its $6 billion takeout offer last year, Google could acquire any number of thriving social networks, including LinkedIn, Twitter or Zynga (in which it has $100 million invested).

Buying Netflix, which has more than doubled its market cap to $20 billion by streaming movies over all platforms and investing in original and first-run fare such as "Mad Men," would give Google's YouTube a ferociously branded boost. (That black-and-white video doodle on Google's sparse home page Friday in honor of Charlie Chaplin's 122nd birthday was no coincidence.)

With a racing private valuation of $80 billion, Facebook can bump along the bottom -- innovating, failing and succeeding without being publicly distracted or chastised, which explains its reticence to go public. Facebook has been swift and agile in developing ad networks, sales, payment, gaming and other mobile features off of its 650 million social user base.

This raises the question of whether even relatively new big public companies can afford to stumble, scramble and search like innovators in order to succeed. The answer the market wants to hear: Only if they accomplish the enterprise and meteoric growth promised -- which, of course, is only part of the risk.

Risk is a word that is relative to a behemoth like Google, whose first-quarter profits were up 15% over last year to $2.8 billion on a 27% rise in revenues and solid metrics. Google also has increased by nearly 50% what it spends on compensation to stem employee defections, but is tying future bonuses to Google becoming more competitive in social, clearly its Achilles' heel.

Even the meteoric adoption of Google's Android operating system is not sufficient to secure its social fortunes, although the mobile platform could own half of the smartphone market by 2015, analysts say. Instead, the market dwells on Google's stagnant search share (66%) and share price, which lost 7% after its earnings announcement and was downgraded by CitiGroup.

Just as important to this peculiar dance of rivals is the notion of fleeting domination or whether any company can truly "future proof" itself, as RIM CEO Mike Lazaridis said last week after launching the new BlackBerry Playbook. Its HD display is already suffering from the dearth of available video (ala Apple iTunes). No sooner does a company command an industry or sector than interactive technology renders an edge for some new competitor to put it to better, smarter use.

Nothing -- not even Google or Steve Jobs' Apple and its closed ecosystem of super devices -- can remain on top forever. That phenomenon takes new twists and turns with every earnings quarter and tech advancement. Consider more evidence just this week:

*Amazon jumped into the advertising fray with an ad-supported version of the Kindle, selling at a $25 discount or for around $100. It clearly opens the door for the cloud-supported retailer to charge into the tablet market in a big way. CEO Jeff Bezos has his sights set on what Kleiner Perkins partner Mary Meeker describes as the $5 billion mobile Web opportunity by 2015, in which mobile apps and videos will catapult consumers and business users into the cloud.

Its 3D printing, streaming music, movie and book services, marketplace partnership, payment systems, social underpinnings and now its new memberships into the "special deals" club puts Amazon in everyone's sweet spot. Amazon has the most sustainable, powerful media ecosystem of all.

*On the heels of selling its movies on Facebook, Time Warner is pulling yet another rabbit out of its digital hat with the new "digital everywhere" app that allows consumers to access and pay for (once) its and other studio films for unlimited play wherever. The question is whether the stop gap app is too little, too late to offset steep declines in DVD and home video and the onslaught of over-the-top streaming video. When Netflix saw these trends coming several years ago, CEO Reed Hastings moved decisively to change the course of his company and the industry.

*Wall Street analysts and tech aficionados like The New York Times tech reporter David Pogue criticized Cisco's decision to kill its Flip video phone camera, even though it leads its sector two years after Cisco paid $590 million for the business. In a hasty response to shareholders enraged by weak returns, CEO John Chambers is cutting jobs and consumer-side innovation to concentrate on Cisco's core enterprise business. Kodak and others responded to the dramatic decline in film and camera sales in recent years, while Cisco refused to believe consumers were simply resorting to smartphone snapshots and video.

*Yahoo is in at least its fifth year of rethinking what it wants to be while its stock price and balance sheet languish. The board is said to be deliberating whether its harsh CEO Carol Bartz should go -- having clarified its platforms, simplified its corporate structure and perked its search advertising with partnership support from Microsoft. No matter who is put in charge, Yahoo cannot be saved, because it refuses to innovate its business model -- even by acquiring the right start-ups. For now, Yahoo remains the longest running, long-suffering misstep on the Internet.


1 comment about "Can Google Afford To Make Mistakes?".
Check to receive email when comments are posted.
  1. Rick Monihan from None, April 18, 2011 at 10:21 a.m.

    The origin of public stock companies was meant to be as a means of accumulating and organizing capital for the purposes of growth and innovation.

    In the past 15 years, this role has shifted dramatically. Capital derived from the sale of public shares still does generate capital (substantial amounts) for these purposes. But generally speaking, the firms utilizing public ownership do so for financial reward of owners, managers, and entrepreneurs.

    The idea that capital stock be used to innovate is a more limited role that once was primary. Andrew Carnegie was famous for not paying dividends so he could continue to invest in his mills, innovate rapidly, drive down costs, and maintain his position in the steel markets.

    Today, firms are focused more on paying large salaries to highly visible names, and innovating via the purchase of other (usually private) firms. Why? Because private firms, while typically lacking in the vast pools of capital, have a better command of their structure and can focus on their vision more intently without the short term aggravation of stockholders or managers clamoring for a payout today.

    The issues you've discussed in this article may be specific to our industry - but are really endemic to the entire economy, an indication of what ails us at the moment.

Next story loading loading..