• by Janet Driscoll Miller , February 14, 2012

As we all know, Google has been a publicly traded company for many years now. So it faces the rather daunting challenge of consistently showing value and growth to its investors. But Google also has a big problem, with several contributing factors: How can it maintain its superstar stock status, or even just survive long-term?

This week I’ll spell out Google’s challenges; in my next post, I’ll offer some solutions.

The Problems

1. Advertising is Google’s main revenue source -- by a wide margin. Yesterday, Business Insider posted a piece claiming that Google has the least diversified business online. (Here’s a graphic that demonstrates the findings from Dan Frommer of SplatF.) What the article shares is what we’ve all known for years -- the majority of Google’s revenue (90% last year) was generated from advertising. That percentage has dropped some in the past few years, but needless to say, advertising is still the cash cow for Google.

For many years, with Google commanding a high percentage of the overall search traffic (most months between 60%-70% or more of total search volume), Google hasn’t had too many worries about competitors like Bing or Yahoo eating away at its slice of revenue from search ads.

But unlike Microsoft, Google’s mere survival is tied to its advertising. Bing isn’t as strong in the search marketplace as it could be – but then again, it doesn’t have to be.

As any financial advisor would tell you, don’t put all your financial eggs in one basket. And that advice holds true whether you’re a company or an individual. Right now, Google’s eggs are pretty much all in the advertising basket, and that’s dangerous. Just ask other one-trick-pony companies how that worked out for them. Disruptive technologies come along and force change. In business, you have to evolve – or die.

2. Enter the competition. Not only is Google challenged with having too much of its revenue tied to one product, it’s also facing a myriad of new competitors in the advertising space -- not least of which is Facebook. I’m sure back in 2005 Facebook looked like a mere diversion, and many might have felt it would go the way of MySpace. But it hasn’t.

In a study from late last year, measurements from Citi Investment Research and Analysis showed that users spend more than double the time on Facebook as they do on Google sites, including Gmail. That’s somewhat to be expected given the nature of the two entities. And users are still flocking to Facebook in all age groups, which means that Facebook has expanding reach and influence. Couple that with the growing amount of time Facebook users spend on the site, and you’ve got a large captive audience.

The final blow from Facebook is its attractiveness to advertisers. Unlike other forms of online advertising, including search, Facebook offers unprecedented demographic targeting for ads -- by age, gender, geographic location, likes, and even status updates. The response? A recent OnlineMediaDaily piece  reported how Facebook ad growth is outpacing search advertising, with advertisers increasing Facebook advertising budgets by 109% in the fourth quarter of 2011.

3. U.S. search market begins to level off. That post also mentioned how the U.S. search advertising market may be slowing down. Search advertising has been around now for more than ten years (be it through AdWords or other platforms), and advertisers clearly understand the benefits. However, at some point, search advertising as a tactic will likely plateau.

Evidence of Google’s possibly reaching this plateau came to me late last year. Each year I guest lecture at my alma mater, James Madison University, and help college students in the Google Online Marketing Challenge (GOMCHA) course with basic comprehension of Google AdWords and how to manage campaigns. Each team is given $250 free advertising dollars from Google to spend over a three-week period for a client.

One of the contest rules deals with the types of companies students can recruit as clients for GOMCHA.  Several years ago, students had to select a company that had NEVER used Google AdWords before, clearly showing that Google was trying to introduce AdWords to new prospective companies. However last year the rule loosened somewhat, and now students must work with companies that have not advertised on AdWords in the past six months.

To me, that was a clear sign that Google understands that the U.S.-based search ad market is reaching saturation. It would be almost impossible for a student today to find a company (unless it was a new company) that had NEVER tried AdWords before.

Other signs showing an imminent plateau include studies like one from eMarketer recently, showing how search ad spend compared to all online marketing spend is beginning to level while online marketing spend overall continues to grow.

So those are the problems Google faces. Stay tuned for my suggestions on how to solve them.