Are Google's best days behind it?

Slowing product development, legal woes, and rising bureaucracy may signal trying times ahead for Silicon Valley's favorite company

By Neil McAllister, InfoWorld |  IT Management, Google

Despite Page's best intentions, Google's salad days may be over. The hard days may already be on their way.

Google's river of moneyNot that the search giant isn't successful. Last year, Google reported $29.3 billion in revenue, and it's on track to earn even more in 2011. But Google is unique. Unlike most tech companies, which make their money by selling or licensing products and services, fully 97% of Google's income derives from a rather more prosaic source: advertising.

In one sense that's a good thing. Think of Google's revenue as an endless river of money flowing in from advertisers -- those that want to advertise on Google's sites and those that want to reach other sites through Google AdSense, AdWords, and DoubleClick. Whenever Google has an idea for an innovative new technology or service, it just dips a bucket into the river.

But in the bigger picture, Google's total reliance on advertising means innovative product development isn't truly central to its business model. Google spent $3.8 billion on R&D in 2010, or about 13 cents of every dollar it earned. That level of investment has to justify itself somehow -- and yet, in 2010 Google earned just $1.2 billion from all nonadvertising sources combined.

That may limit the search giant's reach into markets that offer fewer advertising opportunities. For example, enterprises don't want their data mined for targeted ads, which means products such as Google Apps for Business must be underwritten by customer subscriptions. Yet the subscription fees Google earned in 2010 were just a tiny fraction of the $18.6 billion that Microsoft Business Division, which produces Office, earned over the same period.

Google stands little chance of making further inroads into that lucrative market as long as its product development is so completely subsidized by advertising. After all, it makes little sense to prioritize feature requests from customers that make up less than 3% of your business. It's only logical that customers of its ad-supported offerings, which drive the most revenue, get the most attention. And which upgrade will do more to bolster Google's bottom line -- improving Gmail's UI, or refining its email indexing algorithm to deliver more targeted ads?

Your privacy is your concernGoogle's reliance on the ad market may further impair its ability to shore up new revenue streams, as the need to monetize its services through advertising may influence Google to innovate in ways customers might not like. In particular, Google has demonstrated a tin ear for individual privacy concerns. The watchdog group Privacy International has gone as far as to describe the company as "hostile to privacy."


Originally published on InfoWorld |  Click here to read the original story.
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