Google: The search party is over
`
`July 29, 2010· 6:00AM ET
`
`Recommend 0
`
`Yes, the company is still growing at rates that would be the envy of the rest of the Fortune 500. But its core
`business is slowing, its stock is down, its .;ndroid mobile platform ge_nerates scant r:evenue, and competition
`(hello, Facebook) is fierce. Can Google find its footing in this brave new world?
`
`By Michael V. Copeland with Seth Weintraub
`
`Stroll across the Googleplex in Mountain View, Calif., and you are
`confronted by a world that sparkles a bit more than whatever slightly
`dreary one you just left. Massive stone busts of ocean explorers like
`Jacques Cousteau fix their gaze on the cobbled paths that flow into the
`main Google buildings. At sunny tables outside, Google employees -(cid:173)
`the coolest, most confident techies you'll meet -- eat their free food and
`chat animatedly about who-knows-what arcane computer algorithms. or
`the latest must-do pastime of the young and affluent Silicon Valley set,
`like kite-boarding or indoor skydiving.
`
`It looks a lot like the midday break at some elite college campus. But
`almost 12 years after it was launched by precocious Stanford grad
`students Larry Page and Sergey Brin, Google and its founders are
`grappling with a very grownup set of problems. Google's core business,
`online search, is slowing. That is partly due to Google's own success; Google founders Larry Page (left) and Se
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`business so thoroughly-- Google s1tes lead the U.S. market with 64Yo Google's revenue .
`of all searches conducted. But more crucially, the web has changed
`significantly since Google became a verb. There is (at long last) fresh
`competition from Microsoft's Bing, and also a new wave of sites and services that offer alternatives for consumers' time and
`attention -- and the advertisers that follow them .
`
`The Googlers certainly know this, but in classic Innovator's Dilemma fashion , the company seems unsure about how to
`move beyond the core search business that has brought it such massive success. Google has placed expensive bets on
`acquisitions, chief among them its $1 .6 billion purchase of You Tube, a $3.1 billion wager on ad network DoubleCiick, and
`more recently its $750 million purchase of mobile advertising platform AdMob. But none of those deals have yet
`significantly diversified Google's $23-billion-a-year revenue stream: Google's main focus continues to be driving people
`back to the search box and the ad dollars that Google collects for helping marketers reach highly targeted consumers. Even
`Google's most successful new product, the Android operating system for smartphones, generates scant revenue for the
`company: Google gives the licenses free to mobile-phone operators to facilitate, you guessed it, searches and use of other
`Google services on mobile phones. And while it lets its whip-smart engineers dedicate a portion of their workdays to
`dreaming up the coolest products for the web, all that Googley experimentation hasn't had a huge impact on the bottom line.
`
`That was fine when the search business was expanding at 30% or 40% a year, and Google's revenue was growing at twice
`that. Long-term projections for growth in the search business are more in the 15% to 17% range. Yet analysts estimate that
`91% of Google's revenue still comes from the AdWords and AdSense business model that Google built around Page and
`Brin's breakthrough PageRank algorithm. Even more telling , an estimated 99% of its profit does too. This year's projected
`earnings growth of 18% is a third of what Google averaged over the past five years. A lot of companies would kill for that
`growth, but for technology companies, and Google in particular, those numbers don't impress. Google is rounding a corner
`that all the fruit smoothies at its Silicon Valley campus make it hard to pull back from. This year Google (GOOG) has joined
`the ranks of just about every great technology company before it, including IBM (IBM), eBay (EBAY), Cisco (CSCO),
`Microsoft (MSFT), and Oracle (ORCL). Google, against its will , and defying its massive cash hoard, is transitioning from a
`growth company to-- and there is no kind way to put it-- a cash cow. That ranks right up there with being a former
`supermodel, but it is a taint Google can't seem to shake right now, at least not on Wall Street. It's a big part of the reason
`that Google shares are down 21 % since Jan. 4, underperforming the Nasdaq (up 1%). ---
`-
`EXHIBIT 2081
`Facebook, Inc. et al.
`v.
`Software Rights Archive, LLC
`CASE IPR2013-00480
`
`

`

`  
`
`Google  searches  for  growth
`There  are  good  reasons  why  companies,  and  tech  companies  in  particular,  want  to  maintain  the  mantle  of  Growth
`Enterprise.  For  starters,  Wall  Street  values  you  differently.  A  growth  company  stock  commands  a  premium  price/earnings
`multiple  based  on  its  future  potential  that,  in  turn,  helps  it  lure  employees  with  stock  options.  Just  as  important,  being  a
`growth  company  affords  employees  and  founders  (and  even  shareholders)  a  huge  psychological  boost:  You're  driving  the
`economy,  you're  changing  the  world.  Facebook  and  Twitter  are  packed  with  engineers  who've  left  formerly  hot  tech
`companies.  As  soon  as  early  adopters  smell  a  whiff  of  last  year's  technology,  they  are  on  to  something  new.
`
`That  particular  odor  has  never  attached  itself  to  Google  since  it  launched  in  1998,  crushing  all  comers.  You  may  recall
`AltaVista,  Infoseek,  Lycos,  and  HotBot.  Google's  edge  was  better  technology  (see  "smart  engineers,"  above),  so  it  must  be
`somewhat  worrisome  in  Mountain  View  that  Bing  is  gaining  in  popularity  -­-­  Microsoft  sites  had  about  a  12.7%  share  of
`searches  in  June,  according  to  comScore,  up  from  12.1%  in  May  -­-­  partly  due  to  its  interface  and  other  features.  Indeed,
`Google  has  dispatched  Ben  Ling,  a  former  YouTube  wizard,  to  help  improve  the  quality  of  its  mainstay  business.
`
`Up  against  the  ever-­changing  web
`
`Some  investors  also  worry  about  Google's  ability  to  keep  pace  with  consumers'  evolving
`use  of  the  web.  Say  you  want  to  buy  running  shoes  to  train  for  a  marathon.  Five  years  ago
`you  would  have  simply  Googled  it,  looked  at  the  list  of  results,  weighed  your  options,  and
`made  the  purchase,  perhaps  by  clicking  on  one  of  the  sponsored  links  that  accompanied
`your  search.  Today  you  might  still  do  that,  but  increasingly  you  might  pose  the  question
`"What  running  shoes  should  I  buy?"  to  your  friends  on  Facebook,  or  maybe  write  "Who
`knows  about  training  for  marathons?"  on  Twitter.  By  the  time  shopping  service  Groupon
`sends  you  (and  25  of  your  friends)  an  offer  for  the  perfect  shoes  and  registration  for  a  race,
`you'll  probably  just  pounce  on  it.
`
`And  what  if  you  don't  even  have  a  question  to  pose?  What  if  you  just  need  help?  Consider
`the  case  of  American  graduate  student  James  Buck.  Egyptian  police  detained  Buck  for
`taking  photographs  of  a  protest  in  a  city  outside  Cairo.  Using  his  cellphone  and  his  Twitter
`account,  Buck  broadcast  a  single  word,  "arrested."  Buck's  network  alerted  officials  at  the  University  of  California  at  Berkeley,
`who  ultimately  got  the  U.S.  State  Department  and  a  local  lawyer  involved.  Buck  was  out  of  jail  in  24  hours.  Try  that  with  a
`keyword  search.
`
`This  is  the  phenomenon  Google  is  up  against.  In  the  decade-­plus  since  Page  and  Brin  came  up  with  PageRank,  the  web
`and  the  way  we  use  it  have  changed  dramatically.  As  Buck's  example  shows,  the  web  experience  is  increasingly  mobile  and
`social.  We  take  it  everywhere,  and  are  connected  almost  all  the  time.  Google  needs  to  find  real  success  in  this  new  world  -­-­
`or  invent  the  next  major  evolution  of  the  web.  It  isn't  easy  to  create  new  multibillion-­dollar  businesses,  but  the  rewards  are
`great  for  the  companies  that  do:  Consider  former  Google  ally  Apple  (AAPL),  which  has  dominated  add-­on  businesses
`(music  players,  retail)  that  are  more  profitable  than  the  one  that  brought  it  prominence  (computers).  Apple  is  just  killing  it,
`and  it  is  now  the  most  valuable  technology  company  in  the  world,  with  a  market  cap  of  $236  billion  vs.  Google's  $156  billion.
`Thus  far  Google  has  been  tight-­lipped  about  plans  for  a  world  beyond  search.  Marissa  Mayer,  head  of  search  at  Google,
`says  the  company  doesn't  provide  financial  guidance,  but  contends  that  Google  doesn't  need  a  huge  second  act,  a
`collection  of  smaller  businesses  will  suffice.  The  original  search  business  will  always  dwarf  any  subsequent  new  units.  And
`Page,  Brin,  and  Google  CEO  Eric  Schmidt  simply  haven't  articulated  a  vision  for  Google's  future.  "That  is  what  is  scaring
`investors,"  says  Sameet  Sinha,  a  senior  analyst  with  JMP  Securities  in  San  Francisco.  "There  is  no  clear  path  toward  what
`Google  is  doing,  or  wants  to  do."
`
`

`

`5/15/2014
`
`Google: The search party is over - Fortune Tech
`
`"Google  is  not  the  hot  company  anymore,"  says  Marc  Benioff,  CEO  of  Salesforce.com  (CRM).  "Their  stock  has  been  mostly
`flat  for  five  or  six  years  now.  How  can  you  claim  to  be  a  leader  with  equity  performance  like  that?  That's  starting  to  look  like
`Microsoft  or  Yahoo  (YHOO).  They  have  to  get  into  some  other  place,  and  quickly."
`
`Microsoft  is  an  apt  comparison,  except  the  software  company  found  a  second  engine  of  growth  to  supplement  its  Windows
`computer  operating  system  business  eight  years  after  MS-­DOS  hit  the  market.  That  business  would  become  Office,  the
`world's  most  profitable  application  software,  which  today  accounts  for  roughly  40%  of  Microsoft's  earnings.  Of  course,
`Microsoft  has  been  struggling  since  to  find  its  next  big  winner.  Its  server  business  chugs  along.  Its  gaming  console,  Xbox,
`could  still  be  an  engine  of  growth,  but  it  hasn't  moved  the  needle  yet.  Once  Office  saturated  the  workplace  and  then  some,
`Microsoft  lost  its  growth-­company  status.
`
`So  what  is  Google's  best  shot?  It  won't  be  international  growth.  Google  dominates  search  in  developed  countries,  and  it  will
`be  a  long  slog  in  other  parts  of  the  world,  such  as  Russia  and  China.  (In  China,  where  Google  recently  renewed  its
`license  despite  strained  relations  with  the  government,  Google's  30%  share  trails  China's  homegrown  search  king,  Baidu
`(BIDU).)  Google  has  plenty  of  real  estate  on  the  web  to  which  it  can  attach  more  advertising,  such  as  Google  Maps  and
`Google  Images.  And  indeed,  during  the  recession  Google  boosted  its  ad  revenues  by  opening  up  inventory  on  its  sites  to
`marketers.  But  those  are  incremental  gains,  not  a  big  new  source  of  revenue.
`
`Searching  for  Google's  next  big  thing
`
`The  company's  recent  acquisitions  and  product  launches  fall  into  four  main  avenues  of  business:  the  mobile  Internet
`(Android,  AdMob),  display  advertising  (splashier,  graphics-­heavy  ads  with  DoubleClick),  YouTube  and  video,  and
`applications.  A  fifth  area,  social  networking,  is  likely  to  be  a  big  push  for  Google  and  holds  the  most  potential.  The  company
`is  widely  rumored  to  be  pursuing  a  "Google  Me"  project  to  do  battle  with  Facebook.
`
`Google  does  not  report  specific  financials  of  businesses  outside  of  search,  but  Sandeep  Aggarwal,  an  Internet  and  software
`analyst  with  Caris  &  Co.,  estimates  that  mobile,  display,  YouTube,  and  apps  generated  about  $1.5  billion  in  revenue  in
`2009,  and  this  year  should  bring  in  about  $2.1  billion  in  sales.  On  a  bottom-­line  basis,  that  translates  to  about  $1.44  in
`earnings  per  share  this  year.  That's  peanuts  today  -­-­  Google  is  expected  to  earn  $27  per  share  in  2010  -­-­  but  those  are
`areas  that  are  already  outpacing  traditional  search  in  their  rates  of  growth.
`
`Amazingly,  Google's  biggest  and  most  promising  opportunity  to  date,  its  successful  Android  operating  platform  for  mobile
`phones,  doesn't  produce  much  revenue  or  profit  for  Google  -­-­  by  design.  The  company  in  2007  made  the  technology
`available  to  all  comers  in  a  bid  to  make  the  web  more  accessible  on  smartphones  and  in  turn  to  encourage  consumers  to  do
`more  Google  searches  on  their  mobile  devices.  The  strategy  worked.  Encouraged  by  this  easy  access  to  Android,  handset
`makers  began  churning  out  multimedia  phones,  and  the  Android  platform  has  been  a  consumer  success:  Google  says
`some  160,000  new  Android  devices  are  activated  each  day,  and  device  makers  from  Motorola  (MOT)  to  HTC  have  all
`released  popular  phones  on  the  Android  platform.  But  Google  doesn't  make  gobs  of  money  on  those  devices.  (Google
`dabbled  in  phones  but  discontinued  its  Nexus  One  after  only  six  months.)  Apple,  on  the  other  hand,  also  stoked  the
`smartphone  market  with  its  iOS,  but  with  very  different  financial  results:  Last  year  the  company  posted  an  estimated  $15
`billion  in  iPhone  sales,  a  benefit  of  making  the  hardware  and  the  software.
`
`So  where  will  Google's  next  $20  billion  come  from?  It  may  not  come  from  one  blockbuster  new  business  but  rather  from  a
`handful  of  smaller  opportunities.  Google  insiders  are  optimistic  about  YouTube,  which  accounts  for  10%  of  all  the  time  spent
`online  worldwide,  according  to  comScore.  (The  only  greater  time-­suck  on  the  web  is  Facebook,  at  17%.  We'll  get  back  to
`social  networking.)  Four  years  after  buying  the  money-­losing  video  site  for  $1.6  billion,  Google  seems  to  have  figured  out  a
`way  to  eke  out  operating  profits  by  selling  video  and  display  ads  against  a  growing  pool  of  professionally  produced
`programming,  including  infomercials  and  other  content  created  by  marketers.  Likewise,  Google's  $3.1  billion  acquisition  of
`DoubleClick,  the  ad  exchange  that's  been  folded  into  Google's  display  network,  will  help  expand  Google's  ability  to  place
`multimedia  and  display  ads  on  websites,  including  its  own  properties:  It  essentially  hopes  to  do  for  online  display  what  it  has
`done  with  text  ads.  But  few  analysts  see  those  businesses,  in  the  short  term  at  least,  becoming  Google's  next  huge  follow-­
`on  business  -­-­  its  Office  equivalent,  to  use  the  Microsoft  analogy.
`
`Could  its  Office  equivalent  be,  well,  an  Office  equivalent?  It's  a  long  shot,  but  one  of  the  more  profitable  efforts  at  Google,
`and  one  that  doesn't  have  a  thing  to  do  with  advertising,  is  its  nascent  business-­software  operation,  Google  Apps.  For  an
`annual  licensing  fee  of  $50  per  head,  Google  provides  corporate  customers  with  Gmail,  collaboration  tools,  and  other
`services  that  are  delivered  via  the  Internet.  Some  companies  have  started  ditching  traditional  software  vendors  (including
`Microsoft)  for  the  Google  Apps'  cheapness  and  flexibility  (adding  or  dropping  a  new  account  takes  just  a  few  clicks).  In
`June,  Google  announced  that  more  than  2  million  businesses  were  using  Google  Apps  for  Enterprise.  That  sounds  like  a
`big  number,  but  analysts  peg  revenue  from  Apps  this  year  at  about  $350  million,  or  just  $175  per  business.  Nikesh  Arora,
`Google's  president  of  global  sales  operations  and  business  development,  told  analysts  at  a  technology  conference  in  June
`
`http://tech.fortune.cnn.com/2010/07/29/google-the-search-party-is-over/
`
`3/5
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`

`

`5/15/2014
`
`Google: The search party is over - Fortune Tech
`
`that  he  expects  the  number  of  apps  customers  to  double  in  the  next  few  years.
`
`The  net  effect  of  all  these  efforts?  Analyst  Aggarwal  pegs  revenue  from  Google's  nonsearch  businesses  at  $5  billion  to  $8
`billion  in  2013.  For  any  other  company,  that  might  be  enough,  but  Aggarwal  estimates  that  the  company's  search  revenue
`will  be  about  $40  billion  three  years  down  the  road.  In  that  context,  nonsearch  revenue  still  isn't  enough  to  make  a  huge
`difference  in  how  Google  is  valued.  For  the  foreseeable  future  Google  will  remain  a  search  company.
`
`The  real  shift  going  on  within  the  Internet
`
`Mike  McCue  has  had  a  front-­row  seat  watching  the  web  grow  up,  and  as  far  as  he  is  concerned,  the  search  box  is  all  about
`the  past.  McCue  was  an  early  Netscape  guy,  and  he  recently  launched  tablet  software  company  Flipboard,  which  takes
`all  your  Facebook  updates,  your  Twitter  feeds,  all  the  news  sites  you  like  and  subscribe  to,  and  in  a  very  elegant  way
`publishes  a  constantly  updated  magazine  of  text,  photos,  and  video.  "There  is  no  need  to  do  a  search,"  McCue  says.  "We
`almost  view  it  as  a  bug  if  we  have  the  user  search  for  something."
`
`At  Google,  where  every  problem  is  waiting  to  be  solved  by  some  form  of  search  query,  that  is  tantamount  to  blasphemy.  But
`Flipboard  sums  up  the  shift  going  on  within  the  Internet,  one  that  is  arguably  the  biggest  change  to  the  web  and  the  way  we
`use  it  since  Google  came  on  the  scene.  Your  network  simply  provides  you  with  answers,  stories  to  read,  bargains  to  buy  -­-­
`and  you  often  don't  even  need  to  ask  a  question.
`
`In  this  new  phase  of  the  web,  one  of  the  largest  threats  to  Google  and  its  core  search  business  is  the  expanding  Facebook
`footprint  around  the  world.  Not  only  because  social  networks  (and  those  used  for  work  like  LinkedIn  fall  into  that  same
`category)  offer  a  substitute  for  search  for  consumers,  but  also  because  they  offer  a  substitute  for  advertisers  as  well.  In
`display  advertising,  for  example,  Facebook  has  a  16%  share  of  the  roughly  $9  billion  market,  according  to  comScore
`(Google  sites  have  2.4%  of  the  market),  and  advertisers  say  they're  looking  for  more  ways  to  plug  into  Facebook.
`
`"Facebook  has  got  Google  in  its  sights,"  says  Debra  Aho  Williamson,  a  senior  analyst  with  eMarketer.  "Advertisers  get  the
`best  of  both  worlds  -­-­  a  mass  audience  but  also  the  ability  to  target  more  than  anyone  else.  Who  are  the  advertisers?  In  a
`lot  of  cases,  they're  Google's  advertisers."
`
`Most  alarming  to  Google  is  that  much  of  this  new  social  and  real-­time  world  is  closed  off  to  Google's  core  search  business,
`and  its  index  of  the  world's  information.  Facebook,  LinkedIn,  and  Twitter  are  essentially  "closed"  platforms.  "It's  a  growing
`chink  in  their  armor,"  says  a  former  Googler  now  working  at  a  popular  social  network.  "They  know  that.  The  question  is,
`What  can  they  do  about  it?"
`
`Google's  Mayer  believes  the  answer  lies  in  delivering  better-­quality  -­-­  almost  intuitive  -­-­  search  results.  Mayer  calls  this
`implicit  or  passive  search.  It's  the  sort  of  thing  that  makes  connections  between,  say,  a  friend  who  is  an  amateur  expert  on
`travel  in  Australia  and  your  upcoming  trip  Down  Under.  A  keyword  search  could  not  only  flag  hotels  and  tourist  hot  spots  but
`also  find  blog  posts,  e-­mails,  messages,  and  even  pose  questions  to  your  friend  about  where  to  go  shopping  or  dining  in
`Sydney  -­-­  without  bothering  the  rest  of  your  network.  "Who  you  are,  your  context,  what  you  are  doing,  who  your  friends  are  -­
`-­  if  all  of  that  comes  in  as  the  search  input,"  she  says,  "what  is  the  right  output?"  (The  key  word  in  her  quote?  "Friends.")
`
`Mayer  won't  say  what  Google  is  building  (perhaps  the  rumored  "Google  Me"  service?),  but  clearly  she  is  pushing  the
`company  in  a  more  social  direction,  which  means  changing  users'  perceptions  of  Google.  "You  need  to  create  a  place
`where  it's  okay  to  be  social,"  Mayer  says.  Google  doesn't  have  that  yet,  and  in  fact,  its  efforts  so  far  have  been  widely
`panned:  Remember  Google  Buzz,  which  drew  the  ire  of  consumers  for  automatically  sharing  Gmail  users'  lists  of  friends?
`If  would-­be  rivals  are  worried,  they  aren't  letting  on.  "Google  is  smart  to  figure  out  how  to  make  its  stuff  social,"  says  Chris
`Cox,  head  of  product  at  Facebook.
`
`But  critics  question  whether  Google  can  make  the  leap.  "They  are  just  not  that  good  at  it,"  says  Tom  Coates,  until  recently
`the  head  of  product  at  Yahoo's  defunct  Brickhouse  lab.  "Google  is  very  good  at  building  these  utility-­type  products  -­-­  search,
`e-­mail,  and  messaging.  They  are  sort  of  like  the  power  company  of  the  Internet.  But  what  they  lack  is  a  sense  of  how  people
`share  and  collaborate."
`
`Coates's  point  is  that  you  don't  have  friends  on  Google,  you  have  contacts  and  tasks.  These  services  reflect  an  engineering
`culture  that's  all  about  utility,  but  one  that  makes  it  hard  for  the  company  to  create  something  that's  friendly  and  social.  But  if
`Google  can  change  its  utilitarian  ways,  the  company  stands  a  real  chance  of  tapping  into  that  next  growth  engine.  Imagine  if
`it  added  that  social  layer  to  its  core  search  business  and  to  Android,  and  blew  it  out  on  YouTube,  giving  people  a  reason  to
`hang  out  on  Google  sites  for  long  periods.  Advertisers  would  come  flocking.  If  it  can  get  that  right,  as  the  former  Googler
`now  working  in  social  media  sees  it,  "Google  would  be  unstoppable."  Just  like  it  used  to  be.
`
`http://tech.fortune.cnn.com/2010/07/29/google-the-search-party-is-over/
`
`4/5
`
`

`

`5/15/2014
`
`Google: The search party is over - Fortune Tech
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`512
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`[what's  this]
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`http://tech.fortune.cnn.com/2010/07/29/google-the-search-party-is-over/
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`5/5
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