What is Google's biggest threat .. the Internet

I was reading an article on TechCrunch the other day titled Do Startups Stand A Chance Against Valley Incumbents?. That got me thinking on what is Google's biggest threat. Google has slowly grown from a small search engine that was powering Yahoo and Microsoft web search back in the early days to one of today's biggest companies.



Its success can be attributed to three powerful strategies Google followed (and still follows).

1. Simple design to encourage users: From its single line web search to email and to every other product Google makes, they are really focused on simplicity. They go to extraordinary lengths to maintain the simplicity and consistency of their sites.
2. Really powerful search and ad matching: The keyword matching and bidding systems used by Google's AdWords and AdSense platforms are outstanding. Since they have captured the search market as well, Google is able to generate volume which drives optimization which again drives better ROI for advertisers. If advertisers see better ROI, they are more likely to go back to Google to advertise.
3. Free: Google offers almost all its services for free. You can't compete with that! Most users don't know where Google really makes money, but they trust Google because the search and almost everything else is really really good and free.

Ok, so now you're wondering why I am still talking about Google's strengths when the blog post is supposed to be about Google's threat. I just wanted to lay some ground work. Google's revenue comes from its ad network. The table below shows that more around 96% of Google's revenues are from advertising revenues. This has been true for many years now.

	Full Year			2013
			(unaudited)	(unaudited)
Revenues	2011	2012	2013	Q1	Q2	Q3	Q4
As % of Google Segment Revenues
Google Websites	69%	68%	67%	67%	68%	68%	67%
Google Network Members’ Websites	27%	27%	24%	25%	24%	23%	23%
Other Revenues	4%	5%	9%	8%	8%	9%	10%

Source: http://investor.google.com/financial/tables.html (see 2013 information). More information here.

The key strengths of Google is also its biggest weakness. Google is one of the biggest proponents of the Internet and has believed that if more people use the Internet then Google will have more content to search and therefore can make more money. But as more people came to the Internet, two things happened,

1. Google made more money: Yes that part was true to a certain extent
2. The organic search results started interfering with the ads

The second point is key. As more people (advertisers) also come on the internet with their websites, blogs, pages (facebook, linkedin, pinterest, etc.), then Google organic search (the main search results) will have more (if not all) the advertisers in it. So there will come a point when Google will have to pick what to show in the search in order for users to click on the ads. If Google stays true to its search philosophy, it will have to show the advertiser's site in the search result and the advertiser's ad on the right. Users will naturally click on the search results and Google search will start cannibalizing on its ad revenue. At some point, the advertisers will see that if they are relevant, users will find them anyway on Google and if not, users will not click on their ads because they found better "results".

So, as I read the article on TechCrunch I was thinking to myself, who could stand up to Google? The simple answer is .. no one has to. Google search and advertising paradigm is heading towards a point of collision. Well, you might argue how come this hasn't been happening so far. If all of Google's ads are links to others sites, then why has Google been able to generate revenue so far. The reason for that is that advertisers didn't have enough presence on the Internet to link them to people. So keywords were the answer. Advertisers could use keywords as hooks to draw people to their sites. Now, with so much data and information about each advertiser on the Internet (continuing to grow), advertisers do not need the keyword hooks anymore. Google can already find the right match and show that in the search results.

I am yet to dig into whether we can spot signs of this theory from Google's revenues and rankings. But you can see anecdotal evidence in the way Google has started showing paid ads more prominently, in the form of widgets, giving it larger screen real estate, etc. in the recent years. Here's a great post on recent changes to Google's ad spots on its search results page.

http://www.rimmkaufman.com/blog/a-more-organic-experience-part-iii/19022014/

Google has tried numerous attempts to generate revenue from hardware (Motorola purchase), services (like Google Shopping Express) and others to diversify its reliance on the ad revenue but with ad revenues making up 96% of total revenues, there is a lot of work to do. Google is the king in search but I think it is getting closer to being forced to make difficult decisions on whether it has to stay true to its search philosophy or try to play the consumer to continue its dominating ad revenue.

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