Recent news that U.S. Federal Trade Commission staff recommended that the regulatory agency sue Google two years ago for antitrust violations has dredged up legal worries that the company thought were put to rest.
While Google isn’t facing an active antitrust investigation by U.S. authorities, EU regulators haven’t completed their own probe of the company’s business practices. One EU lawmaker has suggested that the disclosure of the FTC staff recommendation lends credence to European concerns about Google’s business practices.
The potential for antitrust in Europe is just one reason why the immensely wealthy and powerful search and Internet company that was in a seemingly invincible position a few years ago is looking more vulnerable than it has in its history.
While Google has expanded into a number of new ventures in the past two or three years and the company continues to be a formidable voice for the IT industry on numerous issues, most notably on those pertaining to government surveillance and censorship, some market analysts are raising questions about whether Google is past its greatest period of growth.
They note that Google’s revenue growth has slowed and its profit margins have declined. Once an unquestioned darling of Wall Street, the company has consistently missed analyst expectations five quarters in a row.
Though Google continues to be hugely profitable, has a market cap in excess of $370 billion and is sitting on a pile of cash estimated at more than $60 billion, revenues from its core ad business have slowed.
The company still holds a dominating presence in the search engine market but its overall share has declined as Yahoo’s has gained in recent months. If Apple does not renew an existing contract to retain Google Search as the default search engine on Safari, Google could see an even more dramatic erosion in market share.
Particularly troubling from Wall Street’s point of view is the gradual slowdown in revenue growth and profitability in Google’s core desktop advertising business. This comes amid rising competition from Facebook, Amazon and Microsoft in areas like mobile ad revenues, cloud services and enterprise software. They have noted with concern how Google’s ad acquisition costs have inched up steadily even as the money it is making per click has declined.
Google’s numerous development projects like its Project Loon balloon-powered Internet effort, autonomous cars, smart glasses and Gigabit Internet efforts have attracted considerable attention, but analysts believe the company is still years away from seeing any financial returns from these initiatives.
Despite all its efforts to diversify its revenue streams Google remains heavily dependent on advertising dollars. Based on last quarter’s results Google’s core advertising business still accounts for nearly 90 percent of the company’s revenues. All its other businesses including Google Apps, Google Cloud Platform, Android, Nexus, Chromebooks and Google Play accounted for barely 11 percent.
For a Wall Street accustomed to seeing growth at Internet speed from Google, the company’s recent business performance has been lackluster at best.
“Many investors remain skeptical of Google’s position among technology darlings exacerbated by the accelerating shift to mobile,” Baird analyst Colin Sebastian had recently noted even while expressing his own optimistic outlook on the company.
Google Antitrust Worries, Growth Slowdown Seen as Temporary Setbacks
“Even within industry circles, there is a prevailing view that Google has lost some ‘mojo,” he noted.
By continuing to cling to “aging revenue pillars” and squandering the present to focus on “scattergun projects” Forbes columnist Gordon Kelly recently likened Google to the old Microsoft. “Google’s pillars of ads and search have become its Windows and Office,” Kelly said. “Both are being chipped away by more targeted advertising within social media and the compartmentalization of an apps-based world.”
That certainly is a somewhat different Google than the one, which prompted FTC staffers to recommend the company be sued for anti-competitive behavior back in early 2013.
Google managed to avoid a federal antitrust lawsuit when the FTC’s Commissioners in January 2013 unanimously decided to drop a 19-month investigation of the company, which had voluntarily agreed to change some of its business practices.
But an internal FTC document obtained by the Wall Street Journal shows that Google used its enormous search engine clout to bully other companies, stifle competition and resort to what the FTC staff described as actions that hurt consumers and rivals.
So now Google is not only facing questions about future growth prospects, it has to be concerned that these recent disclosures will raise the chances that the company will face antitrust prosecution in the EU or even a renewed investigation in the U.S.
However, not all industry analysts believe that Google’s recent setbacks are a sign that it is on the tipping point of a prolonged decline.
While Wall Street has fretted about a slowdown in Google’s core businesses, industry analysts say the issues are typical for any technology company of Google’s size, particularly one that has grown the way it has in recent years.
“Some people are now attacking Google with the same vitriol they reserved for Microsoft,” said Gartner analyst Tom Austin. But “Google’s fine,” he said pointing to a recent Gartner report on the company titled ‘Understanding Google, 2015.”
In the report, Austin and other Gartner analysts acknowledge the many challenges that Google faces from rivals, regulators and evolving market conditions. Yet, Google continues to flourish, says Gartner.
From an enterprise standpoint, “Google’s investments in and ROI from enterprise offerings continue to grow,” Gartner said. “The company leads in some market segments and competes effectively in a broad range of other enterprise- relevant businesses.”
While Google does derive a lot of its revenue from the advertising business, it is a mistake to continue to view the company as only an Internet ad giant, Gartner says.
Google’s wide-ranging technology investments have put the company in a great position for the future. Its growing portfolio of enterprise systems and services, such as Google Apps, the Google Cloud Platform, Google Drive for Work and Chromebooks, position the company well in the enterprise space. Furthermore, Google’s huge infrastructure investments to support its advertising and marketing services mean the company will only have to make minimal investments to scale out its enterprise offerings, according to Gartner. “This is a substantial benefit not available to many other competitors,” the analyst firm noted in its 43-page report.
Google Antitrust Worries, Growth Slowdown Seen as Temporary Setbacks
Ezra Gottheil, principal analyst at Technology Business Research says what is happening to Google is typical for any company that grows as fast as Google and reaches a certain size. “Then you have the law of large numbers. You cannot keep growing at the same high rate,” he said. “As companies get bigger their growth rates tend to slow down and not necessarily because they are executing badly.”
Google’s slowing ad revenues and growing acquisition costs are also not very surprising for the same reasons, Gottheil said. “Once you have harvested the most valuable clicks, the next round is going to be less valuable and each additional piece of the market is going to be harder and more expensive to acquire,” he said. “There is a certain amount of diminishing return,” beyond a certain point.
Google’s forays into numerous new areas need to be viewed in this context, according to Gottheil. The moves are as much about the company diversifying its revenue stream as they are about enabling more growth of its core businesses. Google’s autonomous cars, for instance, could one day become another platform for targeted ad delivery or another rich source of customer data for marketing purposes.
A lot of Google’s business is about connecting people in ways that bypass current infrastructure, he noted. But not all of them will pay off, and if they do, it won’t be for an indefinite period of time, Gottheil said. “The complaint that they are somehow wasting this money suggests it is better that Google with all its great people and all its great resources just give the money back to investors,” he said.
Independent analyst Jeff Kagan is even more sanguine about Google’s prospects, suggesting that Wall Street jitters over Google’s financials are much ado about nothing. “Wall Street has a different measuring stick than the rest of the world. You really can’t judge a company by what investors think,” said Kagan.
The bigger any company gets, and the more diverse its business ventures become, the more complicated things get. But that doesn’t mean Google is struggling in any way, Kagan said.
“I don’t see any red flags yet. This is typical for a fast growing company,” he added. “Like many successful businesses, Google is very innovative and has a habit of throwing new stuff against the wall and seeing what sticks. They work on whatever sticks and discard the things that fall to the ground.”
Another analyst, Charles King of Pund-IT noted that “since its origin in the late 1990s, Google has been one of the most ambitious and consistently innovative companies in IT.The market has certainly shifted since then, and Google has mostly been successful in adapting to those changes.”
By venturing into unproven new markets, Google no doubt has chosen a difficult road, King said. But the strategy is deliberate. Unlike companies that have chosen to specialize in specific technology areas, Google appears to have opted for “informed generalization,” he said.
The company’s effort seems to be to investigate and understand the bigger picture, and to strategically add value where it best suits it purposes and goals, King said. “I believe that by taking a wider view of the intersection of technology and daily life than the vast majority of its competitors, Google is poised for a resurgence.”