Handicapping Google's 'horse in every race' strategy
Search giant is investing in everything from broadband access to grocery deliveries. But it still hasn't found a way to turn them into moneymakers. Will that change soon?
The juggernaut continues to roll, but what's next?
Google turned in another stellar report card when its second-quarter earnings handily beat estimates, sending the stock up nearly 4 percent on Friday. Little surprise there: Google remains the world's most dominant digital advertiser, and no rival comes close. In fact, Google is expected to finish the year with more than 31 percent of the global digital ad market, according to eMarketer. In comparison, its closest competitor, Facebook, trails with just shy of 8 percent.
But Google's management knows the cyclical nature of the history of the tech business, a narrative replete with examples of seemingly unchallengeable companies that later got knocked off their perches. A closer look at Google's earnings report did turn up a few blemishes.
For instance, the company said its average cost per click, which is the amount of money that Google gets each time you click on its ads, fell 6 percent. Google blamed the slip on low smartphone ad prices. Still, it's an indication of a shifting landscape as users scatter to different platforms. Whether it's a harbinger for real worry or a temporary issue will only become clear in coming quarters.
Analysts don't seem particularly upset about that shortfall, but during a conference call after the earnings report was released Thursday afternoon, several nonetheless expressed curiosity about what else Google's got cooking -- and how soon those things will begin making money. Over the years, the company has ranged far beyond its traditional business, heading into then-foreign markets like email and online video.
CEO Larry Page certainly isn't fazed by shareholders' concerns. "Investors always worry, 'Oh, you guys are going to spend too much money on these crazy things.' But those are now the things they're most excited about --YouTube, Chrome, Android," Page told Wired last year. "If you're not doing some things that are crazy, then you're doing the wrong things."
Most recently, there have been questions about Google offering things like broadband access, with a project called Fiber, or premium content on YouTube.
"Fair to say, we've got a horse in every one of those races," said CFO Patrick Pichette, predictably without getting into details.
The company is said to be readying the release of a paid-tier version of YouTube, which would feature music from artists on major and indie labels. A subscription-based revenue stream for entertainment services would be new for Google.
Pichette dodged directly answering a question about bundling content together. But Sameet Sinha, an analyst at investment bank B. Riley, said he thinks Google will one day offer a service that packages movie and music, and resembles Amazon's popular Prime service.
"They want to be everything -- your home entertainment center, your video provider," he said.
Google has not been shy about its desire to expand to every facet of peoples' lives. At I/O, the company's annual developer conference in late June, Google laid out an ambitious plan for the expansion of its Android mobile operating system. The company wants to make it the platform that powers everything from smartwatches to televisions to car dashboards. The company also in February bought smart device maker Nest, another platform it can leverage as it surges into the smart home market.
"We're helping users take their services from one screen to the other and making that happen seamlessly," said Nikesh Arora, Google's business chief, who announced that he's leaving the company to work at SoftBank. "If that works out, I think there will be phenomenal business opportunities across the future."
As Android grows, the company's online content market Google Play, becomes even more important for Google. Originally called the Android Market, the Play store was announced in 2008. Downloads from the Play store, which sells Android apps, exceeded those from Apple's iOS App Store by around 60 percent in the second quarter, according to mobile analytics firm App Annie. The firm also said, however, that Apple's App Store still earned about 80 percent more in revenue. The Play store has 1.5 million apps available, more than Apple's 1.2 million, also according to App Annie.
Still, analysts clearly see the promise in Google Play. "I think there's a real marketplace there," said Sinha. "Google has the ability to control that marketplace." On Google's earnings report, "other revenue," which includes Google Play sales, accounted for 10 percent of total revenues. The figure rose 53 percent from last year to $1.6 billion.
Google also has its famous "moon shots," audacious projects that attempt to advance technology in leaps instead of incrementally. In addition to Fiber, those initiatives include driverless cars, or using software to operate vehicles. (New Google-built prototype cars don't even have steering wheels, accelerators, or brake pedals.) There's also Google Glass, the ambitious connected headset, which mounts a mini computer in front of a person's eyes and allows wearers to record video of what they see. Then there's an effort called Tango to accelerate 3D mapping and machine vision on mobile devices, and a project called Loon that aims to bring Internet access to rural areas via giant, high-flying Wi-Fi balloons.
But as Google enters new areas -- Page has, in the past, called it "virgin territory" -- the company has been clear that these projects are not ready for prime time. Pichette said some initiatives, like driverless cars, can take half a decade or more before the company starts to think of profitability.
In the meantime, analysts are willing to give Google the benefit of time, at least as long as the main business continues to thrive. "[Google] continues to have a powerful core growth engine with multiple areas of optionality to drive the business in the future," Gene Munster, an analyst with Piper Jaffray, wrote in a note to clients on Friday. He also said that Google is the "best long-term large cap story" in his firm's coverage space.
Google is even pacing itself with more down-to-Earth projects like Shopping Express, an e-commerce effort that lets users buy products from local retailers for same- or next-day delivery. The service is only available in limited markets, and started out as an "experiment," Pichette said.
"These things will be critical three years along," Sinha said. "But not now."