Google Is Far From Safe

(MoneyWatch)  Google is facing some "challenges," as the corporate set says when wanting to avoid the word "problem." Only in this case, the real concept may be "quicksand pit." As the tech industry has seen throughout its history ?€" including the likes of Wang, Netscape, AOL, and Packard Bell -- companies can ride high one day and wind up in a ditch the next. And, as some recent developments are showing, online advertising isn't the first industry where success is not guaranteed to be everlasting.

What should spark this realization in anyone, including all those working in Mountain View at Google's headquarters, is the story yesterday when Reuters broke that Verizon chose Microsoft to provide mobile search services on its network. (To give all their due, the Wall Street Journal had reported in November that Microsoft was close to sealing a deal.)

In any case, the race for this contract had been on for at least a year. Microsoft has stated for some time now that it thinks its future is in online advertising, and has been ready to spend to get what it wants:

Under the terms now being considered, Microsoft would share revenue with Verizon from ads shown in response to cellphone Web searches, with guaranteed payments to the carrier of approximately $550 million to $650 million over five years, or roughly twice what Google offered, these people said. Separately, Microsoft is negotiating a deal to put its Windows Mobile software in more Verizon devices. The combined value of the two deals could top $1 billion.

Whatever the final numbers turn out to be, hundreds of millions is a lot less than the tens of billions that Steve Ballmer was ready to drop for Yahoo. And if he's interested in dominating search, this is a much more economic and efficient way of going about it for the same reason that Eric Schmidt sees Google's future growth in mobile online advertising. It is one market that is largely untapped, and once you have a preferred provider relationship with a carrier, you have a strong (though not unbreakable) lock on searches.

When it comes to this mobile ad market, Microsoft actually enjoys a number of advantages over Google:

• Being a distant third in online search is actually a benefit, because any increase starts looking like a big improvement and helps capture momentum.
• As of September 30, 2008, Google had roughly $14.4 billion in cash, cash equivalents, and marketable securities, according to its last 10-Q. On the same date, Microsoft had $20.7 billion, according to its last 10-Q, and so has a bigger war chest.
• Only a tiny portion of Microsoft's revenue is currently tied to online advertising, while in the first nine months of 2008; over 97 percent of Google's revenue came from advertising.

That last point is the biggest. When economic times are hard, companies cut back on advertising. Although analysts are still projecting search ad growth through 2009, those numbers are in the low double-digits ?€" respectable, but potentially misleading. Even if all of that went to Google, the company wouldn't be getting near the size of Microsoft. But increasingly any increase will be the product of mobile advertising. That makes Google incredibly vulnerable if it cannot dominate the new market, and with Microsoft getting the Verizon business, it can't.

Google has big reasons to look for diversification, which would explain the rumors of the company developing a router. Android might seem to be an answer, but remember that the company is giving it away for free, probably as a play to extend reach in mobile ad delivery. And that gets it back to needing a heavy shot of diversification.

Mobile search image via Flickr user Openkimia, CC 2.0.