MoneyWatch Tech

Google Needs to Escape From Its Ad Prison -- and an Acquisition Seems Likely

By Erik Sherman

Updated on: May 5, 2010 / 3:47 PM EDT / MoneyWatch

The press sure does like to slap at Yahoo (YHOO) CEO Carol Bartz. The latest incident was her remark that competitor Google (GOOG) was a one-trick pony, capable only of selling ads and, as a result, limited. The typical reaction? Bartz should keep quiet until Yahoo can do as well as Google. Pointing out the flaws in someone doing far better than you is a bit silly, but she does have a point.

Google does need to diversify -- and its management knows it. Most of Google's diversification efforts have turned into a big fat zero, and even the comparatively successful ones only make 4 percent of the company's revenue. Now management plans to rent movies and sell e-books. The question is whether selling content will finally provide the sliver bullet formula to slay over-dependence on advertising and offer the diversity that the company badly needs. I think the answer is yes.

Normally I disparage silver bullet solutions because they're unrealistic. Most business problems are complex and long-standing. But Google is an exception. At the start, founders Sergey Brin and Larry Page weren't clear on how the company would make money, trusting that a large enough user base would provide an opportunity. It was a common enough strategy then and still appears to be, as Twitter has proven.

Google was fortunate that it was able to acquire Applied Semantics, which created the AdSense and AdWords systems that have fueled Google's economic success since 2003. In fact, many of Google's best features and product lines started in companies that Google acquired:

Where2 and Google Maps
Pyra Labs (Blogger)
Picasa
Urchin Software (Google Analytics)
Android
YouTube
GrandCentral (Google Voice)
Writely and 2Web Technologies (Google Docs)

You could say that, outside of creating top search engine technology, Google has depended on acquisitions for success, and the strategy has become a natural part of the company's culture.

Another part of Google culture is how it best makes money. It excels when it can get paid for content -- whether its own software or video, text, and other media that it collects from parties -- and run the entire transaction and customer relationship through automated processes. Nothing complicated like the Google Nexus One smartphone that has become a minor disaster.

As I've argued for a long time, Google is already a publisher. It creates and distributes software. It aggregates and delivers web content from many news sources. Google search results are like real-time custom information directories. Google has shown its interest in reproducing books and, now, offering e-books. YouTube will allow some users charge for video. Expanding into media sales is a natural for the company.

But if the history of Google holds true, chances are that it won't take off without a suitable acquisition that could jumpstart the company into a position competitive with Amazon (AMZN) and Apple (AAPL). In this case, I think that Google needs a company that has a foot in traditional media as well, if for no other reason than to have established relationships with content publishers.

Powell's Books would be one possibility, but a better one I think would be Borders (BDG). Sure, Google probably doesn't want to pick up a chain of stores, but they would provide additional outlets for Google tablets and phones (assuming the company remains serious about selling software). Furthermore, there's a natural set of relationships with book, magazine, music, and video publishers -- just what Google will need -- as well as people who understand how those industries work.