Google's Acquisitions Are No Substitute for Effective Innovation

Last Updated Aug 11, 2010 2:37 PM EDT

Google (GOOG) is on the prowl for more acquisitions. That's turned into an acquisition every two weeks or so. But an increase in the pace of buying companies can come from strength or weakness. In Google's case, it's the latter. Although the company has had success with some of its acquisitions, most will fare badly unless it learns how to nurture new lines of business.

Though plump with ad money, Google has lost its way to the future. Yes, the company is massive and, yes, financially successful -- but only to a point. CEO Eric Schmidt as good as admitted to Bloomberg Businessweek that his company can't keep up the necessary pace of innovation internally.

The company is snapping up startups in social networking, mobile technology and graphical advertising -- areas where its homegrown efforts needed outside help. Google still gets more than 90 percent of revenue from its traditional advertising business, and it's stopped work on projects such as the Wave collaboration site because they didn't bring in enough users. The company also has struggled to keep pace with the growth of Facebook Inc."They're trying to keep up with a rapid rate of innovation in the online world," said Clay Moran, an analyst at Benchmark Co. in Boca Raton, Florida. He recommends buying the stock, which he doesn't own. "One way is to that is through external sources. You could certainly argue that they haven't been able to do it internally as well as they would have liked."
As I've mentioned before, Google has a number of problems that all feed into why its internal product development is so unaccomplished.

The company is abysmal at marketing because of its engineering culture combined with a lack of emotional intelligence. It doesn't know how to communicate with people and expects consumers to do things just because Google thinks they make sense. Furthermore, Google is awful at business innovation. It doesn't matter how good a technical idea is if you don't try to support an idea and make it work in the market.

All this is due to two aspects of the company's culture. I've mentioned its arrogance before: the expectation that no one is as smart as the people at Google and that it couldn't make mistakes. (When it does, Schmidt likes to "celebrate" them, as if they are a rare event to be noted.)

But another characteristic, passivity, also drives the company. Google takes actions up to a point and then waits for things to happen of their own accord. Its major money driver, search ads, depend on companies taking an action without Google really doing anything. It's great so long as it works. And, yes, Google does use sales teams for more complex business lines, like trying to get Google Apps into corporations. Even there, though, the company depends on the passive conversion model of freemium services, with people using the free version and some small percentage paying for additional capabilities.

The problem is that passivity is so ... passive. When times are good, you don't worry. When times are bad, you need a less laissez-faire approach to creating new businesses and launching products. When you look at Google's acquisitions, most have added functions and extensions to existing offerings. Only a tiny percentage of all its acquisitions over the years, such as Android and YouTube, have become new business lines. If Google insists on remaining passive, you can bet that only a similarly small percentage of the new acquisitions will turn into significant opportunities, so I wouldn't expect the company's revenue curve to snap out of its relatively flat pattern any time soon.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.