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Google Inc. is facing new challenges as more consumers are buying smartphones. This phone is able to format Google to fit its screen.


Google: The disrupter, disrupted

by John Burfisher
Dec 04, 2012


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John Burfisher/MEDILL

Google's purchase of Motorola impacts major retailers like Best Buy, which carries its products.

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John Burfisher/MEDILL

Customers at Best Buy browse its mobile phone section. An increasing number of consumers rely on mobile phones for internet access in their daily life.

Ever since it burst onto the tech scene 14 years ago with a game-changing search technology that shook the financial foundations of the media sector, Google Inc. has been a disruptive force.

But these days, as mobile technology increasingly displaces the PC-based platform that was dominant when Google was born, the disrupter is being disrupted.

If you doubt Google’s impact, think of this: How many companies can be used as both a noun and a verb? Google’s entry into the English language underscores just how much consumers use the company to get information in the Digital Age. Since 2004, when Google launched its initial public offering, the company’s share price has soared as Google became synonymous for search, dominating every other search engine predecessor. to date, no serious mainstream rivals have appeared.

Google’s online ads, because they can precisely target different market segments, generated big change. Major advertisers began allocating dollars to Internet ads instead of traditional media outlets such as newspapers and magazines, draining publisher revenue and forcing news providers to cut back staff and circulation.

With the industry's longstanding financial model broken, mainstream media began a downward trend that continues today.

Now Google is the world’s most widely used search engine, and –- with a whopping market capitalization of just over $225 billion -- is also one of the largest publicly traded companies on the planet.

It is commonly accepted that Google’s sophisticated algorithm generates the best search results. That’s why it attracts the most users. And the company has been using its staggering cash flow to diversify away from its original base. “They are now no longer just a search engine company, they are now a tech giant,” said Dany Gaspar, director of digital strategy of Levick, a Washington consulting concern.

But these days, the change-maker is itself scrambling to adapt to new changes in the tech industry. The price advertisers pay for each “click” from a Google search has softened recently. In addition, advertisers pay much less for “clicks” from mobile-phone searches; as mobile units grow ever more common, that’s putting pressure on Google’s margins.

A major challenge the company faces is finding profit from mobile advertising and keep consumers searching on Google as people start using smaller devices to gather their information instead of desktop computers or laptops.

As more people are buying and using smartphones, customers are becoming more dependent on their mobile devices -- and Google's potential exposure grows.

“Abundance creates disruption,” CEO Larry Page acknowledged in a recent earnings conference call, discussing the trend toward mobile computing. “But it also creates amazing opportunity.” Google, he said, is very well placed to take advantage of such opportunity.

The company’s most recent endeavor into mobile media was its $12.4 billion acquisition of cell phone maker Motorola Mobility. Libertyville –based Motorola has a broad portfolio of patents that Google thinks will help it in the litigious telecom sector, but some investors are worried the acquisition company may pose a risk to the buyer’s growth.

But Google execs remain confident. “We are really pleased with Motorola’s progress in its first 150 days,” CFO Patrick Pizhette Said during the conference call. “Our team has made a lot of operational changes,” adding that “We harmonized and narrowed the product portfolio and streamlining of software operations, (and) scaled back the markets in which we operate.”

It is too early to tell whether Motorola is a successful endeavor, said Sameet Sinha, an analyst from B Riley and Co.. In order for Google to stay fresh in the mobile phone marketplace, he said, the company must be a producer of not only software, but hardware as well. Hardware is “still an important part” of consumers’ interaction with software, he noted, and Google, as creator of the Android operating system, is doing “fine” in that arena.

 “But to really stitch everything together they need a hardware platform as well,” said Sinha. “You can really define how the operating system works when you have the hardware.”  The Moto deal, by adding a hardware platform, ” will help them get better products out there.” the analyst said.

By design, “When you do a search on a smartphone you get different sites than you would on your desktop,” said Marc Purtell, director of search engine optimization at Media Whiz LLC in New York. That adjustment, he said, has Google “going in the right direction.”

CEO Page said “There is tremendous innovation in advertising, which I believe will help us monetize mobile queries more effectively than desktop today. Mobile commerce is growing dramatically across the board.”

Currently, the company’s price-earnings ratio is 20.87 over the trailing twelve months, higher than the S&P’s current PE ratio of 15.60.
Over the past twelve months, the company’s shares have risen about 11.5 percent – not quite matching the 13.2 percent increase in the S&P 500 Index.

In the first nine months of 2012 the company generated revenue of $33.14 million, up 21 percent from $27.32 million in the year ago period; the Motorola acquisition has boosted revenues since its closed in May. Google’s net income rose 11 percent to of $7.85 billion, or $23.69 a diluted share, from $7.03 Billion a year ago.

But some experts agree that Google needs to slow down its paid search ads and allocate organic search listings to provide a better user experience. Marc Purtell, of Media Whiz, said “77 percent of users prefer organic search listings because they trust them more.” Pay search ads turn a lot of customers away.

Many investors think Google still has plenty more opportunity for growth. Citi research said in a recent analysis that Google, which will benefit from “its clear market leadership,” is likely to see revenue increase 38 percent next year, to 52.49 billion, and to rise in 2014 to $72.13 billion.

Gaspar from the communications company Levick says that, “They need to leverage the learning they have had over the years in search and translate that to mobile. The overall strategy is not to stray away from search, but keep their foot on the gas pedal and remain innovative and ahead of the curve.”