Google Fail? Think Again!

Michael Hedges October 22, 2012 Follow on Twitter

Tipping past the growth phase of the business cycle to the mature phase brings on new challenges for an organization, media, technology or otherwise. As it happens when a company matures the profit growth rate levels out, the cost of doing business rises. Smart organizations don’t panic, embrace the change, keep focused and avoid all the jumping up and down.

“Just shocking,” howled stock market analysts when Google’s Q3 financials showed slower year-on-year core revenue growth. After the inadvertently early data release (October 18) Google’s shares dropped as much as 11% before the company ask the NASDEQ to suspend trading for two hours, an eternity at the betting parlors. The share price recovered, more or less, to keep Google ahead of Microsoft – but still behind Apple – in total market value.

On closer examination it wasn’t all that earth (or Google) shattering. To be sure, year-on-year net profit is down about 20% and the oft-mentioned per-click ad revenue was off about 15%. Total revenues, though, are up 45% year-on-year to about US$14 billion. It’s that acquisition of Morotola’s mobile division that shook Google’s quarterly profit along with summertime blues, quarter ending September 30th, in the search ad business. Q3 profit was US$2.18 billion, about a half billion lower than the betting parlors expected.

Search advertising remains Google’s core business, 77% of all revenue. The company’s revenue from search ads had been growing at least 20% per quarter in each of the last ten quarters and in Q3 was US$11 billion. The drop in search ad revenue was attributed by several analysts to that mobile problem. Serving ads to the very small screens of mobile platforms is a challenge both technically and, well, folks really don’t like them.

But search advertising makes a lot of money for Google and whenever there’s a lot of money on the table it’s a target of opportunity. When infamous American bank robber Willie Sutton was asked why he robbed banks, according to legend, the answer was obvious: because that’s where the money is. Google is spending more and more to defend the search ad revenue stream.

Newspaper publishers in Brazil are but the latest to attempt to squeeze money from Google. The 154 members of the Association of Newspapers in Brazil (ANJ), including regional giant O Globo, have removed themselves from Google News search results, reported the Knight Center for Journalism in the Americas (October 18). “Google News benefits commercially from that quality content and is unwilling to discuss a remuneration model for the production of these materials,” said ANJ president Carlos Fernando Lindenberg. “Staying in Google News was not helping us grow our digital audiences. On the contrary, by providing the first few lines of our stories to internet users, the service reduces the changes that they will look at the entire story in our web sites.” Newspaper publishers in Belgium went down that logic path in 2010 and promptly reversed course when Belgium disappeared from the Google universe.

The response from Google remains the same: the headlines and snips, like the street corner newsstands of yore, create interest and, if just right for the person searching, a click to the originating webpage. Every good ad salesperson explains the concept to shop owners as the job of advertising being to bring customers to the store and the store salesperson’s job is making the sale.  Google’s director of public policy and governmental relations in Brazil Marcel Leonardi, at the Inter American Press Association meeting in São Paulo last week (October 16), said paying for headlines is just as absurd as restaurants charging taxi drivers for delivering customers to dinner.

Testiness between newspaper publishers - and their government supporters – and Google has only grown more acrimonious after the noted Belgian incident, something similar with the Associated Press and more recently with German publishers pushing a tax on Google’s profits. The French government, at the prompting of newspaper owners and trade unions, is moving toward establishing a new intellectual property right that would force search engines to compensate publishers for content referenced in search results, obviously directed at Google.

Google France responded officially to the proposed law (October 18) with characteristic aplomb. Implement this law and “less information will be available online,” reported Le Monde (October 18), because Google would simply stop indexing French websites. “This legislation would be detrimental to the promotion of the French language,” catching French Culture Minister Aurélie Filippetti where it hurts. ”Adoption would significantly reduce search results of French sites, deferring to Anglo-Saxon sites, which would obviously not be constrained.”

“You don't deal with a democratically-elected government with threats,” replied the miffed Minister Filippetti.

Indeed Google’s attitude toward these incursions on the profit margin is, in some respect, characteristic of a maturing corporate culture. At the annual shareholders meeting last week (October 16) News Corporation Chairman Rupert Murdoch, on the far-side of maturity, told complainers to sell their stock if they don’t like the way he’s running the company. Earlier this year News Corporation owned UK newspaper The Times reversed its policy toward Google, allowing the search engine to index its headlines.

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