Are Google's Best Days Behind it?

Slowing product development, legal woes, and rising bureaucracy may signal trying times ahead for Silicon Valley's favorite company

Few companies have made a splash in the tech industry as big as Google has. Launched by Larry Page and Sergey Brin from Page's Stanford University dorm room in 1998, the company became a $27 billion titan overnight when it went public six years later. Soon it was the darling of Silicon Valley, sweeping competitors aside and taking Microsoft head on. For a while, at least, it seemed Google could do no wrong.

On June 30, 2011, Larry Page closed his first full quarter as Google's new CEO, succeeding Eric Schmidt. Page has never led a public company, and the pressures of leading Google certainly differ from when he last held the helm in 2001. In January, Page told the New York Times, "One of the primary goals I have is to get Google to be a big company that has the nimbleness and soul and passion and speed of a startup."

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But that may be wishful thinking. Not only have more experienced CEOs seldom managed to strike such a balance, but Google is no startup. Today the search giant's full-time head count is almost 30,000 employees. It has offices in 42 countries on six continents. In terms of market capitalization, it's bigger than Ford, GM, Starbucks, FedEx, United Airlines, and Viacom combined.

With Google's rapid growth have come new challenges. It faces intense competition in all of its major markets, even as it enters new ones. Its newer initiatives have often struggled to reach profitability. It must answer multiple ongoing legal challenges, to say nothing of antitrust probes in the United States and Europe. Privacy advocates accuse it of running roughshod over individual rights. As a result, it's becoming more cautious and risk-averse. But worst of all, as it grows ever larger and more cumbersome, it may be losing its appeal to the highly educated, impassioned workers that power its internal knowledge economy.

Despite Page's best intentions, Google's salad days may be over. The hard days may already be on their way.

Google's river of money

Not that the search giant isn't successful. Last year, Google reported $29.3 billion in revenue, and it's on track to earn even more in 2011. But Google is unique. Unlike most tech companies, which make their money by selling or licensing products and services, fully 97 percent of Google's income derives from a rather more prosaic source: advertising.

In one sense that's a good thing. Think of Google's revenue as an endless river of money flowing in from advertisers -- those that want to advertise on Google's sites and those that want to reach other sites through Google AdSense, AdWords, and DoubleClick. Whenever Google has an idea for an innovative new technology or service, it just dips a bucket into the river.

But in the bigger picture, Google's total reliance on advertising means innovative product development isn't truly central to its business model. Google spent $3.8 billion on R&D in 2010, or about 13 cents of every dollar it earned. That level of investment has to justify itself somehow -- and yet, in 2010 Google earned just $1.2 billion from all nonadvertising sources combined.

That may limit the search giant's reach into markets that offer fewer advertising opportunities. For example, enterprises don't want their data mined for targeted ads, which means products such as Google Apps for Business must be underwritten by customer subscriptions. Yet the subscription fees Google earned in 2010 were just a tiny fraction of the $18.6 billion that Microsoft Business Division, which produces Office, earned over the same period.

Google stands little chance of making further inroads into that lucrative market as long as its product development is so completely subsidized by advertising. After all, it makes little sense to prioritize feature requests from customers that make up less than 3 percent of your business. It's only logical that customers of its ad-supported offerings, which drive the most revenue, get the most attention. And which upgrade will do more to bolster Google's bottom line -- improving Gmail's UI, or refining its email indexing algorithm to deliver more targeted ads?

Your privacy is your concern

Google's reliance on the ad market may further impair its ability to shore up new revenue streams, as the need to monetize its services through advertising may influence Google to innovate in ways customers might not like. In particular, Google has demonstrated a tin ear for individual privacy concerns. The watchdog group Privacy International has gone as far as to describe the company as "hostile to privacy."

In 2004, Sergey Brin told Playboy magazine he had been surprised by public outcry over the use of targeted ads in Gmail. The email service came under fire again in 2010, when Google began mining Gmail users' personal data for its Google Buzz social network without their consent. That same year, Google admitted that it had inadvertently intercepted emails, website addresses, and passwords as part of a Wi-Fi mapping project.

The Wi-Fi snooping earned Google at least seven class-action lawsuits. The Google Buzz blunder triggered an inquiry by the Federal Trade Commission, and the search giant now must submit to independent privacy audits for the next 20 years. Google has also drawn legal challenges in several countries over privacy issues related to Google Street View.

But none of this may be enough for Google to learn its lesson. The supply of ad dollars isn't infinite, and competition is heating up. The temptation for Google to increase the value of its ads by mining ever more personal data from its users must be great, as must the temptation to focus its efforts on products that increase its share of the overall ad market. Both could come back to bite Google, particularly if the legal climate around individual privacy grows more hostile to advertisers.

An elephant's graveyard of products

Diversification could help the search giant reach new markets, but as much as Google insists that it won't shy away from innovative, risky projects, its track record for turning them into successful products is spotty at best. If a particular product fails to capture the public's imagination, Google is often quicker to pull the plug than to invest in making it a more attractive offering.

A few such aborted initiatives include Google Wave, a much-hyped messaging technology that we were told would reinvent Internet communications; Google Health, an ambitious effort to kick-start electronic medical records; PowerMeter, a tool for monitoring home energy consumption; Realtime Search, an aggregator of up-to-the-minute information from Twitter and other social networks; and Lively, a 3-D virtual world similar to Second Life. Still other ideas aren't quite dead, yet lumber along listlessly -- remember iGoogle?

Part of the problem may simply be too many ideas. Google's product development tends to be scattershot and engineering-driven, leading to a company with its hands in too many pies at once and too few marketable products to show for it. Google's stated mission is "to organize the world's information and make it universally accessible and useful," yet it currently has initiatives under way covering everything from Web browsers to mobile phones, e-books, streaming music, video on demand, programming languages, social networking, home automation, cloud computing, and even self-driving cars.

Google also tends to fixate on its favorite ideas even when they seem impractical. For example, it has invested heavily to develop Chromebooks, an attempt to reinvent the PC as a dedicated Web browsing terminal. But this idea shows few signs of gaining traction with either businesses or consumers, no matter how near and dear it is to Google's heart.

In other cases, Google can't seem to grasp what customers really want. The market for video on demand is exploding, yet the ballyhooed Google TV effort has fallen flat, with Logitech reporting returns of its Google TV boxes now exceeding new sales.

Following, not leading

A company with pockets as deep as Google's can shrug off a few such missteps, but not forever. After a while, it's only natural to forsake novelty and take your inspiration from your competitors -- even for a company that prides itself on its engineering culture, as Google does.

Take Google+, for example. It's Google's most buzzed-about launch in recent memory, but it's hardly the company's first foray into social networking. (It's the fourth, if you count Buzz, Wave, and Orkut.) It is, however, the first time Google has unabashedly aped its top rival. The Google+ Stream layout is a virtual clone of Facebook's News Feed -- ditto for its profile pages. Squint your eyes and the Google+ favicon even looks like Facebook's "F."

That's quite a turnabout for Google, which earlier this year accused Microsoft of copying its search results. While imitation may be the sincerest form of flattery, the risk is that users may not find Google's offering sufficiently different enough to switch. So far there has been no mass migration from Facebook; although Google+ gained 20 million users in its first three weeks, its momentum already appears to be slowing.

In its quest for growth, Google may also tend to redouble its emphasis on existing offerings, such as Gmail, YouTube, and especially search. Of the $28.1 billion Google earned from advertising in 2010, two-thirds came from Google's own sites, rather than its ad networks. The risk there is that too much emphasis on its core products could put Google on the same road as Microsoft: For all its recent attempts to innovate in new markets, the Redmond-based giant has never managed to shake its reliance on Windows and Office, which still account for more than half its revenue.

Some critics already see evidence of calcification at the Googleplex. Former Google engineer Dhanji Prasanna describes the company's much-hyped software infrastructure as "10 years old, aging and designed for building search engines and crawlers"; for other purposes, he says, it is "well and truly obsolete." Similarly, Prasanna says the house-built tools that power Google's products are "ancient, creaking dinosaurs" that make prototyping new products excessively difficult.

A tangled legal Web

Technology aside, Google's ability to innovate is also constrained by legal concerns. Tech companies are increasingly using the courts as a means to gain competitive advantage, particularly in the more hotly contested markets. As a result, Google and its partners must answer to multiple ongoing lawsuits over patents and other intellectual property.

Google's Android smartphone OS has become a particular snake pit of litigation. Most prominently, Oracle claims Android's Dalvik virtual machine violates several key Java patents and is seeking billions in damages. Meanwhile, Gemalto is suing Google and its partners HTC, Motorola, and Samsung over patents related to its Java Card technology. NTP alleges Google has violated its wireless email delivery patents. Microsoft has signed patent licensing agreements with at least five Android device makers, while Apple is seeking an injunction banning HTC from importing its handsets.

It seems anyone involved with building Android devices can expect to find themselves in court sooner or later, and the patent-licensing toll may soon rise high enough that it negates any cost advantage of the otherwise "free" OS. Google's recent purchase of 1,000 patents from IBM may slow the tide, but won't stem it.

Then there are the antitrust probes. As Google has grown larger and its commanding share of the Web search market has solidified, it has drawn ever closer scrutiny from antitrust regulators, both in the United States and abroad. The Federal Trade Commission has probed Google over its purchase of mobile ad provider AdMob, its acquisition of travel industry software maker ITA, and an ad-sharing partnership with Yahoo. The first two deals were approved; the last was not. The agency now says it is ready to press forward with a more formal antitrust investigation, citing questions about Google's search and advertising businesses. European regulators launched a similar investigation in November.

Individuals can't innovate

None of this bodes well if you're a Google staffer with big ambitions. Famously, Google engineers are encouraged to spend 20 percent of their hours working on what they think will most benefit the company, irrespective of their regular duties. But as Google has grown more cautious and its management structure has grown more rigid, 20 Percent Time projects are less and less likely to become full-fledged products. Larger development teams have become the norm, and decisions require countless rounds of meetings and conferences. In 2009, former CEO Eric Schmidt observed, "There was a time when three people at Google could build a world-class product and deliver it, and it is gone."

Little wonder, then, that Google has gradually scaled back its commitment to 20 Percent Time. In 2008, Valleywag reported that managers were curbing the practice when mission-critical projects fell behind schedule. This year Google shut down Google Labs, a hub that allowed the public to experiment with 20 Percent projects and give feedback.

Google insists that the death of Google Labs won't mean the end of 20 Percent Time. Yet a neutered, ineffectual 20 Percent program may be the worst of both worlds. On the one hand, Google has burdened itself with an engineering staff that operates at just 80 percent efficiency, given its growing reluctance to experiment. On the other, engineers whose personal projects go nowhere may resent that their entrepreneurial instincts are wasted at Google. Combine that resentment with inefficiency, micromanagement, overwork, underutilization, and a rising corporate bureaucracy, and they may ultimately seek work elsewhere.

Wars of attrition

Former CEO Eric Schmidt flatly denies any brain drain at Google, insisting the company's attrition rate remained constant throughout his tenure. But that stability is hard won; in recent years Google has offered hefty raises and six-figure bonuses to stave off its competitors' overtures. In November 2010, it increased its entire pay scale by 10 percent.

Where Googlers go when they leave is no surprise. Many of them turn up at its closest competitors. Microsoft is reportedly engaged in an all-out hiring war with the search giant, as is Facebook, which has poached at least 142 Google staffers, including its top chef. Still others find new homes at startups.

Curiously, throughout it all Google has persisted with some of the most arduous hiring practices in the industry. While lots of tech companies claim to want the best and brightest, Google has refined its screening process to such a degree that some critics feel it may actually be sabotaging its own recruitment efforts. Although Google says it's on a "hiring high," not everyone need apply.

Hiring at Google typically involves multiple meetings with teams of Google staffers, over weeks or even months. Academic achievement is particularly stressed. Even administrative and HR positions are likely to be staffed by graduates of top schools. Interviews focus on brain teasers and mental gymnastics rather than on-the-job experience. Commenters on the career community site Glassdoor.com describe being asked to show their college and even high school GPAs, despite decades of professional experience. Little effort is made to sell seasoned candidates on a job at Google; often, prospects won't even be told what actual work they're being interviewed for.

A new Page for Google?

All this is in keeping with Google's origins as a Stanford University project, as well as the tone Larry Page has set for the company. Page's predecessor as CEO, Eric Schmidt, liked to joke that he was brought in to provide "adult supervision" for Page and Brin. He was only half kidding.

In meetings, the co-founders have been known to pace the room, climb on furniture, play with Lego, or simply sit silently. During his own first tenure as CEO, the retiring Page reportedly told his PR staff that he would only give them eight hours of his time for appearances and speaking engagements for an entire year. He's also not known for his practicality; once, when told that Microsoft employed about 25,000 engineers, he announced, "We should have a million."

Such eccentricities might be endearing in the founder of a startup, but in the CEO of a multi-billion-dollar public company they inspire little confidence. If ever there was a time that Google needed grown-up leadership, it is now.

Google director of research Peter Norvig describes the search giant's culture as "a cross between a startup and grad school," where employees get the perks of both. But in reality Google is neither. It is a large and growing corporation, with obligations to its shareholders, its customers, and its staff. Among those obligations are to use its resources wisely, to compete vigorously, and to protect the interests of its customers, including their privacy. But perhaps above all else, it must also learn to assess itself honestly and recognize that its days as an arcadia for hacker savants may be coming to an end. It's time for Google to graduate.

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