Big Google Investors Getting Antsy To See New Revenue Sources

Investor's Business Daily

Aug 28, 2009 10:46 EDT

Though Google's making more than $5 a share and dominating the lucrative search-ad field, some investors are starting to get anxious to see more success in other fields.

The recession is slowing online ad -- and thus Google's GOOG -- revenue growth, making investors impatient to see the company diversify into online video, the mobile Web and other avenues. The company plans a series of open Webcasts to explain its plans, starting Sept. 9.

Chris Baggini, senior investment manager on the U.S. equity team for Google shareholder Aberdeen Asset Management, wants to start seeing some other revenue sources.

"Google continues to gain share (in search), but I'd be very disappointed if four years from now they were not getting (significant) revenue from other sources," he said.

Google, like most companies, has felt the sting of the recession. Analysts expect its revenue, minus commissions it pays partner sites that carry its ads, to rise 6% this year, down from 36% in 2008.

The company gets some 97% of its revenue from text-based ads strategically placed with search results. That's been a stellar business, but Google has its eyes and hopes on mobile search ads and its YouTube video site.

By 2013, sales of mobile Web-based ads in the U.S. alone will reach $3.3 billion, up from $648 million in 2008, says eMarketer.

To help make sure that its search service is front and center with users of smart phones, Google developed Android, a mobile operating system that is open source and completely free to companies that make smart phones. Android smart phones will generally give best placement to Google's search and other services.

The company aims to dominate mobile search like it does PC-based search, says Darren Chervitz, co-manager and director of research for the Jacob Internet Fund, a Google shareholder.

"If people are using Android, it's very likely they are going to be using the Google search engine," he said.

Services On Top Of Chrome

Google is also developing an operating system for mini-laptop computers, or what are called netbooks.

The Chrome OS, too, will be free for product makers, but it's not clear if Google will follow the same game plan with Chrome as with Android. Google CEO Eric Schmidt reportedly has said the company plans to charge for other services on top of Chrome, but hasn't provided details.

Baggini, for one, hopes Google develops something other than ad revenue from Android and Chrome.

"I'd like to see different revenue from a lot of these things over time," he said.

Baggini says he realizes Google is taking a "holistic" approach with Android, "but personally I'd like to see them get a buck per Android phone."

But others say free will bring rewards.

Google is following the book for how to eventually dominate an area: Give something away early and then charge later, says Renny Ponvert, founder of Management CV. The research firm analyzes corporate managers.

Monetizing Is Second Step

"The important thing is to get market share, not to generate near-term revenue," Ponvert said. "Giving it away for free gets you to the install base that someday allows you to monetize it."

Google also wants to cash in on online video. By 2011, sales of ads on online video sites in the U.S. will reach $1 billion, up from $530 million last year, says eMarketer and Interpublic Group's Magna Global.

Google's YouTube is the most-used online video site. Advertisers, however, had shied away from the site because the great bulk of videos are made by amateurs and look like it. But as the quality of the videos has improved, more ads are appearing, the company says.

In April, Google's Schmidt said in an interview with CNBC that making YouTube profitable is "our highest priority this year."

Last month, in Google's last earnings conference call, Schmidt said he was pleased with YouTube's progress.

On the same call, Jonathan Rosenberg, Google's senior vice president of product management, told analysts that "monetized views have more than tripled in the past year" on the site.

And Patrick Pichette, Google's chief financial officer, said: "In the not too long future, we actually see a very profitable and good business for us."

But Chervitz points out that Google declines to provide data, such as how many videos on the site have ads. So claims of turning a profit seem a little hollow, he says.

"I'm a little skeptical," he said. He says from what he can tell, so few of the videos have ads sold against them "that it makes it hard to believe it's on the verge of turning profitable."

On Tuesday Google expanded a program that lets video makers get a cut of revenue for any ads sold to run with their videos, as an incentive for better videos. That, Google believes, will lead to more ad sales.

But Chervitz, for one, isn't holding his breath for any big profit from video or mobile -- for now.

"Video and mobile are the two areas that have potential to grow Google's business," he said, "but it's going to be a real challenge for either to have a significant impact on their business" for some time.

Source: Investor's Business Daily