Undoing Google

It is when companies look least vulnerable that they are in the greatest danger. This story on the upcoming Google "Android" mobile phone hints at why I think the pivotal company of the 00s is headed for a major fall. In short, Google's product manager thinks their phone will overtake the iPhone because it has a kickass SDK.

Hey--you over there--wake up!

Google is one of the most remarkably clueless companies around when it comes to consumer marketing, but the cash cow that is AdWords has successfully distracted people from this for five years. Worse-than-expected earnings (a term never before used in the same sentence as Google) last quarter have already driven their stock ~40% off its peak. I think there's another 20-30% to go before it's done.

First, Google relies mostly on click-throughs for its advertising revenue, and we've never seen what happens to these in a recession. If buyers know they don't have money to spend, will they click? And even if they do, will advertisers continue to spend as heavily? These forces could put enormous pressure on earnings growth.

Second, Google faces a challenge in recruiting and retention if their stock price catches the flu. In many cases their competition is not just Microsoft or Yahoo, but a gazillion Valley startups, any of which could be "the next Google." Since their IPO, Google has enjoyed the ability to offer employees the best of both worlds--a solid salary, plus the sort of windfall normally found only in (much less secure) pre-IPO businesses.

The days of VC-backed startups paying @#$! salaries are receding. Cost of living around Boston, the Bay Area, and other major startup hubs is such that very few people can live reasonably well on much less than a market-level salary. Nor do I think it likely that we will see a collapse in deals the way we did post-2001. Back then the booming real estate market offered a familiar and rewarding alternative, but with stocks, bonds, and real estate all in the crapper for the foreseeable future, the wealthy investors who fund the VC funds have no easy alternatives. Anyway, the risk to Google here is not simply that payrolls will go up--they will--but more that they will be left out of the bidding entirely.

Last, there is still a general impression that Google can continue to grow revenues at 50% per year by moving into new industries virtually at will. If they roll out a delicious Google Phone with free ad-supported calling and get millions of people on it in short order, well, I'll gladly eat this post because that's just the sort of thing that makes dull rich people willing to invest their grandfather's hard-earned money in technology businesses rather than rental apartments on Comm Ave. But I don't think that's likely.

In fact, Google hasn't demonstrated this sort of green-field innovation capability in some time--not since AdWords itself, IMHO. Look beneath the surface of most of their second- and third-generation products, and you find acquisitions. There's nothing wrong with this--big companies always grow and innovate by acquisition, but Google has in the past had a halo of being not just rich, but also brilliant, which is much rarer. Perceptions play a huge role in setting prices. If tomorrow morning we woke to pictures of Sunnis and Shias in the streets of Baghdad holding hands and singing kumbaya, the price of oil would drop $15 in minutes. People put a premium on Google because they think that more remarkable things are going to happen.  ¶ 9:02 AM