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Google Matures Into A More Diverse Business

Posted on Monday, Oct 18th 2010

Search engine marketing firm Efficient Frontier estimates that Q3 paid search ad spending grew 19% over the year, making this the third consecutive quarter of double-digit growth. While search remains Google’s (NASDAQ:GOOG) core business, the recent quarterly results shows that its non-search businesses are also doing well.

Google’s Financials

Q3 revenues of $5.48 billion were far above the Street’s expectations of $5.25 billion. Revenues from Google sites and third-party sites grew 22% over the year. By region, international revenues constituted 52% of total revenue compared with 53% a year ago. For the quarter, EPS of $7.64 shattered the market’s projected $6.67.

Google saw significant growth across all segments. Paid clicks grew 16% over the year, exceeding the market’s estimated 15% growth. The company increased their share in the U.S search market to 66.1% in September from 65.4% in August. During the month, competitor Yahoo!’s market share fell to 16.7% from 17.4% in August, and Microsoft moved up to 11.2% from 11.1%.

YouTube monetization efforts have also borne results with the site generating over 2 billion video views per week and finally earning profits. In a rare disclosure, Google reported that display ad business, which includes YouTube and DoubleClick, generates $2.5 billion annually and the mobile ad segment is generating $1 billion in annual revenues.

Driven by this third-quarter growth, Google hired over 1,500 employees – the biggest worker increase since 2008.

Google’s Nonsearch Businesses – Online display, video, and mobile phone advertising

Beyond search, Google has seen significant growth in online display, video, and mobile revenues. Android has been a big success, and according to Gartner, Android phones will have 18% of the global smartphone market share by the end of the year and 30% by 2014. Google is already expanding their global footprint for the phone OS. They are counting on players like Spice Mobility and Micromax, smartphone manufacturers that cater to the sub-$100 level smartphone demand, to help expand in the Indian market. India has 670 million cellphone subscribers and adds nearly 18 million subscribers a month, making it a market difficult to ignore.

To continue to grow display revenues and leveraging the Android platform, Google recently released Google TV, a television search software that blends TV content, Web content, and applications. Google TV lets users search the Internet, television programming guides, and even DVRs to find video connected to a request searched for by the user. Logitech and Sony have launched Internet TVs with Google TV, and with other manufacturers are expected to follow suit.

Google’s Social Gaming Efforts

Google is also focusing on social gaming and recently bought Slide, Jambool, and SocialDeck. Slide, the social game maker, has a well-established presence on both Facebook and MySpace with over 15 million active users playing popular games such as Super Poke and Pets. Analysts estimate the deal to have cost Google between $180 million and $230 million. Jambool is the maker of Social Gold, a virtual currency that can be traded to buy in-game items that help players advance in the game. And SocialDeck is a social gaming company that offers games on mobile platforms in addition to Facebook games.

The market is also speculating that Google invested $100 million in Zynga, the social game developer, to help with the launch of Google Games later this year.

Social Networking Acquisitions

As part of their acquisition spree, Google is building on their social networking offerings and during the last quarter acquired Angstro, a social networking search application that runs across social networks to give users information about their contacts. Google is looking to use Angstro’s apps in its Android mobile platform, to help users find and access data from across all of their online social identities.

To augment their shopping experience, Google acquired, the owners of Weardrobe, for over $100 million. Weardrobe is an online community that lets users share opinions and tips about fashion and lets them search and buy items using an image recognition engine.

Social Networking Strategy

Google believes that these small acquisitions will fit well with their long-term social networking strategy. Google had tried earlier to create their own social networking tools such as Orkut and Buzz, but both failed to gain the following that the company had expected. Google is planning to use the newly acquired social tools to help build social “layers” to their own products. For instance, with a user’s permission, Google will use his social network to provide more tailored recommendations and an improved search quality. For services like YouTube, using their social layers, Google will let viewers see which videos their friends are watching.

Some of Google’s other acquisitions include Quiksee and BlindType. Quiksee, also known as MentorWave Technologies, is an Israel-based company that creates location-based interactive videos. Analysts expect the deal to be worth $12 million. Google will use Quiksee’s technology to enhance their own offerings of Google Maps, Earth, and Street View. BlindType is a keyboard technology company that has one of the most impressive predictive keyboards; it lets users type on a touchscreen device without being remotely accurate and is expected to help boost Android sales.

But, Google is also investing in some unrelated projects such as designing driverless robotic cars and investing $200 million in building a power cable network to offshore wind farms that will bring electricity to Virginia, New York, and New Jersey. It remains to be seen how these investments fit into their long-term strategy, but as of now, their stock is trading at $602.50 with a market capitalization of $192 billion. It reached a 52-week high of $629.51 earlier this year.

Overall, Google has done a nice job of diversifying their revenue portfolio, and it seems like the business has matured significantly in the nonsearch areas. Gaming and social media show promise.  Android is a success. Display and mobile advertising are already ramping well. According to a PwC report on Internet advertising, the first half of the year saw online ad sales in the U.S. grow 11.3% over the year to $12.1 billion. Search ads constituted 47% of ad spending, and display ads accounted for 36% share. During the first half, U.S. video ad revenues grew 31% over the year to $630 million. IDC estimates the U.S. mobile ad spending to be worth $500 million in 2010 of which Google will command nearly 21% of the market. All segments show promise for Google and the stock is clearly on its way up.

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