Citigroup's Mark Mahaney has published a report analyzing the competitiveness of Google's non-search products, such as Finance, Gmail, Calendar, News, Froogle, Video, etc. The success of such products is obviously important for Google's long-term outlook, as they should help lock in users and diversify Google's usage patterns. Eventually, they might even contribute revenue, although this is not a given. Mark's key conclusions include:
- Several of Google's non-search products are "best-in-class" or at least "in-the-running." More important, most are continuing to improve and gain traffic share.
- Most of these products have a much stronger competitive position (traffic share) internationally than they do in the U.S. Put differently, Google's dominance is much greater internationally than it is here (a scary thought).
Mark suggests that the success of non-search products creates "option value" for Google that is not yet factored into the stock price. My sense is that such products are to some extent factored into the stock price, although Mark's competitive analysis suggests that, on balance, the products are doing better than they are perceived to be. The analysis suggests that no Microsoft or Yahoo product is safe and that it is way too early to pronounce, say, Gmail, dead simply because it has not yet caught up in user-share. This conclusion alone should serve as a major kick in the posterior to Yahoo, especially: Not only did the company blow its lead in search; it is now losing market share to Google in almost every other critical vertical.
The one key point that Mark did not address is revenue. None of Google's non-search products generate revenue. If the theory is that Google will simply live forever on search revenue, then Google investors will have to get used to the fact that the company's ROI is only going to go one way: Down. Shareholders will also have to live with the risk that, if anything happens to Google's search dominance--or to search advertising itself--the entire company will be screwed.
The most obvious way for Google to monetize its non-search products is display advertising (I continue to find the idea of inserting AdWords style PPC-ads in Calendar, Spreadsheet, etc. absurd). One reason Google's products score well in Mark's comparison, however, is that they are un-cluttered and commercial-free, and adding display advertising might bring them more in-line with the competition. I imagine that Google could add some display advertising--or at least sponsorship buttons--without sacrificing much utility, and I expect this is the way the company will eventually go.
The other option is subscriptions, an option that devotees of Google Spreadsheet, etc., often assume will be a lay-up. I think subscriptions are a good idea, but they seem antithetical to Google's current philosophy, and, even if successful, they will take years to ramp into a meaningful revenue stream (witness Yahoo!'s revenue mix). For the next few years, therefore, it would seem foolhardy to expect the company to flick a subscription switch and immediately pay for all of its non-search spending.
Bottom line, Mahaney's analysis suggests that Google is well on its way to becoming less of a one-trick pony. This is good news for Google fans and bad news for Yahoo. (It's also bad news for Microsoft, but in my opinion, Microsoft has already lost the Internet game).
(Apologies...had to remove link to Mark's report. If interested, contact Citigroup and beg.)