Is Google a Cash Cow? – An Economic Perspective.

Google is first-class at earning online revenue, but having only advertisement based revenue can be problematic for Google if they don’t expand and monetize some of the initiatives they already have developed. In fact, they still earn 99% of their revenue from advertisements and that focus should change to a more diversified revenue stream.

Recent third quarter financial results will not put a damper on Google’s business model. According to their financial report, Google commands a profit of $1.07 billion. This amount is a substantial increase that forecaster hadn’t even anticipated. The profit translates to a 46% increase over the $733.3 million earned during the same period in 2006. Google’s arch rival Yahoo, subsequently reported a 12% increase in revenue, which actually dropped by 5% in comparison to $151.3 million in their third quarter.

Nevertheless, much of Google’s growth is unfortunately attributed to the undeniable fact that search advertisements are so darn profitable. And why wouldn’t it be so profitable when 1.2 billion of world wide searches per day are conducted through their search engine. Yahoo, the second largest search engine, on the flip side lags behind with just a quarter of those searches per day.

Google manages to earn such extraordinary revenue through an ever-green business model. The model in its simplest form processes a user’s search query by navigating its own gigantic database for text-based ads relating to the keywords entered in the user’s search box. Upon matching results with related ads, Google earns big revenue when the user clicks on an ad on the page or its partners’ sites. Arguably, to think that this was basically what it took Google in concept to become part of the Nasdaq 100 Index is remarkable. Nasdaq 100 is one of the most exclusive clubs of the investment community with 100 of the largest non-financial stocks. In fact, Microsoft is now the only high-tech company worth more than the Internet search leader.

Google knows very well the potential of advertisement revenue and are optimizing it to full effect, but in the process are they strategically moving forward or are they eventually going to be devoid of imagination, relying on large acquisitions to compete globally? Specifically, will Google just become a cash cow that earns ad based revenue without offering much to the end user in the realm of innovation and technology? Google’s recent proceedings seem to support these concerns as they have recently sorted out how to place text-based ads across the bottom of YouTube videos and are moving forward in placing ads within ‘widgets’. The possibilities with ad based revenues are endless. Think of the marketing dollar being spent today on the internet. It used to be that traditionally advertisement revenue was the turf of large media platforms such as the television, radio, newspapers and magazines networks.

Alarmingly, considering that there is still so much undiscovered scope in this area to just put it aside and ponder other innovative income streams such as the monetization of existing products is worrisome. As management runs after ad based revenue, hiring engineers on the go, taking on more projects than is economically healthy, an eventual downturn in their exponential growth is quite possible and its going to hurt Google. As a precaution, Google management should not lose sight of the importance of good innovation and monetization, in a world that is increasingly attracted to ad based revenue. This is the sort of epidemic proportions of globalization that we have created on the web and now fear will devalue the technology industry.

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