Google Steps Up Efforts To Go Beyond Search

Google’s Q2 results, announced yesterday, exceeded expectations but failed to bring much cheer to the online ad market. Revenues of $5.52 billion grew a meager 3% over the year but did exceed the market’s expected $5.49 billion. EPS of $5.36 also surpassed the expected $5.09.

By segment, Google.com contributed growth of 3.5% over the year to reach $3.7 billion in revenues for the quarter. AdSense grew 2% year over year to $1.7 billion with strong performances from both content and display.

By region, US revenues grew 2% over the year to $2.6 billion. International revenues contributed 53% of total revenues with UK revenues down 8% over the year to $0.72 billion.

During the quarter, Google maintained its focus on innovation. They launched new features in almost all offerings ranging from Picasa to Gmail to search. They are also deploying the HTML5 standard for the mobile versions of Gmail and mobile web maps.

Google was very impressed with YouTube’s performance in the quarter, and it looks as though their monetization efforts for YouTube are yielding results. There was significant growth in smartphone-driven YouTube search traffic. YouTube’s monetized views tripled in the past year and Google is is now actively promoting featured partner videos on search pages. The DoubleClick Studio tools also helped users build end-to-end rich ad campaigns. Given that Google spent $1.65 billion to acquire YouTube three years ago and reports claim another $0.50 billion has been spent in growing the business. It is high time YouTube started generating significant revenues and profits.

Google’s core area of search, however, seems to be facing challenges. Google has been trying to innovate and improve search and continued to do so in the current quarter through features such as Google Squared, which “automatically fetches and sorts facts and data from across the web on a given topic” and the introduction of a “search options” feature.

Recent reports claim that paid search spend is slowing down as advertisers have figured out that organic search results drive a much more significant portion of their traffic. Google’s global aggregate paid clicks grew 15% over the year compared to 17% growth reported a quarter ago. Paid clicks also fell 2% sequentially owing to seasonality. The aggregate cost per click fell 13% over the year but grew 5% over the previous quarter.

But, as ad spend dollars become rare, Google will have to keep stronger tabs on click fraud as well. To counter click fraud cases, Google already has an internal Click Quality Team which monitors invalid clicks and impressions and removes their source. Google relies on several rule-based and anomaly-based online filters in addition to automated and manual offline detection methods to control fraud. While the filters are regularly monitored and fine-tuned to adapt to the nature of the most recent types of fraud, Google also realizes that they will need to devise a next-generation filter mechanism to be able to monitor emerging complex conditions. Eliminating click fraud entirely might not be possible, but Google will need to work on ensuring that these cases are kept to a minimum.

The competitive landscape is also getting ugly with both Google and Microsoft nearly declaring war on each other. Microsoft’s Bing, a counter to Google’s search engine, has gotten some respectable reviews, and a recent ComScore result revealed that Microsoft gained nearly a half-point of US search market share in June with Bing accounting for 8.4% of searches. While Google continued to retain the comfortable majority of Web searches with a 65% US share, June was the first month in which it failed to gain share since January. Even though Bing is not going to displace Google in search, it does offer features that the search giant lacks. If Google doesn’t react soon enough, its lead might just be compromised. Vertical Search, meanwhile, still remains unaddressed, although Bing has taken some ideas from the domain.

Google also announced a series of cloud computing products which aim to challenge Microsoft’s dominance of the software market. For instance, Google Docs, a suite of applications available free over the Internet, is looking at countering Microsoft’s Office. Google boasts of over 15 million users for Google Docs, claiming that the users trippled over the year. While currently most users are individuals, Google is building their enterprise user base as well. They claim that nearly 3,000 businesses sign up to use Google Docs every day. Similarly, Google Chrome, which was launched to counter Microsoft’s Explorer, is being expanded into an operating system for notebooks — a step Google terms as their “big innovation”.

To counter the potential loss of market share, Microsoft also announced the launch of a limited Office version available free for Windows Live users. We will have to wait and watch to know which of these players will gain market leadership.

But cloud computing comes with issues. The recent Twitter hack in which sensitive company files were distributed after accessing Google Apps documents through an admin account has raised issues of cloud security. Google, however, maintains faith in the system, claiming that they themselves run their business on Apps. Recently they enabled higher security features such as the need to enter a mobile phone number and a secondary e-mail address to receive password recovery authorization notices. They also disallowed Google Apps users to reset their passwords themselves and instead expect such requests to be authorized by Google Apps administrators.

Of course, Google is also getting into mobile technology through Android to gain a foothold in the smartphone market. Android is the first truly open and comprehensive platform for mobile devices which includes an operating system, user interface and applications which run on a mobile phone. Apple led the smartphone brigade with the iPhone. Android was launched last October with G1 on T-Mobile and is expected to gain a stronger footing with all leading manufacturers proposing to launch 18 to 20 Android phones by the end of the year. Majors such as Motorola are pinning their hopes on Android to help improve their platforms.

The differentiating factor among smartphones are the applications that run on them. The open source Android operating system opens up many possibilities for application development. Applications such as the My Location, with multi-lingual and multi-national support, and Google Voice Service, which allows users to manage several phone numbers with a unique number and convert voicemails to emails, exist, but there still isn’t a single “killer app”.

Google might be innovating on all fronts, but they still haven’t got their head around verticalization. Although they do realize the opportunity of putting more information in an ad and then incrementally getting more information from the customer to make ads more effective, especially in their finance and travel portfolio, they don’t seem to be doing anything concrete in this direction. I wonder if they are familiar with the statistics on Internet search marketing which show that such a  strategy could be in their favor; if only they grabbed this opportunity.

Meanwhile, Google’s stock fell 3% to $427.98 in the after-hours session, taking its market capitalization down to a shabby $140 billion.