The Implications Of Google’s Management Change

By all measures, Google is going gangbusters. It has made a major management change, but let’s first look at the results and then analyze the change in context.

With the market recovering, online ad spending is on the rise. According to eMarketer, a marketing research firm, total online ad sales in the U.S. increased 13.9% over the year, with search advertising growing 15.6% and online display advertising 17% in 2010. In the coming years, the display advertising market is expected to continue to expand rapidly, driven by strong growth in video advertising: Online video advertising is expected to drive online display ad growth by increasing 34% annually until 2014. Banner ads will increase between 7% and 16.2% annually from 2009–2014. Total U.S. online advertising spending is expected to be $18.84 billion in 2014 compared with $12.37 billion in 2010. Of this, display ads will account for $15.92 billion compared with $7.58 billion in 2010.

Google’s Financials
Meanwhile, Google’s (NASDAQ:GOOG) Q4 revenues increased 26% over the year to $8.44 billion. Excluding traffic acquisition costs, revenues were $6.37 billion compared with the previous year’s $4.95 billion and analyst estimates of $6.06 billion. Revenue growth was driven by Google’s display advertising business, which now has more than 2 million publishers; YouTube, where revenues are expected to have doubled; and the success of Android, on which Google now claims to have nearly 300,000 phones activated a day. The quarter’s EPS of $8.75 was also significantly higher than the market’s expected EPS of $8.09.

Google-owned site revenues increased 28% over the year to $5.67 billion, while partner site revenues of $2.50 billion grew 22% over the year. Aggregate paid clicks increased 18% over the year and 11% over the previous quarter, while average cost-per-click  increased 5% over the year and 4% over the quarter.

Google has seen growth across most segments. According to NetApplications, Google Chrome’s share increased to 10% of the market compared with 4.6% a year ago. Chrome is taking away share from rival Microsoft’s Internet Explorer, which saw market share drop from 62.7% in 2009 to 57% in 2010. Display ad business is also growing. eMarketer reports that while Yahoo! remained the market leader in display ads, Google’s share grew from 4.7% in U.S. in 2009 to 13.4% in 2010.

Google and Mobile Ad Spending
Within ads, mobile ad spending is another big growth market in the coming years. According to eMarketer, in 2010, U.S. mobile ad spending increased 79% over the year to $743 million. It is expected to cross $1.1 billion in 2011 and reach $2.5 billion by 2014. Google is already seeing expansion in the AdMob market. The company claims to be receiving more than 2 billion ad requests a day compared with nearly 10 million ad requests a month in May 2010.

According to AdMob data, ad requests have doubled over the past six months to more than 100 million unique Android and iOS devices ad requests each month. There is also significant growth outside the U.S., with the strongest regional growth in monthly ad requests over the year coming from Asia with 564%.

Google’s Newsstand
In addition to increasing ad revenues, Google is working on a newsstand to compete with Apple. Google is getting publishers to join in Google-operated digital newsstands for users of Android devices. The e-newsstand will include apps from media companies offering versions of their publications for smartphones or tablets running Android. It should not only let Android users access their favored publications on their devices but also help publishers monetize their apps.

Google’s Acquisitions
Google continued their acquisition spree during the quarter. During the previous quarter, they acquired Phonetic Arts, a U.K.-based company that works on speech synthesis in games. Phonetic Arts’s technology helps to convert recorded dialogue into a ‘speech library’ that consists of sounds that can be then put together to create sentences that sound more human. While Phonetic Arts used the technology for games, Google is planning to use it in the development of voice recognition and transcription capabilities.

They also acquired Widevine Technologies, a Seattle-based vendor of digital rights management software. Widevine’s software is used in more than 250 million Web-connected devices by broadcasters to safely transmit video content online. The acquisition of Widevine will help Google to become a major player in protecting online video content. Before the acquisition, Google had only a “content ID” fingerprinting system for YouTube as part of their digital rights management portfolio.

Earlier last week, Google also acquired eBook Technologies to help strengthen their own e-bookstore. eBook Technologies supplies digital reading devices and licenses technologies to enable automated publishing and control over content distribution.

Google’s Groupon
Besides these smaller players, Google also placed a bid for the local deal site, Groupon. At a proposed purchase price of $6 billion, Groupon rejected the deal. Analysts value Groupon at $15 billion. Groupon currently boasts of annual revenues of close to $1 billion with 50 million subscribers and access to over 40,000 local businesses in more than 300 markets.

However, still wishing to enter the market, Google has decided to come out with their own daily deals site called Offers. Offers is in the test phase, and Google is working to get small businesses to enlist in the promotion program. Offer will help Google to expand their local reach. Presently, its local offerings include HotPot, which lets users post local reviews, and Places, which enables local businesses to set up pages, post photos, and share promotional information and reviews.

How will the battle between the two players turn out, given Groupon’s reach? According to Experian HitWise, Groupon controls 79% of the local deals market. In August of last year, Groupon announced their biggest deal, during which it sold 441,000 Gap vouchers worth $11 million. Recently, another competitor, Living Social, outpaced Groupon’s deal when it sold 1.3 million Amazon cards, netting $13 million.

Google’s Management Change
Meanwhile, Google made a significant change in leadership by replacing CEO Eric Schmidt with co-founder Larry Page. Schmidt will move to an executive chairman position. Google claims that the change will help to simplify decision making in the organization. Analysts, however, expect that the change was made to help Google wage a bigger war on rivals like Facebook, which is fast becoming a greater threat to the search giant.

There are many who believe Schmidt’s movement was justified. “Schmidt had to go not because the company failed to innovate during this reign as CEO, but because the innovations it did produce during his time at the top failed to solve revenue-generating problems,” wrote Tim Beyers of The Motley Fool. Page was of course a cofounder, and the market believes that his innovative ideas will light a fire at Google, where product development has slowed. It is expected that he will speed up decision-making and product development inside Google, possibly by cutting through some big-company processes that were implemented by Mr. Schmidt and had slowed things down. Like Fred Wilson, I “am particularly inspired by the idea of Larry Page in the leadership role at Google.” I agree with him that it is important to have the founders close to the business and engaged and involved in the key strategic issues. But that has never been a problem at Google. Page and Brin have always been intimately involved in the running the business. So, it is not clear to me that this change is going to lead to greater innovation. I see this simply as a move that says Eric Schmidt is no longer needed. The founders can now officially take back the reins.

As Tony Scott mentioned earlier, most successful companies have CEOs who fit the part of the life cycle the company is in. Google too has moved beyond the initial stages and can be defined as a mature organization that needs to focus on extending its product lines efficiently. The new CEO needs to be able to deliver innovative products and prove he’s capable of managing a 24,400-employee organization without Schmidt, the “chaperone.” I will hold my judgment on the topic until I see more data.

Google’s stock is trading at $611.08 with a market capitalization of $195.4 billion. It touched a 52-week high of $642.96 earlier last week.