Has Google Become A Victim Of Its Own Success?

 Google is still pulling in money hand over fist, but Wall Street is hungry for the company's next move. 

On a conference call with analysts Thursday, after Google reported its third-quarter earnings, the questions came fast and furious: How will Google match Apple's new payment system? Can YouTube topple television? Is Google serious about trying to challenge Amazon on same-day delivery? 

The problem was that in the earnings report, the Internet giant showed signs that its ultraprofitable business in search advertising was starting to slow. 

In almost every way, Google has become a victim of its own success. Its search engine remains dominant in desktop computers and mobile phones, and businesses like YouTube and the Google Play store are growing quickly. The company churns out billions in quarterly profit and has a $60 billion cash hoard. 

The thing that worries investors, though, is that the company's golden goose - its search engine - is showing signs of age. Paid clicks on advertisements increased 17 percent in the third quarter compared with the same quarter last year. But in the second quarter, paid clicks were up 25 percent from a year earlier. 

"Google's core search business is the best Internet business model ever created," said Jordan Rohan, founder of Clearmeadow Partners, a strategic advisory firm focused on Internet companies. "Every other business Google is in looks pedestrian by comparison." 

Another concern for analysts is the cost per click, the average price the company is paid each time a user clicks on an ad. The cost-per-click measurement has fallen for several years as people spend more time on mobile phones, which have smaller screens and are harder to place ads on. 

In the third quarter, the cost-per-click measure again fell, down 2 percent year over year and flat from the second quarter. 

Google executives get annoyed with analysts' fixation on clicks and cost per click. Mobile advertising is still pretty new, they point out. It accounts for about 11 percent of U.S. ad spending, according to the research firm eMarketer. Even mighty Google is trying to figure it out. 

"I think we just need to keep innovating and experimenting here to get it right," said Omid Kordestani, Google's chief business officer 

Google does not release figures for mobile ad revenue separately from desktop ad revenue, so it is hard to know exactly how Google is doing in this area. 

Mobile is likely to be one of Kordestani's chief business problems. During the conference call, the company announced that Kordestani, a longtime Google executive who stepped into the role after the departure of Nikesh Arora for SoftBank, will be in the job permanently. 

Despite its challenges, Google remains a fast-growing business. Third-quarter revenue increased 20 percent, to $16.5 billion. Net revenue, which excludes payments to the company's advertising partners, was $13.2 billion, up from $10.8 billion in the same quarter of last year. 

And the company is making money in many new kinds of ways. Google reported that "other revenue," a large portion of which is Google's Play Store, increased 50 percent 

Posted in: EXPERT ADVICE