Google making strides in emerging businesses

By Juan Carlos Perez

July 19, 2010 07:27 PM ET

IDG News Service - Google's second-quarter financial report last week provided further signs that, after years of trying, Google may finally be seeing material results from emerging businesses that could help it diversify from search advertising, which still generates most of its revenue.

Google executives on Thursday said that the company has made significant progress in growing its three main emerging businesses -- display advertising, mobile advertising and hosted workplace software.

Some financial analysts are also becoming convinced that this is so, although Google doesn't break out its revenue in a way that lets outsiders know the specific revenue figures for those emerging businesses.

Google's revenue engine has always depended on search advertising -- a highly profitable, large and vibrant segment of the broader online advertising market that the company has thoroughly dominated.

But while search advertising has fueled Google's stellar financial performance, the company has been criticized for depending on it too much, with some calling Google a one-trick pony.

The implication is that if a competitor builds a better search advertising mousetrap, Google could suffer a major financial blow. Critics also question how long Google can remain on a revenue growth path while depending so much on search advertising.

To Google's credit, the company has been planting seeds for years in other markets. While some of those have failed to sprout, display advertising, mobile advertising and hosted workplace software seem to be blooming for the company.

Financial analysts, through their own research and calculations and from Google executives' comments, seem fairly certain that the opportunity in these emerging markets is real.

Citing Google's better-than-anticipated 24 percent year-on-year revenue increase in the second quarter, Barclays Capital analyst Douglas Anmuth wrote in a research note that "the growth suggests to us that newer initiatives like display -- and to a lesser extent mobile -- are gaining traction and beginning to impact numbers more."

Citigroup analysts credited particularly strong revenue growth in the U.S. to three factors, one of which was the effect of display and mobile advertising "becoming more material to Google's total revenue and growth."

Ben Z. Rose, president of Battle Road Research, estimates that Google is on track to generate between US$500 million and $700 million in display advertising this year. "It seems YouTube is doing extremely well," he said in an interview, referring to the video sharing site that is a key component of Google's display ad business.

Rose is also confident that Google will do well in the hosted workplace applications space. "Between their core market and making headway into some of these new platforms, as well as the international expansion they have, assuming the economy holds up, we think Google can grow at 20 percent-plus [revenue] per year," Rose said.

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