The press (both online and offline) is obsessed with Google (NASDAQ:GOOG). An interesting exercise would be to clip the press coverage (or speculation) surrounding the launch of a new Google product and compare it to that product’s performance some months later. I’m afraid this exercise would prove the reality did not live up to the hype. Of course, most of this is not Google’s fault. It isn’t that these products fail miserably. In many cases, they are simply competent products that offer little advantage over the existing alternatives. So, Google moves on.
As one person interviewed for the article put it: “Google has product ADD.” I’m not sure if that’s true. The fact that Google develops these non-search products does not in and of itself suggest anything dangerous about Google’s future spending and the efficiency with which its capital is deployed outside of the core search business.
After all, these products are really little more than ideas. Has the company really put much behind any of them? That’s a more interesting question. It also happens to be one of the most important questions for investors to answer.
This Google article reminded me of a blog post on Microsoft (NASDAQ:MSFT) I had found via Seeking Alpha. The post had one very memorable line: "Name six innovations from Microsoft over the past 12 months."
That jumped out at me because I’m not eager to invest in a company where you can name six innovations over the past 12 months. No company develops six truly meaningful innovations in a year. The issue is not the number of innovations. It’s finding one that really works.
Both Microsoft and Google had the bad luck to develop a unique cash cow in their early years. As a result, both companies will inevitably have to face accusations of mediocrity in their future endeavors.
Microsoft’s Windows (and by extension Office) and Google’s search are once in a lifetime finds in an otherwise unforgiving competitive environment. These oases of extraordinary profitability can not be duplicated. So, if your reason for buying into either stock is an expectation that future products will rival past products in terms of profitability, you are on a fool’s errand. There will be growth within each franchise and there will be other (lesser) franchises. But neither company will duplicate their initial success.
The reason they won’t has nothing to do with size or culture. It’s much simpler than that. Both companies were marketed to investors as a great franchise. There aren’t many such franchises and the odds that two such franchises would be developed by the same company are extremely low. Most of the best businesses (not the biggest, but the best) learn to do one thing very well – and then do that one thing over and over again, year after year.
Google should be able to move into other businesses beyond search – and should be able to do so profitably. That isn’t the problem. Right now, the problem is the expectation that Google will have many successes. It won’t. Usually, there’s no reason why Google will be any more successful than the established players in a particular niche. Obviously, Google’s ventures have the benefit of free publicity. Unfortunately, the benefits from such publicity multiply with the differentiation of the product – and so far, that is an area in which some of Google’s innovations have been lacking.
One Google product I really like is Google Finance. This is the kind of product that would seem to have a lot of revenue potential if developed with that end in mind. I wrote a review of Google Finance when it launched.
I hope Google Finance isn’t suffering from neglect. There are still many improvements needed and I wouldn’t mind seeing Google spend a little more time improving existing non-search products and a little less time developing new ones.
Finally, getting back to the question of what Microsoft has done lately, they did come out with the Xbox 360. Although I don’t like the economics of the console market, I do like the economics of the game market. Microsoft's console may provide a beachhead in that market (actually the original Xbox already provided such a beachhead).
We’ll have to wait to see how this round of consoles plays out. However, I already have to admit Microsoft’s progress in the console business has been a lot faster than I expected prior to the launch of the original Xbox.
It’s also worth noting that, despite the greater press coverage given to Microsoft’s Vista woes, Sony’s (NYSE:SNE) problems with the PS3 are a lot more meaningful. People have to wait for Vista. They don’t have to wait for the PS3 – and they certainly don’t have to pay up. After all, a game console is no more than a platform. Prohibitive pricing will exclude some younger gamers from buying the PS3, which obviously doesn’t bode well longer term.
My point is simply that I would value Microsoft’s single innovation over Google’s entire assortment. To be fair, the one hit is what matters. Many misses are not really a bad omen. But, they certainly don’t warrant all the hype.
Related: See my piece on MSFT from May.
(Image: Justin Pfister)
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