I would like to preface this article by stating categorically that I have nothing personal against Google (NASDAQ:GOOG). I am in fact a staunch supporter and user of the company's products and I would love nothing more to see Google continue its dominance and transformation of the tech industry. That being said, I will also make clear in this article that Google is spreading itself extremely thin by offering such a broad product offering and trying to enter so many different fields. This article will outline the company's many shortcomings and explain how profits will be impacted in the short term, as the company struggles to regain focus and improve their services.
The Growing Years
It all seemed so simple in the beginning. Google was an internet search engine. Its algorithm, even in its earliest days was the gold standard, but nonetheless, the company was "just" a search engine. The word "google," became a verb that people used synonymously with the term internet search. Google was one simple site with a stylized logo and a large text box to enter your query. And in fact, in the early days, the majority of people using the Google search engine probably didn't even realize it. Yahoo (NASDAQ:YHOO) was far and away the most popular web destination in those days, and Google was simply the company running their back end search operations. Well, the company has come a long way since then. Seems such a long time ago…
Since those humble beginnings, Google has made a multitude of acquisitions and used its huge cash flow to organically grow, branching out into an almost uncountable number of industries. It has made enemies and usurped large competitors in the process. In the last ten years, its market cap has grown almost 11 fold, and it is now worth 25% more than Microsoft (NASDAQ:MSFT), formerly the largest company in the world.
I hope the readers will admit that I am not being hyperbolic when I say it; Google does not have a history of simply entering a new field. When it moves forward, it conquers the competition. It uses such force and aggression that it completely overtakes former leaders. It's been able to do this because it intelligently uses its huge cash flow. Google was never burdened by having an old or poorly trained workforce. Yahoo and Microsoft had the first mover advantage on my fronts, but when those companies were hiring and expanding, throughout the late 90's the internet tech scene was small. Computer programming and internet engineering were specialized fields with relatively few new graduates. When Google started making it's massive push as a diversified company, internet and software developers were everywhere and the company filled all available positions with the best and brightest. Working for Google was a badge of honor and the company had first pick at all applicants. The massive impact that this rich talent pool had on expanding the company in all the right directions can never be overlooked. It helps too that the company was founded by Larry Page and Sergey Brin, two brilliant computer scientists with wicked competitive streaks.
Google has bulldozed its way into the undisputed leader in search and internet advertising. The company owns YouTube, the largest video sharing site on the internet. Gmail has surpassed Yahoo and Hotmail to become the most popular and arguably one of the best email services in the world. Google's Android operating system is leading the smartphone and tablet revolution, far surpassing Apple on a global level. In the cloud computing space, Google is not leading yet, but the competition is expected to intensify immensely and Google has made a series of moves as it attempts to corner that market as well. Google revolutionized mapping systems with its Google Maps software and online street view features. And perhaps, in a slightly ironic twist of fate, Google Docs is actually expected to be a major competitor against Microsoft Office, potentially "gobbling" up a 50% market share in the " cloud-based productivity" suits arena within 10 years.
History has shown that Google does not just enter a field to play. It enters to win. And it has a very good track record. Unfortunately, some recent events might signal that the company is moving too fast, and into too many different fields. There comes a point when product quality begins to suffer as resources are spread too thin.
Long, But Thin
Since Larry Page took over as CEO, Google has been working frantically to grow the company into new industries. Page is a firm believe that the impetus behind Google's innovation should be to improve a product by 10 times better than it's current state. In a detailed article which appeared on Wired.com, Page outlined his belief that nothing less that a radical rethinking of a problem in order to find a completely new and improved solution is to be expected from Google. And Page has been putting his money where his mouth is. The company has been making huge investments in it's Google X division with the goal being "to identify and implement once-impossible sci-fi fantasies"
From self driving cars, computerized eyeglasses, mysterious floating barges, immortality, and even an expected robotics revolution, Google is a company on a mission to change the world and vastly improve how everyday people interact with and use technology. Of course, tackling all these big ideas requires a major financial investment. So far it seems that Google has more that enough cash flow to throw at the new concepts without having a large negative effect on earnings. Investors are happy, and shares are trading at a 52 week high, at over $1100 per share.
Well, although all might look fine, if we dig a bit under the surface, we can see some small, but important cracks in the giant's armor. Ironically, a simple Google search will reveal that there are tons of complaints from YouTube users about the website constantly asking them to use their real names when making comments on videos. Users have taken to the popular message board, Reddit.com, to complain about the service and vent their frustrations. A petition was created, urging Google to restore the previous comment setting and so far over 200 000 people have signed. The Google products forums have received over 400 000 complaints on the issue.
In large respect, the YouTube modifications have been caused by Google's relentless attempt to increase the profile of its Google+ social network. So far, these attempts have all but failed. Google has said that Google+ user numbers increased 53% since May, from 190 million to over 300 million, but analysts are skeptical. Since Google has been integrating most of its products into streamlined offerings, real user numbers have been amalgamated and jumbled.
In recent weeks, the problems at YouTube have grown further, as the service was facing a massive amount of link spam, once again linked to ill conceived Google+ integration. Google has admitted that there was a serious problem and in recent weeks they have taken some steps to remedy the situation, but the online community still seems to be upset with the company and the tactics it is using to push the Google+ service.
"There were some real problems with the integration as launched and it took us a matter of days to iron those out. I think most people now are having that experience you are, which are things are dramatically better on the other side of this integration. And there's much more work we'll continue doing." Bradley Horowitz, Vice President of Product Management for Google+
YouTube difficulties are not the only problems facing the company. Google has been making a strong push into the online phone and video conferencing arena with its Google Hangouts platform (previously Google Talk). Although the service is still young, the market is not, and the current leader, Microsoft's Skype, has a definitive lead, both in brand awareness and established user base. While Hangouts is still relatively new, a large company like Google, with over 50 000 employees, had little excuse to releasing an inferior product. Over the last months there have been numerous complaints against the product, stemming from messaging issues, inadequate tablet support, the unavailability of Google Voice outside the USA, and the forthcoming integration of Voice and Hangouts which will disable all 3rd party applications based on the system.
In other news, Google was "inundated with complaints" following its recent release of the new Android 4.4 Kitkat operating system update for the Nexus device. Users complained of download problems, greatly reduced battery life, call and video hang-ups and storage crashes.
In the Chromebooks market, Google and HP (NYSE:HPQ) had to suspend all sales of their new Chromebook 11 device due to problems with the battery charger. The issues arose in mid November, right in time for the peak holiday shopping season. The Chromebook had been positioned as a must have Christmas gift, but unfortunately sales are now more likely to disappoint. Even before the hardware problems, many computer bloggers were already complaining that Chromebooks do not offer enough appeal even to justify their low cost, and some stated that the new HP Chromebook 11 was simply an old model laptop with a nicely redesigned exterior.
Negative and Distracting Effects
The problems outlined above may not seem major, especially for a company of Google's size, but they outline a problem which will continue to plague Google going forward, and in fact, it's a problem which all large companies face. Fundamentally, it's about reaching a balance between growth and maintaining quality. Perhaps with Google, the problem will be further exacerbated by the fact that the companies is growing very rapidly and has branched itself out far from it's core search and online advertising business.
Google has been adding employees at a frantic pace over the last 3 years, and while this can be seen as a move for the company to address growth concerns, it might also be adding to the problem. A huge amount of new employees can dilute the culture of a company, ultimately impacting the products and services being produced. In this case, adding more employees to deal with those issues will only make the situation worse. Recently, many current and former Google employees took to a Quora message board to gripe about their experience with the company. In the broadest sense, it seems that the employees felt they were overqualified for their positions and due to the increasing bureaucratic culture, they felt most of their creative efforts were being stifled. A former Google employee has even gone so far as to say that Google's insistence on pushing Google + and competing with Facebook in social media, has "ruined the company."
I think that might be a bit of an exaggeration, but Google+'s impact on alienating YouTube users cannot be underestimated. And neither can the distracting effects of Larry Page's Google X "moonshot" projects. If any one of these projects is successful, it will likely have a major impact on not only the company financially, but it will also revolutionize technological aspects of our everyday life. But focusing employee and financial resources on these projects which are far outside the company's core business lines and competencies may also be distracting and expensive.
Google is a fast growing company and it is actively trying to diversify its business lines and develop revolutionary technology. At the same time, there are signs that the quality of current products have degraded somewhat and upgrade cycles are notably longer than they were in the past. As a company experiences fast growth, its culture changes and certain employees who were once vital, might find themselves in a back seat position. Ultimately this impacts not only morale, but performance, and subsequently, product quality.
As investors, do we really want to worry about seeing Google's core business's slowly erode as the CEO is out chasing "sci-fi fantasies?" While I don't believe that this is currently happening at Google, there are signs that it could develop if minor problems are not addressed. There is a balance to be found somewhere, but I am deeply concerned that, as it currently stands, Google is sacrificing the quality of its current products and offerings by focusing on non-core offerings. While I am not trying to sound alarmist, investors and shareholders should take note of the concerns and hope that Google management has a plan to address the issues in the future, before they become major problems.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.