The limits of Google.

Last month Millward Brown Optimor published their fourth annual BrandZ Top 100 Most Valuable Global Brands rankings and would have you believe Google's brand is worth exactly $100 billion. While I have debated the worth of these kinds of valuations and surveys in previous blogs, in the wake of the impending release of the Google Wave, it now seems a good time to consider the limits of the brand.

Some people think Google breaks the brand model i.e. no advertising on its home page, no advertising per se but both these measures are merely symbolic. While Google may have inspired what many see as a form of brand disruption, is game changing and is somehow Schumpeterian, it is a behemoth brand utilizing both the common architecture associated with monolithic status as well as exhibiting a traditional set of values not unlike Apple and Virgin.

Similarly, you could argue that Google has unlimited potential as a brand and its brand extensions merely reflect this. However, while Google is a highly successful company but with 97% of its revenues coming from Web advertising and 68% of that from advertising on its own Web sites, it is still very much a single proposition company.

Google’s market dominance means it has virtually reached the limits of organic growth and anything further can only come from transformation via acquisition and perhaps through product and service development, in much the same way Apple has. Sure it’s testing the field with Wave, Chrome and Android, which appear to be the spearheads of a greater platform strategy but if we take YouTube as an example of expansion by acquisition, it seems fairly evident that Google is a one-trick pony.

Since its 2006 acquisition of YouTube revenue estimates have varied wildly with analysts like Bear Stearns and Credit Suisse suggesting Google will see between $90 -240 million in revenues this year. It’s a big range but as the number three brand on the internet YouTube only made around $80 million last year and while that’s no small potatoes, it is struggling. Given Google’s 2006 acquisition of YouTube came with a $1.65billion price tag and Credit Suisse estimates operating costs at around $711 million this year. Therefore it’s reasonabl e to assume that despite Google’s deep pockets, the operating gap is not going to be tolerated for too long.

So what does this mean for the Google brand? Of course, YouTube’s traffic will continue to grow exponentially, with no clear end in sight as will the not inconsiderable cost of this business. Set this against mildly successful efforts at monetizing content via advertising and the overall state of the advertising market and you come back to the central problem for YouTube and ultimately, Google. The non-propietary nature of both its search engine and content that forms the basis of the Google brand and proposition is, at the same time, its achilles heel.

To get further understand these limits, look at the performance and what I see as the eventual fate of Yahoo. Like Google, nearly all of Yahoo’s revenue comes from search and display advertising. Since Google’s 2004 float Yahoo has been losing share in search and though Yahoo is still the second most popular search engine, its searches are inferior. While Yahoo’s content continues to attract users for the moment, its search traffic is secondary to choice of Yahoo as a portal. The problem is that while content from the portal generally helps generate search traffic, yet without either distinctive content (everyone accepts that content is no longer a competitive advantage) and superior search, Yahoo is going to decline. What is best described, as Yahoo’s kitchensink approach to both content and feature development, is not disimmilar to that of Google’s. In this market “innovation” is a very tired word. Yahoo has Flickr. Google Picasa. Yahoo has Finance. Google Finance. Yahoo has Mail. Google Gmail and now Wave. Yahoo has Groups. Google Groups. Now just think of Google’s failures with News, Lively, Orkut and Knol and then apply that to a similar Yahoo’s list of failures or better still AOL, its hard not to draw the conclusion that the direction for both brands is anywhere but down.

On revenue and market performance measures alone, Yahoo is a sombre example of how little stock one can place in single proposition revenue models. In 2004 Yahoo reported net income of about $238 million and had a market value of about $36 billion. At the same time Google's stock market value was around $16 billion based on a net income of around $106 million. Microsoft’s offer for Yahoo last year put its market value $45 billion, against a brand valuation 7.45 billion. It had barely moved and most people thought Microsoft was being generous and Yahoo missed the boat. Now with the rankings reversed and sobriety entering market valuations, Google’s Wave is looking like no tsunami.

This blog was originally published in Marketing Magazine on 11 June 2009.