Google's Growing Grasp


To fend off Microsoft and other foes, the search giant is bulking up on partnerships.
What does Google search for? Over the past few months, the Web titan has been looking for new partners. It has teamed with Intuit to enable small-business owners to manage Google ad campaigns, partnered with eBay to offer "click-to-call" ads that connect online shoppers to sellers, joined with MySpace to supply the social network's search and advertising, and helped MTV distribute video clips with ads tacked on.

Google is seeking growth and security, betting that the coterie of new colleagues on its team will strengthen its ability to live up to its $123 billion stock-market valuation. "Partnerships had not been a core part of the way we were running the company," says Google CEO Eric Schmidt. "When you're a small company, you have to do everything yourself. As you get more established, you realize you'll never get everything done by yourself."

The partner push comes as competition is pushing back. Microsoft is waking to the ad-revenue world, legions of Web 2.0 start-ups are dreaming up useful new tools, and and Yahoo! are closing the gap in search. "People have been brainwashed that search can't get any better than Google," says CEO Jim Lanzone. Ask has dumped its gimmicky Jeeves icon and zoomed in on search, sensing an opening.

Google realized while negotiating a deal with Dell that it needed to stretch its existing user base. That May agreement will put Google's toolbar on millions of Dell machines, and it prompted Google execs to seek other such alliances. Those partners "have a way of reaching customers that we do not on our own," Schmidt says, "and each represents a different strategic thrust."

MySpace gets Google into the fastest-growing online communities, Intuit helps Google target a whole new market of business users, and MTV gets Google into video distribution. So what's in it for the partners? For one, they get to avoid competing with Google, a good outcome particularly for companies without an alternative means of coaxing revenue out of their content. "It's easy to collaborate with Google," says MTV president Michael Wolf. "They move fast. We'd like to do even more with them."

The alliances will also allow Google to get back to its primary business. Schmidt acknowledges that the company had to redirect resources to search after its famous 70-20-10 policy--70% of the time spent on core issues, 30% on side and new projects--went slightly off-kilter. Marissa Mayer, who manages search products, says the company has assigned more engineers to search than ever before and plans to release a new search tool that will enable users to design and build their own flavor of Google search, scanning just the sites they're interested in.

The company's lack of focus is showing on the balance sheet too. Tim Gaumer, director of fundamental research for StarMine, a financial-analysis firm, notes that Google's pretax return on assets declined to 7.6% in the quarter ending in June, down from 11.8% a year ago. "While significantly above the industry average, that's a rapid decline," Gaumer says. What has changed this year is that Google has ramped up its investment in areas with lower expected returns, such as infrastructure. Still, sales should reach $10 billion this year.

Credit Suisse analyst Heath Terry isn't worried about the odd billion spent on new facilities or the free lunches for which the company is famous. His concern is Bill Gates & Co. "Google knows that their biggest threat is now Microsoft," says Terry. Having dragged its feet on search while Google built an empire, Microsoft has been spending heavily on its Web index and recently partnered with Facebook to provide ads for the popular social site. "To believe that Yahoo!, Ask and Microsoft are not going to improve and take share from Google is naive," says Microsoft spokesman Adam Sohn. He likens this period to the DOS era of search, with a major scramble ahead for the next generation of search tools. Google's Mayer agrees that the vanilla results page that Google and others serve today will probably morph into something categorically different, with images, videos and even conversations among Web users replacing static text links.

To repel the Redmond threat--not to mention Yahoo!, yapping at its heels--Google has executed a rash of acquisitions and product launches tied to its powerful website. From spreadsheet software to online word processing and a digital payment service, the company seems to offer new stuff every day. Free, for the most part, the offerings are dumped onto Google's "more" or "labs" page, in seemingly random order. Mayer wants to streamline that process, helping return Google to its roots in simplicity. "Users aren't going to remember our 50-plus products. They'll remember three to five. We need more features and fewer products," she says.

The idea is that Google wants to organize your life, not just your information, says Oren Etzioni, a professor of computer science at the University of Washington who has consulted for the company on tech development. "In starting up services that haven't been at the core of their business, Google is experimenting to see if they can expand your everyday interaction with them," he says.

Part of that effort means bringing Google to businesses that are still offline oriented. Online advertising, though growing fast, represents just 6% of total ad spending. So Google is going retro, ramping up its video-ad program, launching a major radio-ad service and testing ads in print. "We start with the premise that we should partner with everybody," says Tim Armstrong, Google's vice president of ad sales, who helped close the deal with MySpace.

To some, Google's numerous business deals overshadow the additions on its search side and suggest a slide away from consumers as it seeks new areas of growth. "Google has been an inspiring and innovative company, but the recent alliances seem less creative," says Irma Zandl, principal of the Zandl Group, a marketing and trend-forecasting agency in New York City. "They seem to be going in a less consumer-centric direction, focusing instead on monetizing to the max, which may be a good thing from a Wall Street perspective but perhaps not so good from the consumers' standpoint." Will consumers enjoy using Google less with each new partnership?

David Eun, Google's vice president of content partnerships, insists that consumer interests continue to trump business concerns. He points out that Google recently decided not to place ads at the start of videos on its site because users would expect to see content, not promotions, when they first clicked. "Don't make the customers hate you" is rule No. 1 on the Internet.

Google's biggest challenge in satisfying its partners and staying ahead of its rivals, says Terry, is managing its explosive employee growth rate. There are now 9,000 Googlers, which certainly adds to the Googleplexity. "When it seems like they're bringing in more outsiders than they have insiders every year and doubling the size of the company, it's hard to maintain the corporate culture that made them successful," says Terry.

Schmidt isn't worried about a challenge from the outside. "Maybe we should be, but we're not. As a leading company, the seeds of our own destruction are within us," he says. To keep them from germinating, Google has come up with 30 key questions to direct its strategic focus. A sampling: "What are the next big breakthroughs in search?" and "We have a lot of cash. What should we do with it?" Google just celebrated its eighth birthday with a strategic review. For 2007, the plan is to spend some of that cash on mobile technologies and more new partnerships.

And if it's any consolation, and it probably isn't, Google is not unlike Microsoft at this stage in its corporate life. In 1983, when Microsoft turned 8, it was basically a one-product company with lots of growing pains. The next two products worked out. They were called Word and Windows.

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