Google’s innovation engine sputtering big time

By Reuters Staff
December 1, 2010

By Rob Cox and Robert Cyran
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

NEW YORK — With an optimistic spreadsheet and a lot of creativity there just might be a way to rationalize the $6 billion or so that Google is expected to shell out on Groupon. Yet making the numbers work on the search giant’s purchase of the coupon website may not matter over the longer term. The bigger lesson to draw from what would be Google’s biggest-ever deal is that the company’s reign as the Internet’s innovation king is ending.

Google’s apparent willingness to spend so much shareholder treasure to acquire a two-year-old startup, in a business with almost no barriers to entry, is the most damning evidence yet. In its heyday, Google would have channeled some of its prodigious cash flow towards creating a Groupon of its own.

That era is receding. Few of these venture-capitalistic initiatives panned out. Google is still a one-trick leviathan: a search engine — albeit an incredibly successful, even scarily dominant one. But it must now buy its way to innovation.
Attempts to take on fast-growing, newer companies by itself have resulted in damp squibs. Two quick examples: Google Checkout never came close to dethroning online payment king PayPal; and Google’s social networking tool, Buzz, accomplished the seemingly impossible feat of making Facebook look responsible at protecting users’ privacy.

Not everything Google has done on its own has been wasteful. Gmail is a success, for example. But it was more akin to building a better digital mousetrap. Or take Google Apps, an attempt to bring Microsoft Office-like tools onto the Internet cloud. These have done fine, but their adoption hasn’t obviously hurt Microsoft or hampered, say, Salesforce.com’s growth.

These self-financed initiatives have modestly helped Google’s core search business. On the other hand, Google has successfully added potentially huge, ancillary business through M&A. As part of the Google machine, YouTube, Android, DoubleClick and AdMob have extended the company’s leadership into areas beyond traditional search.

The problem is the cost of this expansion. For example, Google bought YouTube for $1.7 billion in late 2006. It’s just now close to profitability. Again, by any stretch of the spreadsheet, that’s a poor financial return. If Google’s dilemma is, “overpay or build something that doesn’t catch on?” then purchasing Groupon for $6 billion may be the right answer. Shareholders should worry that Google may even have to ask this question.

Comments

yes it is not a good idea!

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