Google often gets flak for having all its eggs in one basket, at least in terms of how it makes money. Current figures put advertising revenue at 97% to 98% of total revenue. So that has some critics asking what the search giant plants to do to diversify. But to clarify, we should distinguish between two types of diversification: 1) different types of advertising revenue (search, video, billboards, in-game, etc.) and 2) all other revenue (charging for premium services as an example: Picasa, Google Apps, etc.).
Google seems to be aggressively diversifying in one way while only dabbling in the other.
The company really wants to broaden the concept of contextual advertising, an idea it pioneered online. In fact, a Google spokesman put it this way, “We are always considering new ways to extend Google’s advertising program to benefit our users, advertisers and publishers.”
The acquisition of YouTube to patenting digital billboards to controlling and targeting TV commercials… Google wants to become the best way to deliver advertising across practically any type of media globally. As if that isn’t ambitious enough, there’s still a group out there asking how else the company plans to make money.
There’s been speculation all over the place on this: Will Google become an ISP? Sell a phone? Charge for advanced online storage? And the larger question: Will any of these potential models come close to making money in comparison to advertising revenue?
The truth is, Google doesn’t necessarily need to diversify in this way. Unless we’re worried that Google could face bankruptcy at some point as a result of having no other revenue stream, all other risks are mitigated by what the investment community calls Portfolio Theory.
In other words, the market expects a certain amount of risk associated with Google and its practice of non-diversification. Other than the risk of bankruptcy, any other risk can be easily mitigated by investors holding stocks in addition to Google. While Google creates a higher risk for not diversifying, it also can create a higher return.
But for those investors holding on to Google only, yes, Google diversifying would definitely be a good thing. But so would investing in more companies.
Google will be able to last a long time based strictly on advertising income. But some day a new media is going to come along and without diversity Google will falter. Network TV is built on advertising and between Cable options and Internet options Network TV is falling and falling fast. Someday without diversity the same will happen to Google.
Thanks, Jake. Interesting take… It would be kind of ironic if Google later fell in the same way it’s causing network TV to fall.