Google: What Goes Up...

(page 2 of 2)

Browse Issues

Browse the BusinessWeek Archive

Related Items

• Google's Gamble

Schmidt says Google is not yet seeing an impact from the economy Seokyong Lee/Bloomberg News

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• digg this
• save to del.icio.us

It gives its engineers about a day a week to work on personal projects outside the direct scrutiny of their managers, making it tough even for insiders to know who's doing exactly what. And its ad business, ruled by secret, complex mathematical formulas, vexes analysts, who label the company a "black box."

Not Immune to the Slowdown?

That's why data trickling out over the past couple of months have so shaken up some Google boosters. Google contends the apparent flattening of paid clicks is purposeful. It has reduced the clickable area around ads to eliminate accidental clicks that don't represent serious visitors or buyers. As a result, analysts say, the average price per click on search words that advertisers bid on rose 15% in the fourth quarter. Yet skeptics abound. "I've seen some softness that looks to be driven by the economy," says Kevin Lee, executive chairman of search-marketing firm Didit.

Google also faces more competition because of its own unbridled ambitions. Last year it began a concerted push to offer software programs online such as e-mail and word processing, in competition with Microsoft. With its just-closed $3.2 billion purchase of DoubleClick and its 2006 buy of video site YouTube for $1.6 billion, it's also ready to plunge into display and video ads. And despite losing a bid for wireless spectrum recently to Verizon Wireless (VZ) and AT&T (T), it's forging ahead with plans for wireless Internet software.

Unlike in search ads, Google must contend with credible and often large competitors in all those markets. "That's not something they've had to do before," says Geoffrey Moore, managing director of strategy consultant TCG Advisors. Most of all, Google faces a Microsoft that has been in "kill Google" mode for well over a year—spending billions on ad-related acquisitions and making an unprecedented $45 billion bid to buy Yahoo (YHOO).

Trading In for Twitter

Like other highfliers that could do no wrong for so long, Google faces key challenges that could well prove more internal than external. Its very success has created a company so big that some veterans are now feeling restless. Besides the executive departures, a number of engineers have left for startups such as microblogging service Twitter and social media sharing site FriendFeed. And with the stock price down so far, employee retention issues could spread, too. Hundreds or even thousands of employees are holding stock-based grants with strike prices higher than Google's shares.

So far the company remains a magnet for young techies. Tom Kosnik, a professor of management science and engineering at Stanford University, says students are attracted to the creative culture, as much as the free gourmet food and college atmosphere. Still, for the first time, the enchanted corporation may need to search for new ways to maintain the magic.

Hof is BusinessWeek's Silicon Valley bureau chief .