Google's Clicks Not as Profitable

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Google's stock has been on a roll of late. The shares have risen nearly 14% since Google's first-quarter earnings report on Apr. 16, as investors credited Google with boosting profit margins even as the recession sapped demand for the online advertising that makes up most of Google's sales.

New questions are weighing on investors' minds now. They're looking for more clarity about how Google plans to make money from its YouTube site, and whether investments in display ads are paying off. "It seems like they've been working on those for some time, and not much has come of them," says Scott Kessler, an equity analyst at Standard & Poor's, which like BusinessWeek is owned by The McGraw-Hill Companies (MHP). Analysts are also watching whether Microsoft's (MSFT) new vigor on the Web will take a bite out of Google's search-engine market share and sales of its online business applications.

Bing Making Inroads

Google's growth has slowed precipitously as advertisers cut back on spending amid the recession. Wall Street expects Google's revenue to rise just 4.4% this year, compared with 31.3% in 2008. Google is trying to generate more revenue from YouTube by including more professionally produced videos with ad clips that play before the videos start, the company told analysts.

Schmidt also pointed to recently signed corporate customers of Google Apps, its productivity software that has struggled to attract large companies as customers. "The model is beginning to work," Schmidt said. Microsoft on July 13 announced its Office 2010 productivity software, which will include free Web versions of Word and other applications that will compete with Google Apps.

Microsoft and Google are squaring off on several fronts. Microsoft's Bing search engine, which debuted in May, has been gaining favor among users. A July 16 report from market researcher ComScore (SCOR) showed Microsoft gained nearly a half-point of U.S. search market share in June, when Bing accounted for 8.4% of searches. While Google still commands the vast majority of Web searches, with a 65% U.S. share, June marked the first time it didn't gain share since January.

Chrome OS Likely to Be Free

Google isn't sitting idly by as Microsoft treads on its turf. The company said on July 8 that it's developing an operating system, called Chrome OS, to challenge Microsoft's Windows. Schmidt said Google probably won't charge for the software, but hopes its use leads to more time spent on Google's sites. "You don't change the world incrementally," Schmidt said. "You do it through big innovation," like a new PC operating system, he said.

Wall Street is waiting for Google's innovation to trickle down to the bottom line. While it does, the search giant is trying to shake off the effects of an advertising slide that doesn't show signs of abating.

Ricadela is a writer for BusinessWeek in Silicon Valley.

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