What's Holding Back Google Apps?

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Exhibit A: Google Apps still claims just a few large customers besides GE. Two of the few widely recognizable names on a list of largest customers on Google's Web site are Genentech (DNA) and Salesforce.com (CRM).

Google won't say exactly how much revenue comes from Apps sales. But Sanford C. Bernstein analyst Jeffrey Lindsay estimates that Google Apps will generate just $273 million in sales in 2009, just 1.3% of Google's expected total sales of $21.05 billion. Unless Google makes a major acquisition, "we don't place a lot of value" on its enterprise business, says Lindsay. A March Forrester Research (FORR) survey of 152 companies found just 3% running Google's business applications.

"It's hard for us to materially move the needle on Google's revenue in fiscal '09," Girouard concedes. But he says Google's Apps business is profitable, and online productivity software could eventually yield billions of dollars in sales. "We have 10 to 20 years to grow into this market," he says.

Google can afford to take its time incubating new businesses. It commands a wide lead in the Internet search market; first-quarter revenues rose 6% to $5.5 billion, even as companies dialed back on ad spending. Still, accelerating sales of its applications is also important to Google's long-term strategy of weaving its software into more aspects of computer users' lives.

Searching for Money

Getting more large companies to buy into its business tools lets Google use its computing expertise to organize new types of information beside Web pages. "The more data people can create and analyze, the more Google can slurp into its system and index," says Christophe Bisciglia, a former senior engineer at Google who recently founded cloud computing software startup Cloudera. That makes users more likely to turn to the site for searches that Google can make money on. "Not every interaction with Google is monetizable," Bisciglia says.

Several technology trends are on Google's side. The company runs its software across many thousands of servers, providing users a level of speed and reliability few other tech suppliers that rely on smaller data centers can match. At the same time, companies are writing more of their software using industry standard Web technologies, which could loosen Microsoft's hold on the ecosystem of developers. Just as Microsoft marginalized Lotus and WordPerfect in the productivity software market in the '90s, Google may benefit from a new "platform shift" to the Web, argues Gundotra, who spent 15 years at Microsoft.

Facets of Google's structure stand in the way of fully capitalizing on this shift, however. Building a sales staff to proffer its applications is a labor-intensive endeavor that hasn't been part of the company's DNA, says Zachary Nelson, CEO of online accounting software maker NetSuite (N). "If you want to sell enterprise software, you have to have salespeople," he says.

Another challenge: focusing enough management attention for Google Apps. Although Girouard says Google's top executives are "very engaged" with the Apps business, which has a staff of 700, search operations tend to crowd out other initiatives. Creating new ways to analyze business data inside Apps has been "harder to get up on the priority list" given Google's long list of projects, according to Sam Schillace, a Google engineering director who created the software that's the basis for Google's word processor. "I'd give us a low grade," he says.

And while the company has considered a "white label" version of Gmail that customers could fold into their own applications, there's still debate over whether to release software without the Google brand, according to Gundotra.

Google needs a "second act" after search, says NetSuite's Nelson. In the business software market, where sales manpower and trust matter as much as technical chops, Google finds itself on an unfamiliar stage.

Ricadela is a writer for BusinessWeek in Silicon Valley.

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