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What's next for Google, the most successful Internet company in the world?

Mike Barham of Google swaps out a motherboard.

CONNIE ZHOU/GOOGLE

Earlier this year, recruiters from Google Inc. went out looking for seamstresses and balloon engineers.

It was an odd set of professions for a company that runs the world's most popular Internet search engine – even one that receives, on average, 5,000 job applications a day. Many of the men and women approached by Google were not told why they were being hired, but they signed up anyway. "We get people who want to work on the next big crazy thing," says Todd Carlisle, Google's director of staffing.

The next big crazy thing, in this instance, is called Project Loon, an audacious plan to send Google balloons into the stratosphere, where – if all goes well – they will beam down wireless Internet signals to remote and rural communities with poor access to broadband connections.

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Launched this June with a pilot project in New Zealand, Project Loon appears on the surface to be another "moonshot" – the Google term for highly experimental projects that will either become industry-changing success stories or total failures.

In fact, it fits perfectly with the evolving strategy of Google, a business that has done more than any other to change how people find information and do business. Having disrupted one industry after another – from mobile phones to television to advertising – Google is now out to blur the lines between the digital world and the physical one. From phones that answer your plain-English questions to cars that drive themselves, the company that started out with a mission to organize the world's information is now trying to automate and simplify your daily interactions.

Behind all this experimentation and innovation, there's a serious business purpose. At 15, Google has reached middle age for a technology company. It remains the biggest success story of the Internet era; so far, no competitor has been able to mount a serious challenge to its dominance in web search, on every platform. This year, it is expected to earn $12.7-billion (U.S.) in profit, and it has already become the third most valuable corporation in the United States behind only Apple Inc. and Exxon Mobil Corp. and surpassing, yes, even Microsoft Corp.

For all its profitability, though, Google still relies on one business – advertising – for about 85 per cent of its revenue. Search advertising remains lucrative, as the company continues to post double-digit percentage revenue growth. But there are signs that the Internet advertising business is facing long-term challenges.

Last week, Google posted better-than-expected third-quarter earnings, with revenue of $14.9-billion, sending its stock price soaring past the $1,000-a-share mark. The solid results masked some troubling trends. Google received a large boost in ad volume, which itself was due to a surge of mobile advertising, the ads that appear on smartphones and tablets. But while such ads are quickly becoming a major portion of all Internet advertising, they tend to generate less revenue.

In the most recent quarter, Google said a key metric called cost-per-click, which measures how much advertisers are willing to pay for an ad, declined 8 per cent year over year. That marked the eighth consecutive quarter of cost-per-click declines.

Put simply, the ads at the very heart of Google's business model for the past 15 years are slowly losing value, and no company has figured out how to reverse that trend.

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For many investors, the issue of declining online advertising rates is perhaps the only worrying omen for what is otherwise one of the most successful companies of the past two decades. In the context of huge profits, the company's experimental projects, such as the Google Glass wearable computer or the self-driving car, have often come off as a kind of sideshow – a series of wild ideas that, at best, have an unclear path to profitability.

At the Google campus in Mountain View, however, there's a sense that virtually all these projects are part of a wider, more ambitious effort by the company to expand its role as the chief middleman of Internet search into a variety of other areas. That takes new technology, a stomach for risk and big ideas.

"The unifying theme at Google, other than it being a startup run by [CEO] Larry Page, is the bigness of it all," said Steven Woods, director of engineering at Google Canada. "It makes huge bets in areas that can be dramatically impactful in the future."

Indeed, part of the lure of the company to engineers such as Mr. Woods is the deep uncertainty and grand potential of Google's many big bets – with little indication which will fail, and which will end up transforming parts of society.

"I would be very hesitant to guess that ten years from now we'll be an advertising company."

The X-Plex

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On the outskirts of Google's sprawling main campus, about 24 kilometres from downtown San Jose, there's an unassuming building where the company's future is being created.

Outwardly, there's little to differentiate it from dozens of others that make up Google's headquarters. Most employees here refer to the structure as the X-Plex, because it's home to a division of the company called Google X.

Inside, a group of engineers and designers work in open-concept cubicles, surrounded by walls that often double as drawing boards. Compared to some of Google's other buildings, which feature indoor green spaces, swings and hammocks, the X-Plex is downright conservative. But over the past couple of years, it is this part of Google's campus that has spawned some of the technology world's most audacious plans.

In the early years of its existence, Google was well known in Silicon Valley for spending time and money on higher-risk projects. Some of its most popular services, including Gmail, came about as a result of the company's "20 per cent time" initiative, which encouraged employees to take one-fifth of their time to work on their own projects.

But in the years following the 2008 global recession, Google's approach to new projects changed dramatically. In a strategy described by senior vice-president Jonathan Rosenberg at the time as "more wood behind fewer arrows," it focused on core, profitable areas such as search and display advertising. Other projects, including various forays into the worlds of messaging and social networking, were either shuttered or temporarily ignored.

As Google started taking fewer risks, its rivals capitalized. Between 2009 and 2011, upstart rivals such as Facebook and Twitter began attacking the search business, offering consumers so-called "social search," which generates a relatively small set of recommendations from trusted friends, rather than the millions results generated by Google's famous search algorithm.

It was partly in response to those challenges that Google unveiled the most significant management shakeup in its history in January, 2011. During the previous decade, the company had been run by a trio – the two founders, Larry Page and Sergey Brin, and chief executive officer Eric Schmidt. But as it grew (it's now at 46,000 employees, including its Motorola division), Google became much more difficult to manage by committee. In an attempt to become more nimble, the company switched to a single CEO, Mr. Page, with Mr. Schmidt reassigned to the role of executive chairman.

That left Mr. Brin free to do what he loves – tinker with new technology. Suddenly, Google's "moonshot" projects, for years neglected, had one of the company's co-founders as a full-time advocate. Today, Mr. Brin spends much of his time working with the staff at Google X.

Not all of Google's moonshot projects originate at the X-Plex. Last month, Mr. Page announced that Google was creating a new genetics company called Calico. The company's focus? Curing age-related diseases. "As we explained in our first letter to shareholders, there's tremendous potential for technology more generally to improve people's lives," Mr. Page said. "So don't be surprised if we invest in projects that seem strange or speculative compared with our existing Internet businesses."

Google's entire modus operandi, in fact, is to find problems that are complicated or frustrating for large numbers of people, figure out a way that technology can help – and assume that the money will follow.

Take traffic, that great killer of human time and productivity. Google's mapping software can help users find the fastest possible route, but it can't give them back the time spent stuck behind the wheel. So the company has backed technology to make self-driving cars.

Google's technology essentially creates a 3-D map of the car's surrounding environment using a roof-mounted laser. The laser produces a detailed map and measures the distance to various obstacles. Another camera near the rear-view mirror is built to recognize traffic lights. The car pulls in speed limit and direction information from Google's massive Maps database. So far, the Google test cars have driven hundreds of thousands of miles without causing any accidents (although a robot car got rear-ended on one occasion).

Google says it has no plans to monetize the technology at the moment. But driverless cars could prove very profitable – both as a feature to be sold to auto makers and as a generator of data about how people get around.

The speculative nature of these investments causes moments of frustration for some analysts, who are, after all, paid to provide opinions on whether or not Google is worth more than $1,000 a share. (It closed Friday at $1,015.20, giving the company a market capitalization of $339-billion.) It's something its CEO acknowledges, while making no apologies for the company's unconventional approach to spending money.

"People rightly ask how we'll make money from these big bets," Mr. Page told shareholders in a 2012 letter. "We understand the need to balance our short– and longer-term needs because our revenue is the engine that funds all our innovation. But over time, our emerging high-usage products will likely generate significant new revenue streams for Google as well as for our partners, just as search does today."

While waiting for the payoff, however, Google has to keep its cash cow healthy, especially as users switch to the mobile Internet, where ad rates are lower.

The company's current struggle to re-ignite click rates is magnified by it prior success. For five successive quarters, the search engine has failed to post growth rates in its core business of more than 20 per cent. For most companies, such rates would be considered astronomical, but as BGC Financial analyst Colin Gillis noted recently, just two years ago Google's core revenue growth rate was around 35 per cent. "We see the slowing core business as a one reason why Google is investing so heavily in new ventures as new products are needed to re-ignite revenue growth."

That's why, as part of Google's attempt to remain relevant in its next 15 years, even its core Internet business is undergoing a massive overhaul.

The Knowledge Graph

On a whiteboard, Ben Gomes sketches an illustration of the inner workings of Google's most prized possession – its search engine.

Since its inception in 1998, Google has collected information. But for years, that information has been stored in separate databases depending on its content – from books to video to images.

Today, Mr. Gomes, who has been with the company for 14 years and is now one of the chiefs of its search department, is overseeing an effort to combine all of Google's knowledge into a single entity, called the Knowledge Graph.

As an engineering task, the Knowledge Graph is substantial. Already, the data include some 18 billion items collected by Google from internal and external sources such as Wikipedia. It is essentially a database of the relationships among the world's people, places and things. For example, Barack and Michelle Obama are connected by the relationship "spouse," whereas Barack Obama and the value "185 centimetres" are connected by the relationship "height."

Millions upon millions of these linkages exist in Google's Knowledge Graph. The graph contains the connections between stores and their opening hours, companies and their market capitalizationss, singers and their discographies. In effect, it is Google's most overarching model of the real world. (The data also allow Google to answer some natural language queries. Typing "How tall is Barack Obama?" into the search engine, for example, produces a box that says "1.85 m".)

At its core, the Knowledge Graph represents the fullest realization yet of Google's original mission statement – to collect and organize the world's information. Perhaps the most beneficial use of the Knowledge Graph for Google today is its ability to facilitate voice-based searching from mobile devices – where a user simply asks his or her phone a question in plain language, and the phone responds instantaneously.

"In the future you want to give the user the answer as if they were interacting with a real person," Mr. Gomes says. "But to do that … the computer must begin understanding a model of the world."

It is, in other words, a prime example of the future Google hopes for – one in which the company is the middleman in a digital transaction that feels no different from a real-world one.

Like many of Google's endeavours, the Knowledge Graph is in many ways a project without an end. Engineers continue to refine and expand the database, constantly on the lookout for new places to use it. That strategy – innovate first and monetize later – has been the Google way since the company's birth. Indeed, when Google executives sold the first ad on the company's search results page, few could have foreseen the same ads one day running on a YouTube videos, Gmail messages or high-powered smartphones.

Now, the question is whether Google can stumble onto the next profitable technology before its current one stops making money.

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