2014: Google Gathered the World's Smartest Minds — Really Just to Sell Ads

Top 15 Year in Review: Google

Regular article

In 2014, Google Was Still an Ad Company

One episode from late 2014 shows how powerful, and how dominant, Google has become. The European Union voted for a proposal to split Google's search engine off from its other commercial services into a separate company. The vote is not binding, but it will invite more scrutiny of Google and could set off a new round of antitrust investigations.

On the surface, the EU seems forever to be picking fights with Google. In recent years the disputes have centered on antitrust law, privacy, tax avoidance and breaking up the company. Behind them lies the EU's fear of one giant corporation. In search and advertising, few companies can come close to Google.

Here are a few numbers from 2014 that show just how big Google is.

Ten years after its IPO, Google is the world's largest advertising company by revenue.

What it does best is collect information on hundreds of millions of users and use it to target ads. Users happily trade their data for convenience. Google will go on collecting more — and so far, the only thing that data earns it is advertising.

Steady Growth, Mature Finances

By any measure, Google in 2014 was a mature company with steady growth. Like most tech companies, it sits on a large pile of cash: $15.6 billion on its books at the end of the third quarter, enough to make it richer than some countries and to let it try all kinds of new projects. Its spending is also very stable, another mark of a mature company.

The one thing that still makes Google look like a startup is how fast it grows. Its revenue has grown by double digits for many years running, and with $47.9 billion in the first three quarters, this year will be no exception. Slower growth has made some analysts nervous, but Google is still expanding at a pace few companies can match.

The stability is only on the surface. Look closely at where Google's money comes from and you find some interesting, if unsurprising, shifts. First, international business makes up a growing share, but the US and the UK remain its main sources of revenue; no other country accounts for more than 10%.

Even after it parted ways with Motorola in January, Google still earned more than 90% of its revenue from advertising. Ads shown through its ad network, AdSense and similar platforms, barely grew, and are steadily giving way to the ads Google sells on its own search pages.

"Other revenue," which includes patent licensing, is creeping up — from 4% to 10% over five years. Google is working hard to sell ads, and working just as hard on selling things other than ads.

Where Does an Ad Company Go Next?

Why the effort to sell something other than ads? Because ads are hard to sell. Google's own financial figures show its ad network revenue growing very slowly. Third-party websites, in other words, have less and less reason to put Google ads on their pages. Many skip a middleman like Google and deal with advertisers directly, which is better targeted and cheaper.

But that is not the central question for Google's ad business. The world's largest advertising company still hasn't worked out how to sell the ads of the future: mobile ads.

First, its share of the mobile ad market keeps shrinking, from 52.6% to 46.8% in three years. Facebook is the reason. As a social network, it has more precise data on its users, better ways to display ads, and ads that people engage with more. Over the same three years, Facebook's share leapt from 5.4% to 21.7%.

Second, the search-and-ad model Google lives on may not exist on mobile at all. Younger smartphone users who want to know the temperature don't look up a forecast; they search the app store for "weather." To catch the latest TV drama, they search the app store for "American TV shows." "There's an app for that" will become second nature, and this generation will search for different apps to meet different needs.

On mobile, then, the answer to a question is an app on the phone, not a Google search page. The small size of a mobile web page limits how many ads it can show, and more and more ads are now seen inside apps rather than on Google's search pages.

As noted above, Google's ad network is growing slowly. In-app ads don't seem to have given it a new source of growth.

Meanwhile, even Google's strongest business, search advertising, is running into trouble on phones. When the iPhone launched in 2007, Steve Jobs picked Google as a strategic partner and built in its full suite of services. As Android rose, the two companies became rivals, and Apple has since dropped Google Maps and YouTube. The only Google service still preinstalled on the iPhone is the search engine in the Safari browser, and that contract expires next year. Yahoo and Microsoft are both competing to become Safari's next default search engine. Whoever wins becomes the default for every iPhone user.

In the same month, Firefox signed an exclusive search deal with Yahoo. Together, Safari and Firefox hold 19.1% of the desktop market and 46% of mobile.

In 2014, Google's trouble with mobile search ads was only beginning.

In 2014, Everything Was About Selling Ads Better

To sell more ads on mobile, Google tried a great many things. Its efforts centered on Android, the one platform it could get a grip on.

Five Android developments in 2014 put the platform back in the spotlight.

Android One budget phones

The Android One phones, which launched first in India in September, carry Google's hopes for a unified ecosystem. For years, phone makers have tuned Android and adapted it to cheap handsets on their own, and the result has been badly fragmented versions and an inconsistent experience. More important, once phone makers control the software themselves, Google's services are no longer preinstalled, and no longer necessarily needed.

Android One is meant to fix this. Google hopes a better experience will bring more feature-phone users in emerging markets to Android. It also hopes to keep some control over an Android ecosystem crowded with alternatives.

Android 5.0 and Material Design

Material Design is a design language Google created for Android. It sets a clean, modern standard that adapts to different screen sizes, and it underpins the latest version, Android 5.0.

Phone makers, who have long dragged their feet on Android updates, were unusually quick this time. Samsung's Galaxy phones can be upgraded to 5.0 starting this month, along with most of its system apps, redesigned for Material Design. An internal effort called Project Zero is reportedly redesigning the Galaxy S6 from scratch.

The spec race among Android phones has stopped producing anything exciting, and many makers have no idea how to improve next year's models. The new interface that Material Design brings is a strong selling point, and it lets Google pull the ecosystem closer together.

Android Wear, Android TV, Android Auto

The Moto 360 may be the most talked-about wearable of the year. It runs Android Wear, Google's operating system for wearables, which launched in June alongside Android TV, a platform for smart TVs, and Android Auto, a platform for cars.

Google's plan: wherever you use an electronic device, you can use Android.

In 2014, Android's ambition was one ecosystem across every platform — to make the whole ecosystem more valuable, and to gather more user data and sell ads better.

In 2014, a New Rival: Chinese Phone Makers

In Asymco's "The Innovator's Stopwatch", 2012 marks the start of the era of Chinese smartphone makers.

Of the world's ten best-selling smartphone brands, all but Apple, Samsung and LG are Chinese, and those three are all losing share. Chinese smartphone users have made these Chinese brands what they are.

What Chinese phone makers have in common is heavily customized software. On a phone from Xiaomi, Huawei, Meizu, Smartisan or OnePlus, you can use Android comfortably without any Google service at all — and even if you want Google's services, someone has put hurdles in your way.

For policy reasons, Google gave up its search business in China long ago. Android phones should have been a good back door into the market, but with Google's services unavailable and the software heavily customized, Android in China has been "de-Googled." Google earns almost no ad revenue from China.

Android One aims to unify the Android ecosystem from the low end up, to compete with heavily customized third-party ROMs, and so to win more control over how users get in. Google is also trying, in various ways, to come back to China.

On the morning of December 10, Google Play held a developer-only event in Shanghai, Google Play Playtime. It was Google Play's first official event in mainland China, and a sign that it no longer shuts the mainland out entirely.

The biggest obstacle to its return is the phone makers. Xiaomi, Lenovo and their peers understand all too well how consumers think about app stores. Preinstallation is the fastest way for an app store to gain market share, and a major source of profit for phone makers. Some makers that live on preinstallation fees even tightly control how many phones go through each sales channel. Google Play cannot persuade Xiaomi to drop its own app store and preinstall Google Play instead.

If Google doesn't want to miss out on China, it can partner with Chinese phone makers, or compete with them.

In 2014, Everything Google Did Was a Search for the Next Source of Profit

Phones and tablets

January: Google sells Motorola for $2.9 billion;

June: announces Android 5.0 and Android One;

September: the first Android One phone goes on sale, priced at $105;

October: the Nexus 6 phone and Nexus 9 tablet launch alongside Android 5.0;

December: Google holds a developer conference in Shanghai.

Smart hardware and the home

January: Google buys smart-home company Nest for $3.2 billion in cash;

March: unveils the Moto 360 smartwatch and Android Wear, its operating system for wearables;

June: buys smart-camera company Dropcam for $555 million;

June: announces Android TV and Android Auto.

New ventures and more

April: buys Titan Aerospace, a maker of solar-powered drones that can stay aloft for years without landing;

May: leads a $130 million investment in Flatiron Health, which uses big data to serve cancer care;

May: Google Glass goes on general sale in the US, and Google officially unveils its self-driving car;

June: launches the cloud computing services Google App Engine and Google Compute Engine;

July: launches Google Baseline Study, a project using big data to prevent disease;

September: buys Lift Labs, maker of a spoon designed for people with Parkinson's;

October: launches a $95-a-year shopping delivery service;

November: its charity project, Project Loon, expands to more countries.

This company does almost everything. It is experimenting with wearables, the smart home, smart cars, shopping, cloud computing and all manner of Google X projects.

Asymco's analysis of Google's future observes: "Google's R&D investment appears to be centered on stimulating consumption; the problem is that neither the quality of consumption nor the sources of local revenue receive attention. These problems are structural, rooted in the social structure, and will not change as technology spreads."

So its existing ad business cannot grow forever. Having failed to win on mobile the monopoly it held on the desktop, Google is looking for its next source of profit.

Back to the EU's Doubts

Doubts about Google — from the EU and beyond — over how it uses free services to collect users' private data and then target ads at them have also reached a peak.

Open Google's "About Us" page and you will still find its well-known "Ten things we know to be true," which says: "Our company was founded in California, but our mission is to facilitate access to information for the entire world, and in every language."

In 2014 Google is caught between openness and control of its ecosystem, between the desktop era and the mobile era, between selling ads and protecting privacy. Before it can bring the world more information, it has to keep growing and keep making money.

Yet seen from another angle, Google is still the coolest company in the world.

This October, CEO Larry Page handed control of six core businesses to Sundar Pichai, so that he himself could lead a Google 2.0 project to draw up a blueprint for the world of the future.

Sergey Brin, who co-founded the company with Page, runs Google X, the division that works on new ventures. Its projects include the self-driving car and Google Glass, and it incubated Project Loon, which brings the internet to remote areas.

Also this year, Google bought Skybox, which plans to launch large numbers of small satellites to build a satellite network, and invested in biotech and medical companies across many fields.

What turns science fiction into reality is the more than $10 billion in ad revenue Google earns every quarter. Only a company as large as Google has the money and the means to pursue ideas that look like a distraction from its core business yet are wildly imaginative — and only such a company can change the way we live.

Breaking up a company like this would be absurd.

The Top 15 are: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda and Vanke. The list will change as the companies, their markets and the trends around them change. We will follow them, and we will also follow their competitors and partners.

Why did we set up the Top 15 series? Here is a piece we think explains it rather well.

Cover image:

Titan Aerospace