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Technology > Tech Biz
Google and slower growth
After the company jumps the IPO hurdle, here's what it ought to focus on.
August 18, 2004: 1:35 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - Let's assume that this is the week for Google. That everybody settles on an offering price (the company slashed the target on Wednesday) and that the SEC gives the green light.

Then the hard work begins.

Managing growth

The most difficult thing Google will have to manage is growth. Last week Jupiter Research had some good news in a report projecting that money spent on paid search (the category in which Google's enormously successful AdWords program falls) would almost triple to $5.5 billion in 2009 from $1.9 billion in 2003.

The bad news is Jupiter's prediction that the year-over-year growth rate will slow to a more mature 11 percent from its rowdy 65 percent in 2003. For its part, Google expects 17 percent annual compounded growth over the next five years.

"We're seeing a market that's maturing," says Nate Elliott, an analyst with Jupiter Research. "A market this big can't continue to grow at 100, 80, or even 60 percent. It's not possible."

Which is why it made a lot of sense for Google to go public now. Many believe that its bread-and-butter earner -- paid search -- is at the peak of its growth.

"Nothing else we're seeing can return the growth rates paid search is delivering right now," Elliott says. "People keep looking around for the next area that will grow by 100 percent, and those industries are rare."

It's not just Google's problem

The maturation of the industry will affect all the players, of course. Ask Jeeves, Yahoo!, and Microsoft's MSN division all feature some element of paid search in their revenue models. Understandably, representatives from these companies don't necessarily agree with Jupiter's findings.

"We still see a lot of growth opportunities in the search market," says Gaude Paez, a spokeswoman for Yahoo!'s Overture division. "We expect tremendous growth potential over the next few years."

But few believe that paid search, which currently supplies upwards of 95 percent of Google's revenue, will be able to sustain its torrid growth rate for years to come.

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It will keep growing, sure, and 17 percent growth year over year is very strong any way you look at it. But will it be enough to appease investors?

My money says no. Google needs to pull a page out of Terry Semel's playbook at Yahoo! and start diversifying its revenue stream pretty quickly so it will have cushions in case -- gasp -- Jupiter's projections are on the mark.

Here are two things it needs to do

Go mobile. Net-ready handheld devices -- Palm Pilots, cell phones, and the like -- are growing at a faster rate than new PCs. Right now there are 182 million mobile Internet users worldwide, according to IDC. By the end of 2007, that number is expected to reach 576 million.

What's more, these users spend an average of $56 per year on e-commerce transactions via mobile devices. That figure is expected to double in two years. Yet no one owns the mobile search space.

"All the major players are aware of [mobile search]," says Sue Feldman, an analyst with IDC. "But it just hasn't happened yet."

Conquer enterprise search. Google has a small foothold in the enterprise space with its Google Search Appliance, a rack-mount server component that speeds the search of corporate Web sites, intranets, and databases. It now accounts for about 4 percent of Google's revenue.

A little company called Microsoft, however, is the dominant force among Google's direct competitors in reaching into the enterprise niche. Microsoft is also expected to include a major desktop search component in its next version of Windows.

But since that isn't expected to ship until 2006, Google has a brief window of opportunity to take the fight to Microsoft. It's a battle Google probably can't avoid.

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