Most of the recent news about Google (GOOG) has been bad. Online advertising posted a slow fourth quarter. That unexpectedly included both display ads and search marketing which has made Google one of the fastest growing large companies in America.  Several Wall St. analysts have commented that Google’s search revenue’s rate of increase flattened out in January and February. Since the consensus among experts who cover the company is that revenue will rise 11% in the first quarter, a flat quarter would be devastating.

One of the things that Wall St. hates about Google is that it does one thing better than any other company in the world, but that is all it does. Google Chrome browser, Google Earth, Google Maps, and YouTube have really made much money. Some of the features have not produced any revenue at all. If its search operation falters, Google’s run as the hottest tech company in the world could be over.

At this point, Google is a $22 billion company. If the search business drops to a growth rate of 10% a year, it will take three years for Google’s sales to get to $30 billion. From the time Microsoft (MSFT) hit $22 billion in sales in 2000, it took the company less than three years to get to the $30 billion plateau. Then from 2002 to 2008, Microsoft’s sales doubled. The software business not only grew. Until recently, it grew quickly.

The assumption about Google’s prospects is that the search company is the next Microsoft. Twenty years ago, Microsoft had the hot hand. Sales of Windows and the company’s business and server software were stunning. The margins on some of Microsoft’s software franchises were over 70%. Then the hyper-growth stopped as the company’s market penetration of PCs and servers reached a saturation point. Microsoft’s stock never saw the level it hit in 2000 again. Without lucrative stock options, employees who wanted to make it rich moved to start-ups. The people who had been at the company thirty years were already rich. Many of them retired.

About seven years after Microsoft’s stock hit an all-time high, Google traded at $747, its peak. It now changes hands at $348, and if the company’s sales can only grow at 10% or 15%, the stock is not going back above $700, ever.
The myth about companies like Microsoft and Google is that what they do is so important to business and consumers and so pervasive that the growth curve never flattens out. It does flatten at every company. No exceptions.
The press coverage of Google this week included a few pathetic announcements. Disney (DIS) will put some of its premium content on Google’s YouTube. That should be good for $10 million in revenue a year. Google is starting a $100 million venture capital arm which will make it the 1,000th largest venture operation in the world. In other words, it will not be managing enough venture money to matter. Then word came out that Hewlett-Packard (HPQ) might use Google’s operating system in some of its netbooks instead of Microsoft Windows. The important word in that report is “might.” The news that Google is adding thousands of employees a quarter and that the founders have bought a 747 or an aircraft carrier probably hit a high point two years ago.

Saying that Google is doing poorly is not the same as saying that Microsoft is doing well. What matters to Microsoft is that Google becomes less of a threat each day as it fails in its diversification attempts. Google’s cash flow does not continue to give it an almost limitless capital arsenal. Google has to consider cutting people in areas which will never be profitable. The entire ethos at Google is in the process of changing. Microsoft may be in third place in the search business, but it is in first place in software, which is still the larger industry.

Investors still ask Microsoft why it is in the video game business. There is not any reasonable answer. It is an awful business with poor margins. It has nothing to do with selling Windows. There may have been some idea that being in the hardware business would help the software business, but, if so, that idea didn’t work out a long time ago.

With the perceived playing field that Microsoft and Google operate on a bit more level now, they can race after the one market that could be substantial for either one or both of them, which is providing software and search on mobile devices. The smartphone, which is really a PC for the pocket, is part of the one-billion-units-per-year-in-sales handset industry. Providing the operating software and other key components for wireless devices is almost certainly the next big thing for tech companies from Google to Yahoo (YHOO) to Microsoft to Adobe (ADBE). Trying to milk more money out of the PC gets harder and harder. For the largest companies in the industry, it has become a zero sum game.

For Google and Microsoft, the best days are over, unless one can dominate the handset world the way it did the universe of computers.

Douglas A. McIntyre

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