Google's investors look for next big thing

Google made its fortune on Internet search ads, but Wall Street is increasingly eager for signs that the company's other money-making bets will pay off.

"Even though paid search is 95 percent of the business, I think everybody's looking for that next trick," said John Lutz, a senior research analyst at Frost Investment Advisors, which owns Google shares.

Google will brief investors in a Webcast on Wednesday about search and monetization, though Google spokeswoman Jane Penner said the event will focus more on the monetization of search than on businesses like YouTube.

The Internet giant has myriad initiatives, including a display ad business, mobile Internet products and YouTube, the world's top video Web site.

But none have demonstrated the kind of financial horsepower typically associated with Google, which generated nearly US$22 billion in revenue last year.

The Mountain View, California company has been tight-lipped when it comes to the financials of non-search businesses, though there are signs it is opening up a little.

In July, Google lifted the covers slightly on YouTube, revealing that YouTube is monetizing billions of video views every month and that it expects YouTube to become a profitable business in the not-too-distant future. Executives wanted to dispel reports that YouTube, which it acquired for US$1.65 billion in 2006, does not have a credible business model.

NEW FORMATS

Brigantine Advisors analyst Colin Gillis said new ad formats that incorporate videos and graphics could prove key to Google's future growth, as the company courts advertisers like Johnson & Johnson and Procter & Gamble.

"Google's got to give them a good format to convey emotion. This is going to be the next major area," said Gillis.

Google sought to bolster its display ad business with the 2008 acquisition of ad network DoubleClick for $3.1 billion. But rivals Yahoo Inc, Microsoft and Time Warner Inc's AOL still dominate that market.

Analysts also point to Google's mobile efforts, such as specialized search applications for smartphones, as a natural extension of its business. The price of each ad should be higher, because Google can display fewer paid search links on a phone's screen, Sanford Bernstein analyst Jeff Lindsay said.

Moreover, mobile content has the potential to incorporate a user's geographic location, making the ad more specific and relevant, which could also drive up pricing.

"The hypothesis was that mobile search would deliver much higher revenue per search," said Lindsay, but it is unclear whether that is the case.

Analysts estimate that mobile search ads now yield less than 5 percent of Google's revenue. The question is when mobile could become a more significant source of revenue.

"It's not really this year. It's the next three to four years," said Lindsay.

Near-term, search is still what moves the needle.

"The most important thing that everybody wants to figure out is what does a recovery scenario look like for search," said RBC Capital Markets' Ross Sandler. "Once you get beyond that, and that starts to get priced-in and well-understood, that's when Act 2 or Act 3 becomes important."

- Reuters