Google in 2015

This is the second in a series of posts for Insiders on what I see ahead for some of the major tech companies in 2015 – I covered Apple last week, and Microsoft and others will be coming in the next few weeks. My intention is to look ahead at the challenges and opportunities facing these companies next year and what they should be doing about them.

Core search advertising under pressure

Google’s cash cow is its search advertising business. It has provided huge growth for the company for quite a few years now. But growth in this business is strongly tied to growth in the overall Internet population, and growth in that metric is starting to slow. Beyond that, the vast majority of new Internet users are mobile-only, limiting Google’s opportunity to serve up ads. And many of them will come onboard in markets where ad spending per capita is vastly lower than in some of Google’s key markets. On top of that, in many of those markets where growth is highest, Google faces significant competition from local players, whether Yandex in Russia or Baidu in China, so its share of the available market may well be lower too. For all these reasons, I believe Google will struggle to continue its historic rate of growth and profitability in search advertising in the next few years and that may start to become evident in 2015.

Significant risks and threats in mobile advertising specifically

Mobile advertising is booming, and Google is clearly well positioned to benefit enormously from this growth. eMarketer estimates mobile adverting will rise from 14.1% of Google’s ad revenue in 2012 to 37% in 2014 and that proportion will continue to grow. But, whereas search was clearly the place to be in desktop advertising, various forms of native advertising are far more promising in the mobile world. Whether it’s Facebook’s News Feed ads or Twitter’s sponsored tweets, these in-stream ads are a better fit for the cluttered and limited space on mobile screens, and Google doesn’t have the same sort of product to serve those as competitors do. According to eMarketer figures, while Google’s revenue from mobile ads will roughly quadruple from 2012 to 2014, Facebook’s will increase 15-fold. These competitors’ ability to take share in non-search advertising, and their increasing attempts to bolster their position in search on mobile, will make it tough for Google to replicate its desktop share on mobile. Then there’s the risk of Apple switching away from Google as the default search engine on iOS, which would eat into Google’s mobile search revenue significantly. We’re not likely to see a dramatic shift in any of these areas in 2015, but there may well be signs Google is unable to keep up with competitors, in non-search advertising in particular.

YouTube is Google’s native advertising play

I said Google largely lacked products that suited themselves well to native advertising, but YouTube is the one big exception. Pre-roll video ads have clearly worked very well for Google and YouTube is an increasingly important source of revenue for the company. With the emergence in 2014 of a subscription music service based on YouTube, it’s clear Google is also looking beyond advertising for ways to monetize YouTube’s popularity. The platform is dominant in user-generated video and is acting as a springboard for successful new media businesses such as Maker Studios and Fullscreen Media, which are generating significant valuations of their own. If there’s a risk, it’s that some of these businesses, once they become successful, will start to build their own platforms in order to capture more of the value than they’re able to on YouTube. It takes many millions of views on YouTube for a content creator to generate any significant amount of money and for many who have built up an audience, it may be easier to monetize elsewhere. As some of these businesses get acquired, and with both AOL and Yahoo making a big push around video, it may be tempting for at least some of these brands to jump ship. As long as the major musicians and others still treat YouTube as the default option, that likely won’t cause any damage in the short term, but again, we could see seeds sown in 2015 for a longer term shift.

Nest – Google’s smart-home hub in more ways than one

Nest is clearly becoming Google’s hub for the smart home in two distinct ways: first, Nest, the business, is becoming the vehicle for Google’s other acquisitions in the smart home space. Second, Nest, the product, is becoming the hub for a broader smart home strategy with the release of APIs for third party integration in 2014. So far though, there has been very little integration between any of this and the core Google platforms, in contrast to Apple. That partly reflects a desire to allay privacy concerns that arose at the time the acquisition was announced but it could change over time. Might we see the first attempts to build some sort of data link between Nest and the rest of Google in 2015? It’s also likely Nest and its subsidiaries will continue to create new products for the smart home in other categories, beyond thermostats, smoke detectors and cameras. Nest is certainly building what looks like one of the most viable smart home platforms, and one of the most interesting dynamics will be how it competes and partners with the other ecosystems, whether Apple’s HomeKit, AT&T’s Digital Life, Samsung’s SmartThings or myriad others.

Android’s growth continues but becomes more dominated by low end

Android already has a massive base of users, and it’s likely to grow by several hundred million more in 2015. But even as its scale continues to grow, there’s a risk Android’s biggest weakness becomes more entrenched next year. That weakness is its increasing use by low end users, who spend less on apps and devices. That’s important for a few reasons: one, Android’s ability to attract the best developers will be hampered by its users’ failure to spend money on apps; two, OEMs who focus on Android will find it tough to make premium margins if the major opportunity is in cheap devices; and lastly, Google itself will struggle to monetize Android if the majority of its users are in markets where both disposable incomes and ad spend are very low. Meanwhile, Microsoft is pushing Windows Phone into the lowest end of the market too, with new partners in markets such as India and reference designs intended to facilitate and speed product development. And Apple’s new devices are likely to take share from Samsung and others, at a time when Samsung is already struggling to maintain its share and shipments at the high end. All this taken together could dramatically change the profile of the average Android user, in a way that could hurt Google as well as Android OEMs and developers.

Android Auto, TV and Wear suggest a new trajectory

I’ve written about Google’s announcements at I/O earlier this year and what they signaled for Android and its various flavors going forward. Even as Samsung falters, Chinese vendors are on the rise, and many of them don’t even use Google services on their devices. Google therefore risks a switch from one major vendor which prioritized its own UI and services to a myriad of smaller vendors who do the same. It needs to reassert control over Android and it clearly sees the new flavors of Android – for the TV, for the car and for the body – as opportunities to do so. I expect we may see more control by Google over the smartphone and tablet flavors of Android too – the Material Design language seems an attempt to bring some consistency to both Google and third party apps on Android – and we may well see more of this in 2015 as well.

Meanwhile, Android Auto will see its first mass market adoption in cars in 2015, and will go up against Apple’s CarPlay in this space, along with various platform-agnostic solutions from other players. It’ll be very interesting to watch to what extent people’s smartphone platforms affect their choice of car and vice versa in 2015 and beyond. Android Wear is still struggling to catch on, with Samsung easily the largest vendor in the smartwatch space today but hedging its bets with Tizen-based devices in addition to Wear-based watches. As the Apple Watch launches, it will present further barriers to the existing offerings, but also has the potential to stimulate demand as Apple’s products in other categories have.

Google X – not much potential for monetization in 2015

Google X is the home for many of Google’s more outlandish and forward-looking initiatives, but even though some of them – notably self-driving cars – get lots of press, the reality is essentially all Google X projects are years from generating money for Google. That’s a challenge, because of the increasing headwinds I mentioned at the beginning. Google needs to start finding new revenue streams which can supplement growth from its traditional core areas, while generating significant margins, and Google X seems, in theory, to be the best source. But these projects encompass everything from extremely long range in likely commercialization to almost philanthropic in their business models, and it’s unclear as yet how they will help Google financially in anything like the near term, let alone 2015.

Privacy will continue to be a major theme

Privacy is a perennial theme when it comes to Google, and all ad-supported businesses, and will continue to be a significant theme in 2015, not least because two of Google’s major competitors – Apple and Microsoft – will continue to hammer at it as a competitive differentiator. I’d expect all three of these companies to continue to try to demonstrate their commitment to protecting user data in 2015, Apple and Microsoft proactively, Google more defensively. I don’t see a resolution to the ongoing debate on the topic of tensions between users and advertisers in 2015, but I think, by the end of the year, we’ll have a clearer sense of what extent users really care about privacy enough to let it affect their choice of ecosystems and services. How Google represents itself in this arena during 2015 is likely to have a big impact on how that plays out.

A year of transition for Google

Overall, 2015 promises to be a year of transition for Google. That transition will be much harder to spot from the outside than for many other big tech companies, if only because of the way Google reports its financials. Android, YouTube, mobile advertising in general and so many other interesting Google businesses are entirely opaque to outsiders from a financial perspective. But, underneath the high level reporting, I believe there will be significant shifts taking place in 2015 — whether slowing search advertising revenue growth, falling mobile advertising share, or increasing struggles to monetize new Android and Google users in emerging markets. Meanwhile, the fate of Android will continue to be very much tied up in its partner OEMs, with a major transition from one dominant vendor to a multitude of smaller vendors threatening Google and its ability to monetize Android in whole new ways. As it works to build an ecosystem that spans cars, TVs, wearables, smartphones and the home, Google will have to find ways to build loyalty to itself rather than its partners, a challenge arguably made harder by its ongoing susceptibility to privacy concerns.