Why Google has started to diversify its search business

Google has started to diversify its search business

Google (GOOGL) recently reported its 2Q14 earnings. It was evident that the company is looking to diversify its search advertising business by focusing on other growth areas such as video ads, digital content, broadband internet, and e-Commerce. Although Google’s traditional business of search and display advertising are still growing at a healthy rate of 23%, it still isn’t good enough to compete with Facebook (FB) in the digital advertising market.

Facebook is taking share from Google in the mobile advertising market

Facebook has done extremely well to monetize its ads on mobile in the last couple of years. Mobile is the next area of growth in the digital ad world. According to a report from eMarketer and as the previous chart shows, mobile internet ad spending as percentage of overall digital ad spending could increase from 8% in 2012 to 23% in 2014. This signifies the importance of mobile in the digital advertising world. According to another report from eMarketer, Google’s share in the mobile advertising market could decline from ~53% in 2012 to 47% in 2014, while Facebook’s share could increase from a mere 5% in 2012 to ~22% in 2014.

Google digital content business doing extremely well

Google has started to monetize its Play Store business. Now, Play Store is driving the revenue growth at Google. Google’s “Other” division revenue grew at a rate of 53% year-over-year (or YoY). This growth was primarily driven by sales of applications and content from Google’s Play Store. During the quarter, Google expanded its Play Movies business to other countries. It also signed deals with CBS (or CBS) and Viacom (or VIAB) for bringing the TV content to Play Store.

Google’s video ad business showing strong growth

Google introduced the Google Preferred Video program in April, which helps ad agencies by providing the top 5% of the content on YouTube. According to eMarketer, YouTube’s contribution towards Google’s net ad revenues has increased from 2.2% in 2011 to 5.1% in 2013. This signifies its growing importance to Google.

Google also introduced the “Partner Select” program, which acts as an interface between publishers and ad agencies for video ads. It also gives Google a chance to expand its video ad business beyond YouTube. Despite doing well in the video ad business, Google still faces tough competition in this market. According to a report from Comscore, Google sites are ranked fifth among the online video ad properties in terms of percentage reaching the U.S. population. Players such as Facebook and AOL (AOL) are ahead of Google because they have taken an inorganic route to pass Google.

Google entering into new markets 

Google is also moving beyond the digital advertising world by entering into the broadband internet and e-Commerce market. Google Fiber is the broadband initiative taken by the company to provide high speed internet connection to consumers. This has come at a time when the performance of all big internet service providers seems to have deteriorated. Netflix (NFLX) has reacted strongly about this issue. It claims that the dip in internet service performance constrains Netflix’s performance and subjects consumers to poor video quality.

Google also started the same-day shopping service last year, which it named Google Shopping Express. It will access the growth potential in the e-Commerce market. According to a report from eMarketer, the B2C eCommerce worldwide sales could grow from $1.23 trillion in 2013 to $1.47 trillion in 2014 at a growth rate of ~20%. Google Shopping Express  could become a potential threat to Amazon’s (AMZN) Prime service in the future because Google has the resources to undercut Amazon.