Are Google's best days behind it?

Slowing product development, legal woes, and rising bureaucracy may signal trying times ahead for Silicon Valley's favorite company

Few companies have made a splash in the tech industry as big as Google has. Launched by Larry Page and Sergey Brin from Page's Stanford University dorm room in 1998, the company became a $27 billion titan overnight when it went public six years later. Soon it was the darling of Silicon Valley, sweeping competitors aside and taking Microsoft head on. For a while, at least, it seemed Google could do no wrong.

On June 30, 2011, Larry Page closed his first full quarter as Google's new CEO, succeeding Eric Schmidt. Page has never led a public company, and the pressures of leading Google certainly differ from when he last held the helm in 2001. In January, Page told the New York Times, "One of the primary goals I have is to get Google to be a big company that has the nimbleness and soul and passion and speed of a startup."

[ Get the no-nonsense explanations and advice you need to take real advantage of cloud computing in InfoWorld editors' 21-page Cloud Computing Deep Dive PDF special report. | Stay up on the cloud with InfoWorld's Cloud Computing Report newsletter. ]

But that may be wishful thinking. Not only have more experienced CEOs seldom managed to strike such a balance, but Google is no startup. Today the search giant's full-time head count is almost 30,000 employees. It has offices in 42 countries on six continents. In terms of market capitalization, it's bigger than Ford, GM, Starbucks, FedEx, United Airlines, and Viacom combined.

With Google's rapid growth have come new challenges. It faces intense competition in all of its major markets, even as it enters new ones. Its newer initiatives have often struggled to reach profitability. It must answer multiple ongoing legal challenges, to say nothing of antitrust probes in the United States and Europe. Privacy advocates accuse it of running roughshod over individual rights. As a result, it's becoming more cautious and risk-averse. But worst of all, as it grows ever larger and more cumbersome, it may be losing its appeal to the highly educated, impassioned workers that power its internal knowledge economy.

Despite Page's best intentions, Google's salad days may be over. The hard days may already be on their way.

Google's river of money
Not that the search giant isn't successful. Last year, Google reported $29.3 billion in revenue, and it's on track to earn even more in 2011. But Google is unique. Unlike most tech companies, which make their money by selling or licensing products and services, fully 97 percent of Google's income derives from a rather more prosaic source: advertising.

In one sense that's a good thing. Think of Google's revenue as an endless river of money flowing in from advertisers -- those that want to advertise on Google's sites and those that want to reach other sites through Google AdSense, AdWords, and DoubleClick. Whenever Google has an idea for an innovative new technology or service, it just dips a bucket into the river.

But in the bigger picture, Google's total reliance on advertising means innovative product development isn't truly central to its business model. Google spent $3.8 billion on R&D in 2010, or about 13 cents of every dollar it earned. That level of investment has to justify itself somehow -- and yet, in 2010 Google earned just $1.2 billion from all nonadvertising sources combined.