Recent Google Restructuring Showing Weakness in the Ad Supported Model?

ZdNet, Ars, and I’m sure several others, are beginning to report on layoffs and restructuring at Google today.

Though layoffs and restructuring are nothing new in this tough economy (even Microsoft is rumored to be considering some of the same,, I wonder if this recent restructuring at Google proves an underlying weakness in Google’s ad-funded model. Though Microsoft has a varied portfolio of software and services, as well as varying business models for them (Annuity Agreements, Volume Purchasing, Subscription Agreements, Partner Driven, Ad-Funded, etc.), the majority of Google's revenue base is dependant on being able to attach advertising to their products.

The unfortunate consequence of this weakness at first seems to be its inevitable constraints on innovation. The first application groups to get the chop were ones that, while pursuing interesting or innovative technologies, could not find an effective way to monetize the product. It is interesting to note that in a world where your only revenue comes from a single source, allowing creative projects to continue is almost impossible to justify, as there could never be a business reason to continue it.

As an organization, Google has always touted itself as the company searching for new and inventive ways to catalogue and display the world’s information and to improve the global Internet Experience. It seems now, however, that there philosophy should be updated to read: “to organize the world's information and make it universally accessible and useful – as long as we can find a way to attach ads to that access”.

This is in stark contrast to Microsoft’s ability to seemingly explore and innovate in areas where there is no immediate commercial viability for the technology. An entire division of Microsoft, the incredibly awesome (but rarely talked about) Microsoft Research division is a great example of this flexibility. They have a single objective – to break the boundaries of current technology. Occasionally their work makes it to prime time, either as the fundamental framework a technology can be built on top of, like in the case of Microsoft Surface . In other cases, they might release something which advances our world a little bit (or our Universe, like The World Wide Telescope) with little apparent commercial viability.

How can Google claim to be innovating in this space, when it is unwilling to support projects that cannot support an ad-funded model? Many Wall Street and Tech pundits are calling this a “Growing Up” phase for Google. Proving that they are a mature business that makes decisions based on the economic feasibility of their projects as opposed to their academic qualities. In my opinion this is sort of a jaded view. Can’t we have the best of both worlds? Since when was innovation for innovations sake and commercial success mutually exclusive?

It seems to me like it would be more “Grown Up” of Google to pursue other, non-advertising dependant sources of revenue for some of their products. The real question must be - is that even possible within their framework? I think in many ways it is not – Google’s reputation has been built on the rejection of Software + Services ("Keep it all in the Cloud - Throw Away Your OS!") and the traditional software model ("Why Pay For It When You Can Let Someone Else Pay For It Through Advertising?!").

Even if Google had the inclination and resources to engage in a more traditional software sales methodology, does Google have the right set of tools, applications and competencies to do so? Can Google credibly walk into an Enterprise customer’s office right now and say: “we can offer you a suite of Enterprise level applications, with an Enterprise level of support and a wide array of 3rd party partners who can customize and build on top of our products to help them fit your needs. Here is how much this will cost, and it will continue to be predictable in the future.” I don’t think so, and honestly I think if you take a good look at Google’s Information Worker and Office type options, you will see there is a lot of missing qualities that prevent it from being a legitimate Enterprise offering.

In software, I don’t think there can be such a thing as a one trick pony. The extremely successful Ad-funded model for search does not necessarily extend to other applications and platforms. Either because it doesn’t make sense in the context of the technology or the types of customers that would use the technology require a more stable and predictable method of purchasing software. I think that a more diverse strategy, which incorporates multiple business and deployment models for different products, could help Google continue to innovate in areas outside of search and perhaps become a more relevant software competitor. Until then, I am confident that Microsoft's business model is far more capable of weathering economic weakness or soft sales in single market areas.

- Francesco Esposito