Google CEO Larry Page can be forgiven for being in a bad mood this weekend. On his company’s Q1 2014 earnings call, his people delivered what he thought would be good news: revenues of $15.4 billion, up 19%. Very, very few business can deliver 20% growth on billions in revenues. By any measure, Google is on fire as a company.
Yet investors hated it.
They sold the stock, and it declined 5% immediately after the call. In 24 hours the price had lost $9, from $544 per share to $536.
Google is growing, for sure. But, counterintuitively, it is not growing at the same time, as the following charts show.
From a macro perspective, Google is boxed in by two factors: The available population on the Internet and the population on the mobile portion of the Internet.
Google – according to numbers from Asymco, the quant-y tech analysts – may not be growing so much as it is merely floating in place on a rising tide of humanity.
Unfortunately for Google, that tide is about to go out.
Internet growth is slowing – and Google is the Internet Google handles about 80% of all search queries, and hundreds of millions of people use Gmail and YouTube, its most famous brands. Google is so dominant that its economics are, in many ways, a proxy for the Web as a whole. How grows the Internet, grows Google.
But growth of the Internet won’t go on forever.
Already there are signs of an upcoming “inflection” in 2016, when the level of Internet penetration across the planet gets well past 50% of all humans – and the Internet itself enters a period of rapidly declining growth.
Here’s Asymco’s chart of Internet penetration by geographic area:
The chart shows the portion of the population that has yet to connect to the Web. It’s in decline all over. Don’t worry about the detail or the numbers, it’s important to simply note that the Web’s “house-on-fire” period will be behind us by about 2016.
We’re already in that phase in the US and Western Europe – there just aren’t that many more non-connected humans to bring online.
This will hurt Google because Google’s revenues are highly correlated with the number of humans online.
Here’s the Asymco data showing the correlation between Google revenues and the total Internet population:
Google doesn’t operate in China. You can see that Google’s revenues run in parallel to the number of humans on the Web.
Chart shows a measure of how closely correlated the growth in Google’s revenues is to the growth of the internet population as a whole.
That parallel is very closely correlated, as this Asymco chart of the same data shows: That correlation has a real effect on Google’s actual dollar numbers.
Asymco has also broken down Google’s revenue by geography, next to the world Internet population, if you want more detail on that.
But broadly, the lines look similar because they are similar.
Shown another way, Google’s monetization per user shows that all its growth is in the developed countries, where it is already fully penetrated.
If it is to grow meaningfully in the future (all things being equal) it must do the same in the poorer nations.
But that shows no sign of happening:
Asymco’s blog states this succinctly:
The disparity is enormous. US/UK revenue is on average $86/user/yr (2012) and rising. The rest of the world only manages $12/user/yr. That Rest Of World includes many wealthy countries such as all of Europe and Japan. So the problem for Google is that it has an order of magnitude less income per user in the part of the Internet which remains unpenetrated and the trends show that they are not narrowing the gap.
One might also add that the developed world has been waiting for more than 200 years for the undeveloped world to “catch up” and become rich – but it never happens. So don’t hold your breath for growth on those yellow bars.
The overall effect of this is that Google’s net income per user is relatively stagnant:
Google gets about $1.20 per user in profit – see the blue section of the chart – and the rate doesn’t change very much over time.
OK, you might say. So Internet population growth is slowing. Google is still killing it: You cannot ignore 20% growth per quarter.
That’s true. But there is another way of looking at it – and Wall Street’s reaction to the Q1 numbers may be an indication of that: For investors, “growth” isn’t defined merely as an increase. It’s defined as the growth over and above the background growth you’d get from the general market as a whole. Usually, those background rates are the risk-free interest rates at the bank or an index fund of the S&P 500 stocks.
But at tech companies, growth is often even more dramatic than that. And the Asymco data suggests that the background growth in Google’s business is the Web population as a whole. So Google’s challenge is that it must eke out greater growth than the Web itself, because if it does not then it will actually be moving backward – certainly in terms of market share.
What if mobile becomes a ghost town for Google? There is also the continued weakness in Google’s ability to get higher prices on clicks. Cost-per-click is in decline, and the growth of total paid clicks is slowing. You can see Google’s growth as a whole is slowing as a result:
Part of that is to do with the growth of mobile devices. More and more businesses – Amazon, LinkedIn, Apple, Facebook – have apps with their own internal search functions. And apps generally are invisible to Google’s traditional Web search. But a majority of people’s time in mobile is spent inside apps.
Some massive businesses like Facebook and Pandora (and Business Insider, although we’re much smaller) have majority mobile audiences. Those are audiences that, increasingly, Google can’t see.
That is a long-term structural growth problem for Google. The Web is growing, but not in a way that Google can meaningfully get search ad revenue from it. More than 90% of Google’s revenue comes from search ads and related services.
“Google’s growth is ultimately limited” Asymco concludes:
If the company does not alter its business model then the future potential of the business could be measured as a function of Internet (ex. China) population growth.
And there is a benchmark to watch for in terms of whether Google can figure this out. It’s 2016, Asymco says:
… the inflection point will come in 2016. Essentially the argument is that Google’s growth is ultimately limited by the population of users and that itself is a predictable number.