6 Troubles for Google

You thought Google Inc’s recent spat with the Chinese government must be one of the biggest concerns for the IT giant considering the mammoth sized Internet market in China? Not really! For the search giant has many more challenges to contend with: slowing growth, regulatory scrutiny, shift in ad spending and more.

Here’s looking into Google’s six troubles.

Facebook

While Mountain View, California-based Google has the biggest share of online search at home and in Western Europe, it has been leapfrogged by social network Facebook Inc as the most popular US Web site.

This month, Facebook surpassed Google as the most visited Web site in the US, accounting for more weekly visits than Google.com, according to research firm Hitwise.

Facebook’s gains at Google’s expense weren’t lost on Levi Strauss & Co. The closely held maker of blue jeans and Dockers pants is advertising on Facebook this year for the first time, while its budget for search, Google’s mainstay, is staying about the same as last year, said Megan O’Connor, director of digital marketing.

The same goes for advertisers like Starbucks and JetBlue Airways, which are eager to get their marketing messages in front of Facebook’s 400 million users.

No Search success

Google’s ventures in mobile, video and display ads have failed to match the success of search. To catch up in social media, Google added a social- networking feature called Buzz to its Gmail e-mail, letting users share photos, comments and clips from its YouTube site. The site drew criticism over privacy, prompting Google to scale back some of Buzz’s features.

“They need to show how they’re going to monetize things like Android, where they seem to be taking good mobile market share,” said Richard Parower, manager, Seligman Global Technology Fund. “How can they turn that into operating profits?”

Regulatory obstacles

Like Microsoft, Google faces regulatory obstacles to efforts to break into faster-growing markets. The Federal Trade Commission is investigating whether the AdMob deal would squelch competition in the mobile ad market.

The US Justice Department also has raised antitrust concerns over a proposed $125 million legal settlement between Google and a group of publishers and authors. The agreement, if approved by a judge, would create the world’s largest digital library. In Europe, Google is under scrutiny for possible privacy, antitrust and intellectual property violations.

“Google has enjoyed an extended period of unfettered growth,” said Jonathan Zuck, president of the Association for Competitive Technology, a Washington trade group that represents technology companies. “Between Washington and Brussels, it’s clear that they’re now in a time where their explosive growth will be under greater scrutiny.”

Slowing sales growth

As sales gains diminish, some investors are concerned that Google has begun to resemble Microsoft Corp, which generates billions of dollars in cash from its mature flagship business yet has struggled to conquer new markets. Google’s sales increased 9 percent last year after almost doubling in 2005.

At Google, sales growth has slowed in each of the past seven years, to 9 percent in 2009 from 409 percent in 2002. “They were the new kid on the block and everyone thought they were great,” said Daniel Morgan, a money manager at Synovus Financial in Atlanta, which oversees about $7.5 billion, including 27,720 Google shares, Bloomberg data shows. “That kind of euphoric, love-at-first-sight status has changed.”

Falling stocks

Google shares, which doubled last year, have dropped 8.6 percent in 2010, the sixth-biggest decline among the 75 technology stocks in the Standard & Poor’s 500 Index. The stock is 24 percent below its peak of more than $740 in 2007.

R&D spend

Google has been piling up cash faster than it can find ways to spend it. Its cash and marketable securities surged 54 percent to $24.5 billion at the end of 2009 from a year earlier and made up 60 percent of total assets, up from 50 percent. Meanwhile, research and development costs rose only 1.8 percent to $2.8 billion.

This means Google is spending about 12 cents of every sales dollar on research and development, comparable with 15 cents for Microsoft.