Google at a Crossroads

Google Search

Google is a "verb," a "movement," a "force" of financial nature that at once has captured the imaginations of investors and entrepreneurs and accelerated the fear and paranoia of everyone from Microsoft to Apple to Yahoo.

But are the fears and paranoia justified? Have Google's best days already passed by?

For the first time in the company's short, but colorful and profitable history, the company may be faced with more challenges than opportunities; no where is that concern reflected more clearly than in the company's stock price. It's no slouch at $516 a share (with a market cap of $165 billion), but well off its 52-week high of $629.51 and trading in a very narrow range since last November.

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Why the perception of stagnation? Google still derives 96 percent of its $28 billion in annual revenue from search advertising. If there's one market to control, search advertising is a pretty good one, but that's where Google's troubles longer-term may lie.

Google has had enormous difficulty diversifying and while it continues to control such a dynamic and lucrative segment of tech, it faces stiffening competition in the heart and soul of its balance sheet from Microsoft , Yahoo , Apple and a host of upstarts.

Make no mistake: Google still has plenty going for it. On any given day, 63 percent of the world's searches are done on Google. That's a staggering stat. But that's where Google's story still begins and ends, even after so many attempts at generating new revenue from other streams.

I liken Google to a kind of trust-fund baby for tech: The company got mega bucks at a very early age, and ever since it has been trying to come up with creative ways to spend it, and far-flung business ventures to make even more. Remember that Google spent over $1 billion on its YouTube acquisition, but even after all these years, the deal still isn't generating any material profits.

The company is seeing nice traction with its Android Mobile operating system, but Google gives that software away for free. Nexus One, Google's so-called "hero" phone, the company's foray into hardware that was supposedly going to be an iPhone killer, bombed so badly that both Verizon and Sprint won't stock it.

Just this week there were rumors of a new Google tablet PC in partnership with Verizon, but there are no specs to speak of, no price, no release date. Same goes with the company's ambitious high-speed broadband network that we still don't know much about, or how much it's going to cost, or where it's going to be available.

Google has also dabbled in space exploration, green energy, and its Google Docs is supposed to be some kind of competitor to Microsoft and its Office empire, yet at best, Google has only been able to command 4 percent of that market.

I talked with the president of Microsoft's Business Division, Stephen Elop, and asked him direct questions about Google. So much is made of the rivalry between the two, but its much more like Intel vs. AMD than Coke vs. Pepsi . Elop tells me, "Look, Google is making a number of claims out there, but at the end of the day, it's Microsoft who's winning the customers."

True enough, and when I asked him about Google's attempts at software and browsers, like Android and Chrome, Elop laughed it off, saying "We have a saying at Microsoft: 'Hope' is not a strategy.'"

That might seem like a little hubris, but it's tough to argue the point from a company generating $4 billion a quarter from Office, while Google, with its endless resources, still can't really make a dent. Conversely, Microsoft released its search engine Bing not too long ago and already controls 11 or 12 percent of the market. In other words, Microsoft seems to be able to make more headway in Google's core business—and more quickly—than Google seems to be able to against Microsoft in one of its core businesses.

That's also important: "one of its core businesses" is something you can't say about Google. There's only one business at Google, and an enormous number of initiatives that have yet to pay off.

Google in Crosshairs of Regulators

Google Android
Google Android

One of the more intriguing strategies from Google will be what the company can do with its $750 million acquisition of mobile ad leader AdMob. There's little question that the world is going mobile, and mobile advertising is set to enjoy explosive growth. IAB says mobile advertising, which was worth about $416 million last year, will balloon to anywhere from $3 billion to $10 billion by 2013.

The back story on AdMob is that Apple was interested in it, couldn't get a deal together, and as soon as there was an opening, Google offered a geometric premium for the purchase, snatching it out from under Apple. Bitter, Apple turned around and paid a pittance for Quattro.

Google's move attracted federal regulators and their scrutiny, though with Apple's purchase, it's likely those concerns will dissipate.

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But that speaks to a more insidious issue for Google. Think of it as Google's own version of the law of large numbers. The bigger Google gets, the more interested the Feds are. Google is in the crosshairs of various departments and agencies from Justice, to the Federal Trade Commission, to the Federal Communications Commission, to the European Union.

Microsoft has made fines and settlements a part of its cost-of-doing-business and has decades of experience in these matters. Google is still a newbie as it tries to navigate federal and international competitive statutes. Microsoft's vast experience on this front alone gives it the upper hand against Google, which will most certainly face more legal examination as the days pass by.

As the headline proclaims, Google is indeed at a crossroads. The company gets major kudos for investing heavily in research in development; having lived in and covered the Silicon Valley for the past 20 years, I happen to love Google's throw-it-against-the-wall-and-see-if-it-sticks approach to innovation.

But Google also has to tread carefully and keep its swagger under control. It's bitter break-up with Apple is a classic example of Google's heavy hand and what might have been behind-the-scenes duplicity (oh, no way, we're going to compete with you. Oh wait, we're competing with you!) That cost Google what could have been a great corporate partnership and cost CEO Eric Schmidt his friendship with Steve Jobs.

It used to be that Google had the world at its fingertips even as the world still kept Google at its fingertips. Today and from here forward, Google's survival will depend on what the company does next, and where the money will come from. Google has no trouble generating headlines; new revenue streams is a decidedly different story.

Watch "Inside the Mind of Google", hosted by Maria Bartiromo, Friday May 14 at 10pm ET on CNBC.