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Which company would you rather own stock in: Google or Yahoo? Chances are, like most people, you'd respond 'Google'. And for good reason: by just about every measure, Google is by far the better company.

But that isn't stopping Yahoo CEO Carol Bartz from giving some advice to the search giant. Last week, she told BBC News that Google needs to diversify its business. "Google is going to have a problem because Google is only known for search … it is only half our business; it’s 99.9 [percent] of their business. Google has to grow a company the size of Yahoo every year to be interesting," she said.

On the surface, and particularly from a Wall Street perspective, it would seem that Bartz has a point. But is diversification all it's cracked up to be? That's a difficult question, and answering it in the context of Google is even more difficult.

Bartz is certainly not the first person to point out that Google is almost wholly dependent on paid search for revenue. Or that this dependence is problematic for a number of reasons. The big one: as fast as the market for paid search has grown over the years, like all markets, it's finite. At some point, growth will slow and investors who have become accustomed to solid double-digit growth will have to settle for less growth. Even if Google is still producing gobs of cash, slowing growth will certainly drive growth-oriented investors to seek greener pastures elsewhere.

But if you're Google, a company that, by the way, has never been overly focused on Wall Street, the question is 'so what?' Once could easily make the argument that many of Yahoo's failings are a direct result of the company being too diversified. Yahoo doesn't really do any one thing very well or dominate any market even though it does a lot of things and has a presence in a lot of markets.

Case in point: Bartz points out that search is only half of Yahoo's business, but she doesn't point out that Yahoo's market share in search has declined significantly. 50% of a declining number is, well, still a declining number. Why exactly is that something Google should aspire to?

Perhaps the most interesting thing about Bartz's comment is that Google is somewhat diversified. Think of all of the initiatives it has launched, side projects it has encouraged and acquisitions it has made -- living and dead. And think of all the investments it's making in markets that, at best, are arguably loosely tangential to its core business. The problem: none of those initiatives, side projects, acquisitions or investments have grown into cash cows that can rival search.

Which begs perhaps the most important question: if, after all of Google's efforts to diversify, paid search is still its single cash cow, why should Google fight nature? After all, while a lack of diversification creates risk (eg. what happens if your single cash cow collapses?), trying too hard to do everything probably creates even more risk, especially for a company like Google. Just ask, well, Yahoo.

In a different world, one might actually suggest that Google focus even less on markets outside of search. That doesn't mean it wouldn't innovate, but instead of say, building web browsers and mobile platforms and investing in things like wind farms, it would focus solely on pure search innovations. Eventually, it would transition from a growth company and start returning profits to shareholders in the form of dividends. Obviously, this is unlikely to happen, as the ambitions of Google's management wouldn't allow it, and such a company would be the antithesis to everything Silicon Valley stands for.

But companies, including Google, should always remember: there's nothing wrong with doing one thing really, really well and making a lot of money doing it. If you instead try to appease the gods of Wall Street (or your own ego), you're eventually likely to lose that money discovering all the things you don't do as well.

Photo credit: Yodel Anecdotal via Flickr.

Patricio Robles

Published 4 May, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2377 more posts from this author

Comments (2)

Rob Mclaughlin

Rob Mclaughlin, VP, Digital Analytics at Barclays

Google may see their wider investments/ventures as synonomous with their objective of making Google Search the natural choice.

Gmail / Google docs / Chrome etc don't need to directly make attributable revenue - perhaps it is enough that they shape our online environment and channel us towards Google Search?

about 6 years ago

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Gulsene

oh, and they kinda forgot to update it with a few minor things like Buzz, Nexus, Android, YouTube LiveShows (premium TV content), YouTube promoted videos, Picassa/Buzz integration......ok, I give up. And that still doesn't include any Labs stuff. Or Acquisitions (like AdMob - Ok, that one might get blocked but...). Will it become harder for Google to maintain their pace of income growth? Yes But given their margin increased to 28% on revenues of $23.6 billion in 2009 I doubt they are worrying too much about Carol's comments. [Full disclosure: we are Google's digital agency for Europe - undoubtedly totally biased - but I personally have nothing to do with the account]

about 6 years ago

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